TTM
TRAVELERS TARGET MATURITY
TTM, Travelers Target Maturity, is a deferred annuity Contract ("Contract") that
provides a guaranteed fixed rate of return for your investment if you do not
surrender your Contract before the Guarantee Period ends. Generally, if you do
surrender your Contract before the Guarantee Period ends, your Cash Value will
be subject to a market value adjustment and surrender charges.
This prospectus explains:
o the Contract (single purchase payment)
o The Travelers Insurance Company and Separate Account MGA
o The Travelers Life and Annuity Company and Separate Account MGA II
o the Guarantee Periods and Interest Rates
o Surrenders
o Surrender Charges
o Market Value Adjustment
o Death Benefit
o Annuity Payments
o other aspects of the Contract
This Contract is 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 your Contract for
the name of your issuing company. Both companies are located at One City Place,
Hartford, Connecticut 06103-3415. Travelers Distribution LLC, One Cityplace,
Hartford, Connecticut 06103-3415, is the principal underwriter and distributor
of the Contracts.
THIS PROSPECTUS IS ACCOMPANIED BY A COPY OF THE TRAVELERS INSURANCE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 2003 AND THE
TRAVELERS LIFE AND ANNUITY COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD
ENDED DECEMBER 31, 2003.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MUTUAL FUNDS, ANNUITIES AND INSURANCE PRODUCTS ARE NOT DEPOSITS OF ANY BANK, AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
PROSPECTUS DATED MAY 3, 2004
(SUPPLEMENTED SEPTEMBER 1, 2004)
TABLE OF CONTENTS
Special Terms .............................................................. 3
Prospectus Summary ......................................................... 4
The Insurance Companies .................................................... 5
The Contracts .............................................................. 5
Application and Purchase Payment ........................................ 5
Right to Cancel ......................................................... 5
Guarantee Periods .......................................................... 6
Establishment of Guaranteed Interest Rates ................................. 7
Surrenders ................................................................. 7
General ................................................................. 7
Surrender Charge ........................................................ 7
Special Surrenders ...................................................... 8
Market Value Adjustment ................................................. 8
Waiver of Surrender Charge .............................................. 8
Guarantee Period Exchange Option ........................................ 9
Premium Taxes ........................................................... 9
Death Benefit .............................................................. 9
Annuity Period ............................................................. 11
Election of Annuity Commencement Date and Form of Annuity ............... 11
Change of Annuity Commencement Date or Annuity Option ................... 11
Annuity Options ......................................................... 11
Annuity Payment ......................................................... 12
Death of Annuitant after Annuity Commencement Date ...................... 12
Investments by the Company ................................................. 12
Amendment of the Contracts ................................................. 13
Assignment of the Contracts ................................................ 13
Distribution of the Contracts .............................................. 13
Federal Tax Considerations ................................................. 13
General ................................................................. 13
Section 403 (b) Plans and Arrangements .................................. 13
Qualified Pension and Profit-Sharing Plans .............................. 14
Individual Retirement Annuities ......................................... 15
Roth IRAs ............................................................... 15
Section 457 Plans ....................................................... 15
Nonqualified Annuities .................................................. 16
The Employee Retirement Income Security Act of 1974 ..................... 16
Federal Income Tax Withholding .......................................... 17
Tax Advice .............................................................. 18
Available Information ...................................................... 18
Incorporation of Certain Documents by Reference ............................ 18
Legal Opinion .............................................................. 19
Experts .................................................................... 19
Appendix A ................................................................. A-1
Appendix B ................................................................. B-1
Financial Statements
SPECIAL TERMS
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IN THIS PROSPECTUS THE FOLLOWING TERMS HAVE THE INDICATED MEANINGS:
ACCOUNT VALUE -- The Purchase Payment plus all interest earned, minus all
surrenders, surrender charges and applicable premium tax previously deducted.
ANNUITANT -- The person upon whose life the Contract is issued.
ANNUITY COMMENCEMENT DATE -- The date on which annuity payments are to start.
The date may be designated in the Contract or elected by the Owner.
BENEFICIARY -- The person entitled to receive benefits under the Contract in
case of the death of the Annuitant or the Owner, or joint Owner, as applicable.
CASH SURRENDER VALUE -- The Cash Value less surrender charges and any applicable
premium tax.
CASH VALUE -- The Account Value at the end of a Guarantee Period or the Market
Adjusted Value before the end of a Guarantee Period.
COMPANY (WE, US, OUR) -- The Travelers Insurance Company or the Travelers Life
and Annuity Company, depending on the state where your Contract is issued.
CONTINGENT ANNUITANT -- The person named prior to the Contract Date by the Owner
who, upon the Annuitant's death (prior to the Annuity Commencement Date) becomes
the Annuitant. All rights and benefits provided by the Contract then continue to
be in effect. Applicable to nonqualified Contracts only.
CONTRACT -- For a group Contract, the certificate evidencing a participating
interest in the group annuity Contract. Any reference in this Prospectus to
Contract includes the underlying group annuity Contract. See Appendix A. For an
individual Contract, the individual annuity Contract.
CONTRACT DATE -- The effective date of participation under the group annuity
Contract as designated in the certificate, or the date of issue of an individual
annuity Contract.
CONTRACT YEAR -- A continuous twelve-month period beginning on the Contract Date
and each anniversary thereof.
FREE WITHDRAWAL AMOUNT -- The interest credited in the previous Contract Year
that is not subject to a surrender charge or a market value adjustment.
GUARANTEE PERIOD -- The period for which either an initial or subsequent
Guaranteed Interest Rate is credited.
GUARANTEED INTEREST RATE -- The annual effective interest rate credited during
the Guarantee Period.
HOME OFFICE -- The principal executive offices of The Travelers Insurance
Company or The Travelers Life and Annuity Company located at One Cityplace,
Hartford, Connecticut 06103-3415 (Attention: Annuity Services).
MARKET VALUE ADJUSTMENT -- The Market Value Adjustment reflects the
relationship, at the time of surrender, between the then-current Guaranteed
Interest Rate for a Guarantee Period equal to the duration left in your
Guarantee Period, and the Guaranteed Interest Rate that applies to your
Contract.
MATURITY VALUE -- The accumulated value of a Purchase Payment at the Guaranteed
Interest Rate at the end of the Guarantee Period selected, minus all surrenders,
surrender charges and premium taxes previously deducted.
OWNER (YOU, YOURS) -- For an individual Contract, the person or entity to whom
the individual Contract is issued. Joint Owners, who share in ownership rights
and any benefits or payments, may be named in nonqualified Contracts. For a
group contract, the person or entity to whom the certificate under a group
annuity Contract is issued.
PURCHASE PAYMENT -- The premium payment applied to the Contract less premium
taxes if applicable.
3
PROSPECTUS SUMMARY
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Travelers Target Maturity is a single purchase payment modified guaranteed
annuity contract available to eligible individuals. Modified Guaranteed
Annuities offer a guaranteed fixed rate of return on your principal investment
if you do not surrender your Contract before the Guarantee Period ends. If you
do surrender your Contract before the end of the Guarantee Period, generally
your Cash Value is subject to a Market Value Adjustment and Surrender Charge.
The Contract is offered by either The Travelers Insurance Company or The
Travelers Life and Annuity Company ("the Company," "We" or "Us"). Both companies
are indirect wholly-owned subsidiaries of Citigroup. 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. The Contract
is available only in those states where it has been approved for sale.
You may select an initial Guarantee Period from those available from the
Company. Currently, we offer Guarantee Periods up to ten years. Interest on the
Purchase Payment is credited on a daily basis and so compounded in the
Guaranteed Interest Rate. (See "Guarantee Periods" and "Establishment of
Guaranteed Interest Rates".)
At the end of each Guarantee Period, a subsequent Guarantee Period of one year
will automatically begin unless you elect another duration within thirty days
before the Guarantee Period ends.
You may surrender your Contract, but the Cash Value may be subject to a
Surrender Charge and/or a Market Value Adjustment. A full or partial surrender
made prior to the end of a Guarantee Period will be subject to a Market Value
Adjustment. The surrender charge may be deducted from any surrender made before
the end of the seventh Contract Year. The surrender charge is computed as a
percentage of the Cash Value being surrendered.
CONTRACT YEAR CHARGE AS A
IN WHICH SURRENDER IS MADE PERCENTAGE OF CASH VALUE
-------------------------- ------------------------
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
There is no surrender charge for full or partial surrenders: (1) at the end of
an initial Guarantee Period of at least three years, or (2) at the end of any
other Initial Guarantee Period if the surrender occurs on or after the fifth
Contract Year. We may waive surrender charges in certain instances. (See
"Surrenders -- Waiver of Surrender Charge".)
There is no Market Value Adjustment if you surrender at the end of a guarantee
period. Any such surrender request must be in writing and received by us within
30 days before the Guarantee Period ends. You may request any interest that has
been credited during the prior Contract Year. No surrender charge or Market
Value Adjustment will be imposed on such interest payments; however, all
applicable premium taxes will be deducted. Any such surrender may also be
subject to federal and state taxes. (See "Surrenders" and "Federal Tax
Considerations".)
The Market Value Adjustment reflects the relationship between the current
Guaranteed Interest Rate for the time left in the Guarantee Period at surrender
and the Guaranteed Interest Rate that applies to your Contract. The Market Value
Adjustment amount primarily depends on the interest rates the Company receives
on its investments when the current Guaranteed Interest Rates are established.
The Market Value Adjustment is sensitive, therefore, to changes in interest
rates. It is possible that the amount you receive upon surrender may be less
than your original Purchase Payment if interest rates increase. It is also
possible that if interest rates decrease, the amount you receive upon surrender
may be more than your original Purchase Payment plus accrued interest.
4
On the Annuity Commencement Date specified by you, the Company will make either
a lump sum payment or start to pay a series of payments based on the Annuity
Options you select. (See "Annuity Period".)
The Contract may provide for a death benefit that is the Account Value on the
date we receive written notification of death. If the Annuitant dies before the
Annuity Commencement Date with no designated Contingent Annuitant surviving, or
if the Owner dies before the Annuity Commencement Date with the Annuitant
surviving, we will pay the death benefit to the Beneficiary. We calculate the
death benefit as of the date the Home Office receives written notification of
due proof of death.
(See "Death Benefit".)
We will deduct any applicable premium taxes from the Cash Value either upon
death, surrender, annuitization, or at the time the Purchase Payment is made to
the Contract. (See "Surrenders Premium Taxes".)
THE INSURANCE COMPANIES
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Refer to your contract for the name of your issuing company.
The Travelers Insurance Company is a stock insurance company chartered in 1863
in the state of Connecticut and has been continuously engaged in the insurance
business since that time. The Company is licensed to conduct life insurance
business in all states of the United States, the District of Columbia, Puerto
Rico, Guam, the U.S. and British Virgin Islands and the Bahamas. The Company is
an indirect wholly-owned subsidiary of Citigroup Inc. The Company's home office
is located at One Cityplace, Hartford, Connecticut 06103-3415.
The 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.
THE CONTRACTS
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APPLICATION AND PURCHASE PAYMENT
For the Company to issue a Contract to you, you must:
o complete an application or an order to purchase
o include your minimum Purchase Payment of at least $5,000 and
o submit both to our Home Office for approval.
The Company may:
o accept Purchase Payments up to $1 million without prior approval
o contact you or your agent if the application or order form is not
properly completed
o return your entire application or order form and Purchase Payment if
not properly completed.
RIGHT TO CANCEL
Generally, you may return your Contract to us at our Home Office within 10 days
(7 days for IRAs) of delivery of your Contract. Depending on your state, we will
return your Purchase Payment or Cash Value. Please refer to your Contract for
any additional information.
5
GUARANTEE PERIODS
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You will select the duration of the Guarantee Period and corresponding declared
Guaranteed Interest Rate. Your Purchase Payment will earn interest at the
Guaranteed Interest Rate during the entire Guarantee Period. All interest earned
will be credited daily; this compounding effect is reflected in the Guaranteed
Interest Rate.
EXAMPLE OF COMPOUNDING AT THE GUARANTEED INTEREST RATE
Beginning Account Value: $50,000
Guarantee Period: 5 years
Guaranteed Interest Rate: 5.50% Annual Effective Rate
END OF CONTRACT YEAR
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YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
-------------- -------------- -------------- -------------- ---------------
Beginning Account Value...................... $ 50,000.00
X (1 + Guaranteed Interest Rate)............. 1.055
--------------
$ 52,750.00
==============
Account Value at end of Contract Year 1...... $ 52,750.00
X (1 + Guaranteed Interest Rate)............. 1.055
--------------
$ 55,651.25
==============
Account Value at end of Contract Year 2...... $ 55,651.25
X (1 + Guaranteed Interest Rate)............. 1.055
--------------
$ 58,712.07
==============
Account Value at end of Contract Year 3...... $ 58,712.07
X (1 + Guaranteed Interest Rate)............. 1.055
--------------
$ 61,941.23
==============
Account Value at end of Contract Year 4...... $ 61,941.23
X (1 + Guaranteed Interest Rate)............. 1.055
---------------
$ 65,348.00
===============
Account Value at end of Guarantee Period $ 65,348.00
(i.e. Maturity Value)........................ ===============
Total Interest Credited in Guarantee Period -- $65,348.00 - $50,000.00 =
$15,348.00 Account Value at end of Guarantee Period -- $50,000.00 + $15,348.00 = $65,348.00
THE ABOVE EXAMPLE ASSUMES NO SURRENDERS, DEDUCTIONS FOR PREMIUM TAXES, OR
PRE-AUTHORIZED PAYMENT OF INTEREST DURING THE ENTIRE FIVE-YEAR PERIOD. A MARKET
VALUE ADJUSTMENT OR SURRENDER CHARGE MAY APPLY TO ANY SUCH INTERIM SURRENDER
(SEE "SURRENDERS"). THE HYPOTHETICAL GUARANTEED INTEREST RATES ARE ILLUSTRATIVE
ONLY AND ARE NOT INTENDED TO PREDICT FUTURE GUARANTEED INTEREST RATES TO BE
DECLARED UNDER THE CONTRACT. ACTUAL GUARANTEED INTEREST RATES DECLARED FOR ANY
GIVEN TIME MAY BE MORE OR LESS THAN THOSE SHOWN.
We will notify you about subsequent Guarantee Periods near the end of your
current Guarantee Period. At the end of a Guarantee Period:
o you may elect a subsequent Guarantee Period by telephone or in
writing
o your Account Value will be transferred to the new Guarantee Period at
the Guaranteed Interest Rate offered at that time
o if you do not make any election, we will automatically transfer the
Account Value into a 1-year Guarantee Period, which you may transfer
out of into a new Guarantee Period with no transfer, surrender or
Market Value Adjustment charge
6
ESTABLISHMENT OF GUARANTEED INTEREST RATES
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When you purchase your Contract, you will know the Guaranteed Interest Rate for
the Guarantee Period you choose. We will send you a confirmation showing the
amount of your Purchase Payment and the applicable Guaranteed Interest Rate.
After the end of each calendar year, we will send you a statement that will
show:
o your Account Value as of the end of the preceding year
o all transactions regarding your Contract during the year
o your Account Value at the end of the current year
o the Guaranteed Interest Rate being credited to your Contract.
The Company has no specific formula for determining Guaranteed Interest Rates in
the future. The Guaranteed Interest Rates will be declared from time to time as
market conditions dictate. (See "Investments by the Company".) In addition, the
Company may also consider various other factors in determining Guaranteed
Interest Rates for a given period, including regulatory and tax requirements,
sales commissions, administrative expenses, general economic trends and
competitive factors.
THE COMPANY WILL MAKE THE FINAL DETERMINATION AS TO GUARANTEED INTEREST RATES TO
BE DECLARED. WE CANNOT PREDICT NOR CAN WE GUARANTEE FUTURE GUARANTEED INTEREST
RATES.
SURRENDERS
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GENERAL
You may make a full or partial surrender at any time, subject to the surrender
charges described below. In the case of all surrenders, the Cash Value and
Maturity Value will be reduced.
Upon request, we will inform you of the amount payable upon a full or partial
surrender. Any full, partial or special surrender may be subject to tax. (See
"Federal Tax Considerations".)
We may defer payment of any surrender up to six months from the date we receive
your notice of surrender or the period permitted by state insurance law, if
less. If we defer payment for more than 30 days, we will pay interest of at
least 3.5% per annum on the amount deferred.
Participants in Section 403 (b) tax-deferred annuity plans may not make
surrenders from certain amounts before the earliest of age 59 1/2, separation
from service, death, disability or hardship. (See "Federal Tax Considerations --
Section 403 (b) Plans and Arrangements".)
SURRENDER CHARGE
There are no front-end sales charges. A surrender charge may be assessed on
surrenders made before the end of the seventh Contract Year. The surrender
charge is computed as a percentage of the Cash Value being surrendered.
CONTRACT YEAR CHARGE AS A
IN WHICH SURRENDER IS MADE PERCENTAGE OF CASH VALUE
-------------------------- ------------------------
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
7
SPECIAL SURRENDERS
No surrender charge or Market Value Adjustment will apply for full or partial
surrenders taken: (1) at the end of an Initial Guarantee Period of at least
three years in duration; or (2) at the end of any other Initial Guarantee Period
if the surrender occurs on or after the fifth Contract Year. However, Guarantee
Periods initiated through the Guaranteed Period Exchange Option will be subject
to the surrender charges based on the original Contract Date. (See "Guarantee
Period Exchange Option".)
We will not assess a surrender charge if your Account Value is applied to elect
an annuity option on the Annuity Commencement Date (except if the Fifth Option
is elected within the First Contract Year). A Market Value Adjustment will be
applied if the Annuity Commencement Date is not at the end of a Guarantee
Period. To elect an annuity option, you must notify us at least 30 days before
your Annuity Commencement Date.
In addition, for all full or partial surrenders, no surrender charge or Market
Value Adjustment will apply to any interest credited during the previous
Contract Year. Any such surrender may, however, be subject to federal or state
taxes.
If you participate in our Minimum Distribution Program, any payments that
satisfy the maximum requirements for the Minimum Distribution Program will not
be subject to the Market Value Adjustment or surrender charge. Systematic
withdrawals outside our Minimum Distribution Program are subject to a surrender
charge and a Market Value Adjustment to the extent that the payments exceed the
interest deducted during the prior Contract Year.
Any payments may be subject to federal or state taxes.
MARKET VALUE ADJUSTMENT
The amount payable on a full or partial surrender made before the end of any
Guarantee Period may be adjusted up or down by the Market Value Adjustment.
The Market Value Adjustment is the relationship between the then-current
Guaranteed Interest Rate for a Guarantee Period equal to the time left in your
Guarantee Period, and the Guaranteed Interest Rate that applies to your
Contract.
Generally, if your Guaranteed Interest Rate is lower than the applicable current
Guaranteed Interest Rate, then the Market Value Adjustment will result in a
lower payment upon surrender. Conversely, if your Guaranteed Interest Rate is
higher than the applicable current Guaranteed Interest Rate, the Market Value
Adjustment will result in a higher payment upon surrender.
The Market Value Adjustment amount primarily depends on the level of interest
rates on the Company's investments when the current Guaranteed Interest Rates
are established. The Market Adjusted Value is sensitive, therefore, to changes
in current interest rates. It is possible that the amount you receive upon
surrender would be less than the original Purchase Payment if interest rates
increase. It is also possible that if interest rates decrease, the amount you
receive upon surrender may be more than the original Purchase Payment plus
accrued interest.
The formula for calculating the Market Value Adjustment is shown in Appendix B,
which also contains an additional illustration of the application of the Market
Value Adjustment.
WAIVER OF SURRENDER CHARGE
The surrender charge may be waived if:
(a) distributions are applied to any one of the annuity options
(except if the Fifth Option is elected within the first Contract
Year) or
(b) the Owner or Annuitant dies and payment of a death benefit is made
to the Beneficiary.
8
GUARANTEE PERIOD EXCHANGE OPTION
Once each Contract Year after the first year, you may elect to transfer from
your current Guarantee Period into a new Guarantee Period of a different
duration and at the then-current Guaranteed Interest Rate. A Market Value
Adjustment will be applied to your current Account Value at the time of
transfer. There will be no surrender charge for this exchange. However,
surrender charges will continue to be based on time elapsed from the original
Contract Date. We reserve the right to charge a fee of up to $50 for such
transfers, but do not impose a transfer charge as of the date of this
prospectus.
PREMIUM TAXES
Certain state and local governments impose premium taxes. These taxes currently
range from 0% to 5.0%, depending upon jurisdiction. The Company is responsible
for paying these taxes and will determine the method used to recover premium tax
expenses incurred. The Company will deduct any applicable premium taxes from the
Cash Value either upon death, surrender, annuitization, or at the time the
Purchase Payment is made to the Contract, but no earlier than when the Company
has a tax liability under state law.
RESTRICTIONS ON FINANCIAL TRANSACTIONS
Federal laws designed to counter terrorism and prevent money laundering might,
in certain circumstances, require us to block a contract owner's ability to make
certain transactions and thereby refuse to accept any request for 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.
DEATH BENEFIT
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For nonqualified Contracts, IRAs and individual Section 403 (b) Contracts, the
Death Benefit is the Account Value on the date we receive written notification
of due proof of death. There is no death benefit payable under group contracts
issued to tax qualified plans under Sections 403 (b) (ERISA only), 457 or 401
(k).
PAYMENT OF PROCEEDS
The process of paying death benefit proceeds before the maturity date under
various situations for nonqualified contracts is summarized in the charts below.
The charts do not encompass every situation and are 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.
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BEFORE THE MATURITY DATE, THE COMPANY WILL MANDATORY PAYOUT
UPON THE DEATH OF THE PAY THE PROCEEDS TO: UNLESS. . . RULES APPLY*
- -------------------------------------- ----------------------------------------------------------------------------------------
OWNER (WHO IS NOT THE ANNUITANT) The Beneficiary (ies), Unless the Beneficiary is the Yes
(WITH NO JOINT OWNER) or if none, to the Contract Owner's spouse and the
Contract Owner's estate. spouse elects to continue the
contract as the new owner rather
than receive the distribution.
- -------------------------------------- ----------------------------------------------------------------------------------------
OWNER (WHO IS THE ANNUITANT) (WITH The Beneficiary (ies), Unless the Beneficiary is the Yes
NO JOINT OWNER) or if none, to the Contract Owner's spouse and the
Contract Owner's estate. spouse elects to continue the
contract as the new owner rather
than receive the distribution.
- -------------------------------------- ----------------------------------------------------------------------------------------
9
- -------------------------------------- ----------------------------------------------------------------------------------------
BEFORE THE MATURITY DATE, THE COMPANY WILL MANDATORY PAYOUT
UPON THE DEATH OF THE PAY THE PROCEEDS TO: UNLESS. . . RULES APPLY*
- -------------------------------------- ----------------------------------------------------------------------------------------
JOINT OWNER (WHO IS NOT THE The surviving joint Unless the surviving joint owner is Yes
ANNUITANT) owner. the spouse and elects to continue
the Contract.
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JOINT OWNER (WHO IS THE ANNUITANT) The surviving joint Unless the surviving joint owner is Yes
owner. the Contract Owner's spouse and the
spouse elects to continue the
Contract.
Or, unless there is a Contingent
Annuitant the Contingent Annuitant
becomes the Annuitant and the
proceeds will be paid to the
surviving joint owner. If the
surviving joint owner is the
spouse, the spouse may elect to
continue the Contract.
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ANNUITANT (WHO IS NOT THE The Beneficiary (ies), Unless, the Beneficiary is the Yes
CONTRACT OWNER) or if none, to the Contract Owner's spouse and the
Contract Owner. spouse elects to continue the
Contract as the new owner rather
than receive the distribution.
Or, unless there is a Contingent
Annuitant. Then, the Contingent
Annuitant becomes the Annuitant and
the Contract continues in effect
(generally using the original
Maturity Date). The proceeds will
then be paid upon the death of the
Contingent Annuitant or owner.
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ANNUITANT (WHO IS THE CONTRACT See death of "owner who Yes
OWNER) is the Annuitant" above.
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ANNUITANT (WHERE OWNER IS A The Beneficiary (ies) Yes (Death of
NONNATURAL PERSON/TRUST) (e.g. the trust). Annuitant is
treated as death
of the owner in
these
circumstances.)
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CONTINGENT ANNUITANT (ASSUMING No death proceeds are N/A
ANNUITANT IS STILL ALIVE) payable; Contract
continues.
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BENEFICIARY No death proceeds are N/A
payable; Contract
continues.
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CONTINGENT BENEFICIARY No death proceeds are N/A
payable; Contract
continues.
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- ----------
* Certain payout rules of the Internal Revenue Code (IRC) are triggered
upon the death of any 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.
10
DEATH PROCEEDS AFTER THE MATURITY DATE
If any 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.
ANNUITY PERIOD
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ELECTION OF ANNUITY COMMENCEMENT DATE AND FORM OF ANNUITY
You can select an Annuity Commencement Date at the time you apply for a
Contract. If no date is elected, for nonqualified Contracts, the automatic
default age is 90. For qualified Contracts, the automatic default age is 70 1/2.
Within 30 days before your Annuity Commencement Date, you may elect to have all
or a portion of your Cash Surrender Value paid in a lump sum on your Annuity
Commencement Date. Or, at least 30 days before the Annuity Commencement Date,
you may elect to have your Cash Value or a portion thereof (less applicable
premium taxes, if any) distributed under any of the Annuity Options described
below. If Option 5 "Payments for a Designated Period" is elected in the first
contract year, the Cash Surrender Value will be applied.
If no option is elected for nonqualified Contracts, the Cash Value will be
applied on the Annuity Commencement Date under the Second Option to provide a
life annuity with 120 monthly payments certain. For qualified Contracts, the
Cash Value will be applied to Option 4, to provide a joint and last life
annuity. This Contract may not be surrendered once annuity payments begin,
except with respect to Option 6.
CHANGE OF ANNUITY COMMENCEMENT DATE OR ANNUITY OPTION
You may change the Annuity Commencement Date at any time as long as such change
is made in writing and is received by us at least 30 days prior to the scheduled
Annuity Commencement Date. Once an Annuity Option has begun, it may not be
changed.
ANNUITY OPTIONS
Any one of the following Annuity Options may be elected. Annuity payments may be
available on a monthly, quarterly, semiannual or annual basis. The minimum
amount that may be applied to Annuity Options is $2,000 unless we consent to a
smaller amount.
OPTION 1 -- LIFE ANNUITY -- NO REFUND: The Company will make annuity payments
during the lifetime of the Annuitant ending with the last payment before death.
This option offers the maximum periodic payment, since there is no assurance of
a minimum number of payments or provision for a death benefit for beneficiaries.
OPTION 2 -- LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS ASSURED: The
Company will make monthly annuity payments during the lifetime of the Annuitant,
with the agreement that if, at the death of that person, payments have been made
for less than 120, 180 or 240 months as elected, we will continue making
payments to the Beneficiary during the remainder of the period.
OPTION 3 -- CASH REFUND LIFE ANNUITY: The Company will make monthly annuity
payments during the lifetime of the Annuitant. Upon the death of the Annuitant,
the Beneficiary will receive a payment equal to the Cash Value applied to this
option on the Annuity Commencement Date minus the dollar amount of annuity
payments already paid.
OPTION 4 -- JOINT AND LAST SURVIVOR LIFE ANNUITY -- NO REFUND: The Company will
make regular annuity payments during the lifetime of the Annuitant and a second
person. When either person dies, we will continue making payments to the
survivor. No further payments will be made following the death of the survivor.
OPTION 5 -- PAYMENTS FOR A DESIGNATED PERIOD: We will make periodic payments
guaranteed for the number of years selected which may be from five to thirty
years.
OPTION 6 -- ANNUITY PROCEEDS SETTLEMENT OPTION: Proceeds from the Death Benefit
may be left with the Company for a period not to exceed five years from the date
of the Owner's or Annuitant's death prior to the Annuity Commencement Date. The
proceeds will remain in the same Guarantee Period and continue to earn the
11
same Guaranteed Interest Rate as at the time of death. If the Guarantee Period
ends before the end of the five-year period, the Beneficiary may elect a new
Guarantee Period with a duration not to exceed the time remaining in the period
of five years from the date of the Owner's or Annuitant's death. Full or partial
surrenders may be made at any time. In the event of surrenders, the remaining
Cash Value will equal the proceeds left with the Company, minus any surrender
charge and applicable premium tax, plus any interest earned. A Market Value
Adjustment will be applied to all surrenders except those occurring at the end
of a Guarantee Period.
The Tables in the Contract reflect guaranteed dollar amounts of monthly payments
for each $1,000 applied under the first five Annuity Options listed above. Under
Options 1, 2 or 3, the amount of each payment will depend upon the age (and, for
nonqualified Contracts, sex) of the Annuitant at the time the first payment is
due. Under Option 4, the amount of each payment will depend upon the payees'
ages at the time the first payment is due (and, for nonqualified Contracts, the
sex of both payees).
The Tables for Options 1, 2, 3 and 4 are based on the 1983 Individual Annuitant
Mortality Table A with ages set back one year and a net investment rate of 3%
per annum. The table for Option 5 is based on a net investment rate of 3% per
annum. If mortality appears more favorable and interest rates so justify, at our
discretion, we may apply other tables which will result in higher payments for
each $1,000 applied under one or more of the first five Annuity Options.
ANNUITY PAYMENT
The first payment under any Annuity Option will be made on the Annuity
Commencement Date. Subsequent payments will be made in accordance with the
manner of payment selected and are based on the first payment date.
The option elected must result in a payment at least equal to the minimum
payment amount according to Company rules then in effect. If at any time
payments are less than the minimum payment amount, the Company has the right to
change the frequency to an interval resulting in a payment at least equal to the
minimum. If any amount due is less than the minimum per year, the Company may
make other arrangements that are equitable to the Annuitant.
Once annuity payments have begun, no surrender of the annuity benefit (including
benefits under Option 5) can be made for the purpose of receiving a lump-sum
settlement.
DEATH OF ANNUITANT AFTER ANNUITY COMMENCEMENT DATE
If the Annuitant dies after the Annuity Commencement Date, any amount payable as
a death benefit will be distributed at least as rapidly as under the method of
distribution in effect.
INVESTMENTS BY THE COMPANY
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We must invest our assets according to applicable state laws regarding the
nature, quality and diversification of investments that may be made by life
insurance companies. In general, these laws permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments. Purchase Payments made to
Contracts issued by the Travelers Insurance Company are invested in Separate
Account MGA, and purchase payments made to contracts issued by the Travelers
Life and Annuity Company are invested in Separate Account MGA II. Both Separate
Account MGA and MGA II are non-unitized separate accounts and are not chargeable
with liabilities arising out of any other business that the Company may conduct.
Owners do not share in the investment performance of assets allocated to the
Separate Accounts. The obligations under the Contract are independent of the
investment performance of the Separate Accounts and are the obligations of the
Company.
In establishing Guaranteed Interest Rates, the Company will consider the yields
on fixed income securities that are part of the Company's current investment
strategy for the Contracts at the time that the Guaranteed Interest Rates are
established. (See "Establishment of Guaranteed Interest Rates".) The current
investment strategy for the Contracts is to invest in fixed income securities,
including public bonds, privately placed bonds, and mortgages, some of which may
be zero coupon securities. While this generally describes our investment
strategy, we are not obligated to follow any particular strategy except as may
be required by federal and state laws.
12
AMENDMENT OF THE CONTRACTS
- --------------------------------------------------------------------------------
We reserve the right to amend the Contracts to comply with applicable federal or
state laws or regulations. We will notify you in writing of any such amendments.
ASSIGNMENT OF THE CONTRACTS
- --------------------------------------------------------------------------------
Our rights as evidenced by a Contract may be assigned as permitted by applicable
law. An assignment will not be binding upon us until we receive notice from you
in writing. We assume no responsibility for the validity or effect of any
assignment. You should consult your tax adviser regarding the tax consequences
of an assignment.
DISTRIBUTION OF THE CONTRACTS
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Travelers Distribution LLC ("TDLLC"), an affiliate of the Company, is the
principal underwriter of the Contracts. TDLLC is registered with the Securities
and Exchange Commission under the Act as a broker-dealer, and is a member of the
National Association of Securities Dealers, Inc. The Contract is offered through
both affiliated and non-affiliated broker dealers.
The principal underwriter enters into selling agreements with certain
broker-dealers registered under the Act. Under the selling agreements such
broker-dealers may offer Contracts to persons who have established an account
with the broker-dealer. In addition, the Company may offer certificates to
members of certain other eligible groups. The Company will pay a maximum
commission of 7% of the Purchase Payment for the sale of a Contract. Tower
Square Securities, Inc., an affiliate of the Company, receives greater
compensation for selling the contract than nonaffiliated broker-dealers.
From time to time, the Company may offer customers of certain broker-dealers
special Guaranteed Interest Rates and negotiated commissions. In addition, the
Company may offer Contracts to members of certain other eligible groups through
trusts or otherwise. Also, we may pay additional compensation or permit other
promotional incentives in cash, credit or other compensation for, among other
things, training, marketing or services provided.
FEDERAL TAX CONSIDERATIONS
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GENERAL
The Company is taxed as a life insurance company under Subchapter L of the Code.
Generally, amounts credited to a contract are not taxable until received by the
Contract Owner, participant or Beneficiary, either in the form of annuity
payments or other distributions. Tax consequences and limits are described
further below for each annuity program.
NOTE TO PARTICIPANTS IN QUALIFIED PLANS INCLUDING 401, 403 (B), 457 AS WELL AS
IRA OWNERS:
While annual plan contribution limits may be increased from time to time by
Congress and the IRS for federal income tax purposes, these limits must be
adopted by each state for the higher limits to be effective at a state income
tax level. In other words, permissible contribution limit for income tax
purposes may be different at the federal level from your state's income tax
laws. Please consult your employer or tax adviser regarding this issue.
SECTION 403 (B) PLANS AND ARRANGEMENTS
Purchase Payments for a tax-deferred annuity contract (including salary
reduction contributions) may be made by an employer for employees under annuity
plans adopted by public educational organizations and certain organizations
which are tax exempt under Section 501 (C) (3) of the Code. Within statutory
limits, such payments are not currently includable in the gross income of the
participants. Increases in the value of the Contract attributable to these
13
Purchase Payments are similarly not subject to current taxation. Instead, both
the contributions to the tax-sheltered annuity and the income in the Contract
are taxable as ordinary income when distributed.
An additional tax of 10% will apply to any taxable distribution received by the
participant before the age of 59 1/2, except when due to death, disability, or
as part of a series of payments for life or life expectancy, or made after the
age of 55 with separation from service. There are other statutory exceptions
that may apply in certain situations.
Amounts attributable to salary reductions made to a tax-sheltered annuity and
income thereon may not be withdrawn prior to attaining the age of 59 1/2,
separation from service, death, total and permanent disability, or in the case
of hardship as defined by federal tax law and regulations. Hardship withdrawals
are available only to the extent of the salary reduction contributions and not
from the income attributable to such contributions. These restrictions do not
apply to assets held generally as of December 31, 1988.
Distributions must begin by April 1st of the calendar year following the later
of the calendar year in which the participant attains the age of 70 1/2 or the
calendar year in which the Participant retires. Certain other mandatory
distribution rules apply at the death of the participant.
Certain distributions, including most partial or full redemptions or
"term-for-years" distributions of less than 10 years, are eligible for direct
rollover to another 403 (b) contract, certain qualified plans or to an
Individual Retirement Arrangement (IRA) without federal income tax withholding.
To the extent an eligible rollover distribution is not directly rolled over to
another 403 (b) contract, an IRA or eligible qualified contract, 20% of the
taxable amount must be withheld. In addition, current tax may be avoided on
eligible rollover distributions which were not directly transferred to a
qualified retirement program if the participant makes a rollover to a qualified
retirement plan or IRA within 60 days of the distribution.
Distributions in the form of annuity payments are taxable to the participant or
Beneficiary as ordinary income in the year of receipt, except that any
distribution that is considered the participant's "investment in the Contract"
is treated as a return of capital and is not taxable.
QUALIFIED PENSION AND PROFIT-SHARING PLANS
Like most other contributions made under a qualified pension or profit-sharing
trust described in Section 401 (a) of the Code and exempt from tax under Section
501 (a) of the Code, a Purchase Payment made by an employer (including salary
reduction contributions under Section 401(k) of the Code) is not currently
taxable to the participant and increases in the value of a contract are not
subject to taxation until received by a participant or Beneficiary.
Distributions in the form of annuity payments are taxable to the participant or
Beneficiary as ordinary income in the year of receipt, except that any
distribution that is considered the participant's "investment in the contract"
is treated as a return of capital and is not taxable. Certain eligible rollover
distributions including most partial and full surrenders or term-for-years
distributions of less than 10 years are eligible for direct rollover to an
eligible retirement plan or to an IRA without federal income tax withholding.
If a distribution that is eligible for rollover is not directly rolled over to
another qualified retirement plan or IRA, 20% of the taxable amount must be
withheld. In addition, current tax may be avoided on eligible rollover
distributions that were not directly transferred to a qualified retirement
program if the participant makes a rollover contribution to a qualified
retirement plan or IRA within 60 days of the distribution.
Distributions must begin by April Ist of the calendar year following the later
of the calendar year in which you attain age 70 1/2 or the calendar year in
which you retire, except that if you are a 5% owner as defined in Code Section
416(i) (1) (B), distributions must begin by April Ist of the calendar year
following the calendar year in which you attain age 70 1/2. Certain other
mandatory distribution rules apply on the death of the participant.
An additional tax of 10% will apply to any taxable distribution received by the
participant before the age of 59 1/2, except by reason of death, disability or
as part of a series of payments for life or life expectancy, or at early
retirement at or after the age of 55. There are other statutory exceptions which
may apply in certain situations.
14
INDIVIDUAL RETIREMENT ANNUITIES
To the extent of earned income for the year and not exceeding the applicable
limit for the taxable year, an individual may make deductible contributions to
an individual retirement annuity (IRA). The applicable limit ($2,000 per year
prior to 2002) has been increased by the Economic Growth and Tax Relief
Reconciliation Act of 2001 ("EGTRRA"). The limit is $3,000 for calendar years
2002-2004, $4,000 for calendar years 2005-2007, and will be indexed for
inflation in years subsequent to 2008. (Note: The minimum Purchase Payment
allowed for this Contract is $5,000.) There are certain limits on the deductible
amount based on the adjusted gross income of the individual and spouse based on
their participation in a retirement plan. If an individual is married and the
spouse is not employed, the individual may establish IRAs for the individual and
spouse. Purchase Payments may then be made annually into IRAs for both spouses
in the maximum amount of 100% of earned income up to a combined limit based on
the individual limits outlined above.
Partial or full distributions are treated as ordinary income, except that
amounts contributed after 1986 on a non-deductible basis are not includable in
income when distributed. An additional tax of 10% will apply to any taxable
distribution from the IRA that is received by the participant before the age of
59 1/2 except by reason of death, disability or as part of a series of payments
for life or life expectancy. Distributions must commence by April 1st of the
calendar year after the close of the calendar year in which the individual
attains the age of 70 1/2. Certain other mandatory distribution rules apply on
the death of the individual. The individual must maintain personal and tax
return records of any non-deductible contributions and distributions.
Section 408 (k) of the Code provides for the purchase of a Simplified Employee
Pension (SEP) plan. A SEP is funded through an IRA with an annual employer
contribution limit of $40,000 for each participant.
ROTH IRAS
Effective January 1, 1998, Section 408A of the Code permits certain individuals
to contribute to a Roth IRA. Eligibility to make contributions is based upon
income, and the applicable limits vary based on marital status and/or whether
the contribution is a rollover contribution from another IRA or an annual
contribution. Contributions to a Roth IRA, which are subject to certain
limitations, (similar to the annual limits for traditional IRAs), are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A conversion of "traditional" IRA to a Roth IRA may be
subject to tax and other special rules apply. You should consult a tax adviser
before combining any converted amounts with other Roth IRA contributions,
including any other conversion amounts from other tax years.
Qualified distributions from a Roth IRA are tax-free. A qualified distribution
requires that the Roth IRA has been held for at least 5 years, and the
distribution is made after age 59 1/2, on death or disability of the owner, or
for a limited amount ($10,000) for a qualified first time home purchase for the
owner or certain relatives. Income tax and a 10% penalty tax may apply to
distributions made (1) before age 59 1/2 (subject to certain exceptions) or (2)
during five taxable years starting with the year in which the first contribution
is made to the Roth IRA.
SECTION 457 PLANS
Section 457 of the Code allows employees and independent contractors of state
and local governments and tax-exempt organizations to defer a portion of their
salaries or compensation to retirement years without paying current income tax
on either the deferrals or the earnings on the deferrals.
The Owner of contracts issued under Section 457 plans by non-governmental
employers is the employer or a contractor of the participant and amounts may not
be made available to participants (or beneficiaries) until separation from
service, retirement or death or an unforeseeable emergency as determined by
Treasury Regulations. The proceeds of annuity contracts purchased by Section 457
plans are subject to the claims of general creditors of the employer or
contractor. A different rule applies with respect to Section 457 plans that are
established by governmental employers. The contract must be for the exclusive
benefit of the plan participants (and their beneficiaries), and the governmental
employer (and their creditors) must have no claim on the contract.
Distributions must begin by April 1st of the calendar year following the later
of the calendar year in which the participant attains the age of 70 1/2 or the
calendar year in which the participant retires. Certain other mandatory
distribution rules apply upon the death of the participant.
15
All distributions from plans that meet the requirements of Section 457 of the
Code are taxable as ordinary income in the year paid or made available to the
participant or Beneficiary.
NONQUALIFIED ANNUITIES
Individuals may purchase tax-deferred annuities without any limits. The Purchase
Payment receives no tax benefit, deduction or deferral, but taxes on the
increases in the value of the Contract are generally deferred until
distribution. Generally, if an annuity is owned other than by an individual, the
owner will be taxed each year on the increase in the value of the Contract. An
exception applies for Purchase Payments made before March 1, 1986. In addition,
for Contracts issued after April 22, 1987, all deferred increases in value will
be includable annually in the income of an Owner when that Owner transfers the
Contract without adequate considerations.
The federal tax law requires nonqualified annuity contracts issued on or after
January 19, 1985 to meet minimum mandatory distribution requirements upon the
death of the Contract Owner. Failure to meet these requirements will cause the
succeeding Contract Owner or Beneficiary to lose the tax benefits associated
with annuity contracts, i.e., primarily the tax deferral prior to distribution.
The distribution required depends upon whether an Annuity Option is elected or
whether the succeeding Owner is the surviving spouse. Contracts will be
administered by the Company in accordance with these rules.
If two or more nonqualified annuity contracts are purchased from the same
insurer within the same calendar year, such annuity contracts will be aggregated
for federal income tax purposes. As a result, distributions from any of them
will be taxed based upon the amount of income in all of the same calendar year
series of annuities. This will generally have the effect of causing taxes to be
paid sooner on the deferred gain in the contracts.
Those receiving partial distributions made before annuitization of a contract
will generally be taxed on an income-first basis to the extent of income in the
Contract. Certain pre-August 14, 1982 deposits into a nonqualified annuity
contract that have been placed in the Contract by means of a tax-deferred
exchange under Section 1035 of the Code may be withdrawn first without income
tax liability. This information on deposits must be provided to the Company by
the other insurance company at the time of the exchange. There is income in the
Contract generally to the extent the Cash Value exceeds the investment in the
Contract. The investment in the Contract is equal to the amount of premiums paid
less any amount received previously that was excludable from gross income. Any
direct or indirect borrowing against the value of the Contract or pledging of
the Contract as security for a loan will be treated as a cash withdrawal under
the tax law.
With certain exceptions, the law will impose an additional tax if a Contract
Owner makes a withdrawal of any amount under the Contract that is allocable to
an investment made after August 13, 1982. The amount of the additional tax will
be 10% of the amount includable in income by the Contract Owner because of the
withdrawal. The additional tax will not be imposed if the amount is received on
or after the Contract Owner reaches the age of 59 1/2, or if the amount is one
of a series of substantially equal periodic payments made for life or life
expectancy of the taxpayer. The additional tax will not be imposed if the
withdrawal or partial surrender follows the death or disability of the Contract
Owner.
THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
Under the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended,
certain special provisions may apply to the Contract if the Owner of a Section
403 (b) plan Contract or the owner of a contract issued to certain qualified
plans requests that the Contract be issued to conform to ERISA or if the Company
has notice that the Contract was issued pursuant to a plan subject to ERISA.
ERISA requires that certain Annuity Options, withdrawals or other payments and
any application for a loan secured by the Contract may not be made until the
Participant has filed a Qualified Election with the plan administrator. Under
certain plans, ERISA also requires that a designation of a Beneficiary other
than the participant's spouse be deemed invalid unless the participant has filed
a Qualified Election.
A Qualified Election must include either the written consent of the
Participant's spouse, notarized or witnessed by an authorized plan
representative, or the participant's certification that there is no spouse or
that the spouse cannot be located.
The Company intends to administer all contracts to which ERISA applies in a
manner consistent with the direction of the plan administrator regarding the
provisions of the plan, in accordance with applicable law.
16
Because these requirements differ according to the plan, a person contemplating
the purchase of an annuity contract should consider the provisions of the plan.
FEDERAL INCOME TAX WITHHOLDING
The portion of a distribution that is taxable income to the recipient will be
subject to federal income tax withholding, generally pursuant to Section 3405 of
the Code. The application of this provision is summarized below.
1. ELIGIBLE ROLLOVER DISTRIBUTION FROM SECTION 403(B) PLANS OR
ARRANGEMENTS, FROM QUALIFIED PENSION AND PROFIT-SHARING PLANS, OR
FROM 457 PLANS SPONSORED BY GOVERNMENTAL ENTITIES
There is a mandatory 20% tax withholding for plan distributions
that are eligible for rollover to an IRA or to another retirement
plan but that are not directly rolled over. A distribution made
directly to a participant or Beneficiary may avoid this result if:
(a) a periodic settlement distribution is elected based upon a
life or life expectancy calculation, or
(b) a complete term-for-years settlement distribution is elected
for a period of ten years or more, payable at least annually,
or
(c) a minimum required distribution as defined under the tax law
is taken after the attainment of the age of 70 1/2 or as
otherwise required by law.
A distribution including a rollover that is not a direct rollover
will require the 20% withholding, and the 10% additional tax
penalty on premature withdrawals may apply to any amount not added
back in the rollover. The 20% withholding may be recovered when the
participant or Beneficiary files a personal income tax return for
the year if a rollover was completed within 60 days of receipt of
the funds, except to the extent that the participant or spousal
Beneficiary is otherwise underwithheld or short on estimated taxes
for that year.
2. OTHER NON-PERIODIC DISTRIBUTIONS (FULL OR PARTIAL REDEMPTIONS)
To the extent not subject to the mandatory 20% withholding as
described in (1) above, the portion of a nonperiodic distribution
which constitutes taxable income will be subject to federal income
tax withholding, to the extent such aggregate distributions exceed
$200 for the year, unless the recipient elects not to have taxes
withheld. If an election to opt out of withholding is not provided,
10% of the taxable portion of the distribution will be withheld as
federal income tax; provided that the recipient may elect any other
percentage. Election forms will be provided at the time
distributions are requested. This form of withholding applies to
all annuity programs.
3. PERIODIC DISTRIBUTIONS (DISTRIBUTIONS PAYABLE OVER A PERIOD
GREATER THAN ONE YEAR)
The portion of a periodic distribution that constitutes taxable
income will be subject to federal income tax withholding under the
wage withholding tables as if the recipient were married claiming
three exemptions. A recipient may elect not to have income taxes
withheld or have income taxes withheld at a different rate by
providing a completed election form. Election forms will be
provided at the time distributions are requested. This form of
withholding applies to all annuity programs.
Recipients who elect not to have withholding made are liable for payment of
federal income tax on the taxable portion of the distribution. All recipients
may also be subject to penalties under the estimated tax payment rules if
withholding and estimated tax payments are not sufficient.
17
Recipients who do not provide a social security number or other taxpayer
identification number will not be permitted to elect out of withholding.
Additionally, United States citizens residing outside of the country, or U.S.
legal residents temporarily residing outside the country, are subject to
different withholding rules and cannot elect out of withholding.
TAX ADVICE
Because of the complexity of the law and the fact that the tax results will vary
according to the factual status of the individual involved, a person
contemplating purchase of an annuity contract and/or an Owner, participant or
Beneficiary who may make elections under a contract should consult with a
qualified tax or legal adviser prior to such purchase or the making of an
election. It should be understood that the foregoing description of the federal
income tax consequences under these contracts is not exhaustive and that special
rules are provided with respect to situations not discussed here. It should be
understood that if a tax benefited plan loses its exempt status, employees could
lose some of the tax benefits described. For further information, a qualified
tax adviser should be consulted.
AVAILABLE INFORMATION
- --------------------------------------------------------------------------------
The Company files reports and other information with the Securities and Exchange
Commission ("Commission"), as required by law. You may read and copy this
information and other information at the following locations:
o public reference facilities of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C.,
o the Commission's Regional Offices located at 233 Broadway, New York,
New York 10279,
o the Commission's Regional Offices located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Under the Securities Act of 1933, each Company has filed with the Commission a
registration statement (the "Registration Statement") relating to the Contracts
offered by this prospectus. This prospectus has been filed as a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement and the exhibits, and reference is hereby made to
such Registration Statement and exhibits for further information relating to the
Company and the Contracts. The Registration Statement and the exhibits may be
inspected and copied as described above. Although the Company furnishes
certificate and contract holders with the annual reports on Form 10-K for the
year ended December 31, 2003 the Company does not plan to furnish subsequent
financial reports.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- --------------------------------------------------------------------------------
Each Company's latest annual report on Form 10-K has been filed with the
Commission. They are incorporated by reference into this Prospectus and copies
must accompany this Prospectus.
The Forms 10-K for the period ended December 31, 2003 contain additional
information about the Company, including audited financial statements for the
Company's latest fiscal year. Each Company filed its Form 10-K on March 22,
2004. The Travelers Insurance Company filed its Form 10-K via Edgar File No.
33-03094. The Travelers Life and Annuity Company filed its Form 10-K via Edgar
File No. 33-58677.
If requested, the Company will furnish, without charge, a copy of any and all of
the documents incorporated by reference, other than exhibits to those documents
(unless such exhibits are specifically incorporated by reference in those
documents). You may direct your requests to The Travelers Insurance Company, One
Cityplace, Hartford, Connecticut 06103-3415, Attention: Annuity Services. The
telephone number is (860) 422-3985. You may also obtain copies of any documents,
incorporated by reference into this prospectus by accessing the Commission's
website (http: //www.sec.gov).
18
LEGAL OPINION
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Legal matters in connection with federal laws and regulations affecting the
issue and sale of the Contracts described in this prospectus and the
organization of the Company, its authority to issue such Contracts under
Connecticut law and the validity of the forms of the Contracts under Connecticut
law have been passed on by the Deputy General Counsel of the Company.
EXPERTS
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The consolidated financial statements and schedules of The Travelers Insurance
Company and subsidiaries as of December 31, 2003 and 2002, and for each of the
years in the three-year period ended December 31, 2003, have been incorporated
by reference herein in reliance upon the reports of KPMG LLP, independent
accountants, also incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing. The audit reports covering the
December 31, 2003, consolidated financial statements and schedules refer to
changes in the Company's methods of accounting for variable interest entities in
2003, for goodwill and intangible assets in 2002, and for derivative instruments
and hedging activities and for securitized financial assets in 2001.
The financial statements and schedules of The Travelers Life and Annuity Company
as of December 31, 2003 and 2002, and for each of the years in the three-year
period ended December 31, 2003, have been incorporated by reference herein in
reliance upon the reports of KPMG LLP, independent accountants, also
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing. The audit reports covering the December 31, 2003,
financial statements and schedules refer to changes in the Company's methods of
accounting for goodwill and intangible assets in 2002 and for derivative
instruments and hedging activities and for securitized financial assets in 2001.
19
APPENDIX A
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Plans eligible to purchase the Contract are pension and profit sharing plans
qualified under Section 401 (a) of the Internal Revenue Code, Section 403 (b)
ERISA plans, and eligible state deferred compensation plans under Section 457 of
the Code ("Qualified Plans").
To apply for a group annuity contract, the trustee or other applicant must
complete an application or purchase order for the Group Annuity Contract and
make a Purchase Payment. A group annuity contract will then be issued to the
applicant. While no Certificates are issued, each Purchase Payment and the
Account established thereby, are confirmed to the Contract Owner. Each account
will have its own optional Guarantee Period and Guaranteed Interest Rate.
Surrenders under the Group Annuity Contract may be made at the election of the
Contract Owner, from the Account established under the Contract. Account
surrenders are subject to the same limitations, adjustments and charges as
surrenders made under a certificate (see "Surrenders"). Surrender Values may be
taken in cash or applied to purchase annuities for the Contract Owners'
Qualified Plan participants.
Because there are no individual participant accounts, the qualified group
annuity contract issued in connection with a Qualified Plan does not provide for
death benefits. Annuities purchased for Qualified Plan participants may provide
for a payment upon the death of the Annuitant depending on the option chosen
(see "Annuity Options"). Additionally, since there are no Annuitants prior to
the actual purchase of an Annuity by the Contract Owner, the provisions
regarding the Annuity Commencement Date are not applicable.
A-1
APPENDIX B
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MARKET VALUE ADJUSTMENT
The application of a Market Value Adjustment may adjust up or down your account
value. The following describes the amount the Market Value Adjustment applies
to:
t/365
Maturity Value = [(Current Account Value - FI)x(1+iG) ]
1
Market Adjusted Value = [(Maturity Value)x --------- ]
t/365
(1+iC)
o where: "FI" is the available free interest credited for the Previous
Certificate Year, "iG" is the Guaranteed Credited rate as stated on
the contract specification page, "iC" is the Guaranteed Interest Rate
for a Guarantee period of "t" days, where "t" is the number of days
remaining in the Guarantee Period adjusted for leap years.
The total amount available to customers, prior to any charges or premium taxes,
is: Market Adjusted Value + Free Interest.
The current Guaranteed Interest Rate is declared periodically by the Company and
is based on the rate (straight line interpolation between whole years) which the
Company is then paying on premiums paid under this class of Contracts with the
same maturity date as the Purchase Payment to which the formula is being
applied.
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $50,000.00
Guarantee Period: 5 years
Guaranteed Interest Rate: 5.50% Effective Annual Rate
The following examples illustrate how the Market Value Adjustment may affect the
values of your Contract. In these examples, a Purchase Payment of $50,000 was
made to the Contract. After one year of the guarantee period, the Account Value
(i.e., the Purchase Payment plus accumulated interest) would be $52,750.
The Market Adjusted Value is calculated based on your then current Account Value
less any available free interest, and is based on a rate the Company is
crediting at the time on new Purchase Payments of the same term-to-maturity as
the time remaining in your Guarantee Period. One year after the Purchase Payment
was made, you would have four years remaining in the five-year Guarantee Period.
EXAMPLE OF A NEGATIVE MARKET VALUE ADJUSTMENT
A negative Market Value Adjustment results when interest rates have increased
since the date the Purchase Payment was made. Assume interest rates have
increased one year after the Purchase Payment and the Company is crediting 7.00%
for a four-year Guarantee Period.
The Maturity Value would be:
4
$61,941.23 = ($52,750.00 - $2,750) x (1 + .055)
The Market Adjusted Value would be:
1
$47,254.67 = [($61,941,23)x ---------]
4
(1+.07)
B-1
Total amount available, prior to charges and premium taxes:
$50,004.67 = $47,254.67 + $2,750.00
EXAMPLE OF A POSITIVE MARKET VALUE ADJUSTMENT
A positive Market Value Adjustment results when interest rates have decreased
since the date the Purchase Payment was made. Assume interest rates have
decreased one year after the Purchase Payment and the Company is crediting 3.50%
for a four-year Guarantee Period.
The Maturity Value would be:
4
$61,941.23 = ($52,750.00 - $2,750) x (1 + .055)
The Market Adjusted Value would be:
1
$53,978,21 = [$61,941,23)x -------- ]
4
(1+.035)
Total amount available, prior to charges and premium taxes:
$56,728.21 = $53,978.21 + $2,750.00
These examples illustrate what may happen when interest rates increase or
decrease from the beginning of a Guarantee Period. A particular Market Value
Adjustment may have a greater or lesser impact than that shown in these
examples, depending on how much interest rates have changed since the beginning
of a Guarantee Period and the amount of time remaining to maturity. In addition,
a surrender charge may be assessed on surrenders made before the Purchase
Payment has been under the Contract for five years.
B-2
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 As reported $2 $-- $--
stock option 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 $13.1
billion, respectively.
The Company's revenue was derived almost entirely from U.S. domestic
business. Revenue attributable to foreign countries was insignificant.
The Company had no transactions with a single customer representing 10% or
more of its revenue.
37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities were as
follows:
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2003 AMORTIZED COST UNREALIZED UNREALIZED FAIR VALUE
($ IN MILLIONS) GAINS LOSSES
- ------------------------------------------------------------------------------------------------------------------------------------
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 $42,323
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2002 AMORTIZED COST UNREALIZED UNREALIZED FAIR VALUE
($ IN MILLIONS) GAINS LOSSES
- ------------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and pass-through securities
U.S. Treasury securities and obligations of $ 6,975 $ 434 $ 2 $ 7,407
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 $2.8 billion, respectively.
The Company participates in dollar roll repurchase transactions as a way to
generate investment income. These transactions involve the sale of
mortgage-backed securities with the agreement to repurchase substantially the
same securities from the same counterparty. Cash is received from the sale,
which is invested in the Company's short-term money market pool. The cash is
returned at the end of the roll period when the mortgage-backed securities are
repurchased. The Company will generate additional investment income based upon
the difference between the sale and repurchase prices.
These transactions are recorded as secured borrowings. The mortgage-backed
securities remain recorded as assets. The cash proceeds are reflected in
short-term investments and a liability is established to reflect the Company's
obligation to repurchase the securities at the end of the roll period. The
liability is classified as other liabilities in the consolidated balance sheets
and fluctuates based upon the timing of the repayments. The balances were
insignificant at December 31, 2003 and 2002.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as follows:
- --------------------------------------------------------------------------------
GROSS GROSS
EQUITY SECURITIES: UNREALIZED UNREALIZED FAIR
($ 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 $8 million of negative goodwill. Net income adjusted to exclude
the impact of goodwill amortization for the year ended December 31, 2001 is as
follows:
Year Ended
($ IN MILLIONS) December 31, 2001
-----------------
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) (402) 237
- --------------------------------------------------------------------------------
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)
/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)
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED FUTURE POLICY OTHER AMORTIZATION
POLICY BENEFITS, POLICY BENEFITS, OF DEFERRED
ACQUI- LOSSES, CLAIMS CLAIMS AND NET CLAIMS POLICY OTHER
SITION AND LOSS BENEFITS PREMIUM INVESTMENT 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
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES 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
Fixedmaturities, 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 22 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
23
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 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) (9.3) (90.8)
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 illion 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 -- 3,324 3,324
tax of $1,789
--------------------------------------------------------------------------------------------------------------
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 -- 5,107 5,107
tax of $2,750
--------------------------------------------------------------------------------------------------------------
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
THE TRAVELERS LIFE AND ANNUITY COMPANY
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
- ------------------------
(George C. Kokulis) (Principal Executive Officer)
/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)
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED FUTURE POLICY BENEFITS, CLAIMS, AMORTIZATION
POLICY BENEFITS, LOSSES, NET LOSSES AND OF DEFERRED OTHER
ACQUISITION CLAIMS AND LOSS PREMIUM INVESTMENT SETTLEMENT POLICY OPERATING PREMIUMS
COSTS EXPENSES (1) REVENUE INCOME EXPENSES (2) ACQUISITION 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 OF AMOUNT
OTHER FROM OTHER ASSUMED TO
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT 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
"TTM"
TRAVELERS TARGET MATURITY
MODIFIED GUARANTEED ANNUITY CONTRACTS
ISSUED BY
THE TRAVELERS INSURANCE COMPANY
OR
THE TRAVELERS LIFE AND ANNUITY COMPANY
ONE CITY PLACE
HARTFORD, CONNECTICUT 06103-3415
L-12916 5-2004
(Rev. 8-2004)