THE TRAVELERS INSURANCE COMPANY
THE TRAVELERS LIFE AND ANNUITY COMPANY
REGISTERED FIXED ACCOUNT OPTION
FOR USE WITH ANNUITY CONTRACTS
The Fixed Account Option described in this prospectus is available only in
conjunction with certain group variable annuity contracts (the "Contracts"
and/or "Certificates") issued by The Travelers Insurance Company or The
Travelers Life and Annuity Company (the "Company") and funded by The Travelers
Separate Account QP for Variable Annuities, The Travelers Separate Account Five
Variable Annuities or The Travelers Separate Account Six for Variable Annuities
(the "Separate Account"). The Company may, in the future, offer the Fixed
Account option to additional contracts funded through other separate accounts.
The specific features of the Contract and the Separate Account are disclosed in
greater detail in the Contract prospectus. Where permitted by state law, we
reserve the right under Travelers Retirement Account contracts to restrict
purchase payments into the Fixed Account whenever the credited interest rate on
the Fixed Account is equal to the minimum guaranteed interest rate specified
under your Contract.
The group annuity contracts may be issued to Contract Owners on an unallocated
or allocated basis.
This prospectus explains:
o the Fixed Account Option
o The Travelers Insurance Company
o The Travelers Life and Annuity Company
o the Interest Rates
o Transfers to and from the Fixed Account Option
o Surrenders
o Market Value Adjustment
o other aspects of the Fixed Account Option
Your Contract is issued by either 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
Cityplace, 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 THE FOLLOWING REPORTS: THE QUARTERLY REPORT ON
FORM 10-Q FOR THE TRAVELERS INSURANCE COMPANY FOR THE PERIOD ENDED SEPTEMBER 30,
2004; THE ANNUAL REPORT ON FORM 10-K FOR THE TRAVELERS INSURANCE COMPANY FOR THE
PERIOD ENDED DECEMBER 31, 2003; AND THE ANNUAL REPORT ON FORM 10-K FOR THE
TRAVELERS LIFE AND ANNUITY COMPANY 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.
THE TRAVELERS INSURANCE COMPANY PROSPECTUS DATED DECEMBER 3, 2004
THE TRAVELERS LIFE AND ANNUITY COMPANY PROSPECTUS DATED MAY 3, 2004
TABLE OF CONTENTS
Glossary of Special Terms................................ 3 Market Value Adjustment......................... 8
Summary.................................................. 5 Annuity Period.................................. 10
The Insurance Company.................................... 6 Investments by the Company......................... 10
The Fixed Account Option................................. 6 Distribution of the Contracts...................... 10
The Accumulation Period............................... 6 Federal Income Tax Considerations.................. 11
Purchase Payments................................... 6 Taxation of the Company......................... 11
Declared Interest Rates of the Initial and
Subsequent Renewal Periods........................ 6 Information Regarding the Contracts............. 11
Cash Values......................................... 7 Available Information.............................. 11
Transfers................................................ 7 Incorporation of Certain Documents by Reference.... 11
Transfers from the Fixed Account...................... 7 Legal Opinion...................................... 12
Transfers to the Fixed Account........................ 8 Experts............................................ 12
Surrenders............................................... 8
General............................................... 8
Payment of Full or Partial Surrenders................. 8
Contract Termination.................................. 8
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GLOSSARY OF SPECIAL TERMS
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ACCUMULATION PERIOD: The period before annuity payments begin.
ANNUITANT: A Participant on whose life Annuity payments are to be made under a
contract.
ANNUITY: Payment of income for a stated period or amount.
ANNUITY COMMENCEMENT DATE: The date on which Annuity payments are to begin.
ANNUITY PERIOD: The period during which Annuity payments are made.
CASH SURRENDER VALUE: The Cash Value less any amounts deducted upon surrender,
any applicable premium tax and any outstanding loans.
CASH VALUE: The Purchase Payment(s) plus all interest earned, minus all
surrenders, charges and applicable premium taxes previously deducted.
CERTIFICATE ANNIVERSARY: Each anniversary of the Certificate Date.
CERTIFICATE DATE: The date an individual Certificate of Participation is issued
under a group contract.
CERTIFICATE YEAR: Each 12-month period beginning with the date an individual
certificate of participation is issued under a group Contract.
COMPETING FUND: Any investment option under the Plan, which in our opinion,
consists primarily of fixed income securities and/or money market instruments.
CONTRACT ANNIVERSARY: Each anniversary of the Contract Date.
CONTRACT/CERTIFICATE VALUE: The amount of all purchase payments, plus any
applicable credits, plus or minus any investment experience or interest.
CONTRACT DATE: The date shown on the Contract specifications page on which the
Contract is issued.
CONTRACT OWNER: The employer, individual or entity owning the contract.
CONTRACT YEAR: Each 12-month period beginning with the effective date of the
contract.
DECLARED INTEREST RATE(S): One or more rates of interest which may be declared
by the Company. Such rates will never be less than the guaranteed interest rate
stated in the contract and may apply to some or all of the values under the
Fixed Account Option for periods of time determined by the Company.
FIXED ACCOUNT OPTION: An annuity option which does not vary with the investment
experience of a Separate Account as described in this Prospectus.
GENERAL ACCOUNT: The General Account of the Company that holds values
attributable to the Fixed Account Option.
GUARANTEE PERIOD: The period between the initial Premium Payment or Renewal Date
and the Maturity Date during which a Guaranteed Interest Rate is credited.
HOME OFFICE: The Travelers Insurance Company or The Travelers Life and Annuity
Company (sometimes referred to as the "Company") located at One Cityplace,
Hartford, Connecticut 06103-3415.
IN WRITING: A written form satisfactory to us and received at our Home Office.
MARKET VALUE ADJUSTMENT: The Market Value Adjustment reflects the relationship,
at the time of surrender, between the rate of interest credited to funds on
deposit under the Fixed Account Option at the time of discontinuance to the rate
of interest credited on new deposits at the time of discontinuance.
OPTIONAL DEATH BENEFIT AND CREDIT: An optional feature available under the
Travelers Retirement Account Contracts where for an additional charge we will
add a credit to each purchase payment equal to 2% of that purchase payment.
Refer to the Travelers Retirement Account prospectus for more details.
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MARKET ADJUSTED VALUE: The value of funds held in the Fixed Account Option
increased or decreased by the Market Value Adjustment.
PARTICIPANT: An eligible person who is a member in a tax qualified Plan under
Sections 401, 403(b) or 457 of the Internal Revenue Code of 1986, as amended
(the "Code"), or a nonqualified deferred Compensation Plan.
PARTICIPANT'S INDIVIDUAL ACCOUNT: An account to which amounts are credited to a
Participant or Beneficiary under the contract.
PREMIUM TAX: A tax charged by a state or municipality on premiums, Purchase
Payments or contract values.
PURCHASE PAYMENT: The premium payment applied to the Contract.
SALES CHARGE: Any applicable surrender charge or contingent deferred sales
charge, as defined in the Contract.
SEPARATE ACCOUNT: The Travelers Separate Account QP for Variable Annuities, The
Travelers Separate Account Five for Variable Annuities or The Travelers Separate
Account Six for Variable Annuities.
SEPARATE ACCOUNT OPTION: A Funding option available under your Contract, the
value of which varies with the investment experience of the underlying mutual
fund.
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SUMMARY
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This prospectus describes the Fixed Account Option available as a companion
contract with variable annuity contracts of Separate Account QP (Gold Track and
Gold Track Select Contracts), Separate Account Five or Separate Account Six
(Travelers Retirement Account Contracts). The contracts are used with:
o qualified pension and profit-sharing plans
o tax-deferred annuity plans (for public school teachers and employees
and employees of certain other tax-exempt and qualifying employers)
o deferred compensation plans of state and local governments and
nonqualified deferred compensation plans
o individual retirement accounts
The Travelers Insurance Company or The Travelers Life and Annuity Company ("we"
or the "Company") issues the contracts. 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. Purchase Payments made under
the contracts and directed to the Fixed Account Option become a part of the
Company's General Account. Purchase Payments may also be allocated to one or
more Separate Account Options. The variable annuity contract and underlying
mutual funds are described in separate prospectuses. Please read all
prospectuses carefully.
During the Accumulation Period, the Fixed Account Option provides for Purchase
Payments to be credited with an initial interest rate for a 12-month period. We
guarantee that the initial credited interest rate will never be less than the
minimum interest rate permitted under state law. The initial interest rate will
be declared quarterly for Gold Track and Gold Track Select contracts issued in
connection with plans established under Section 401, Section 457, and certain
plans established under Section 403(b) of the Code. The initial interest rate
will be declared monthly for all Travelers Retirement Account contracts and for
Gold Track contracts issued in connection with combination plans established
pursuant to Sections 403 (b) /401 and certain contracts issued in connection
with Section 403 (b) plans.
At the end of the 12-month guarantee period, a renewal interest rate will be
determined by the Company. We guarantee that the renewal interest rate will
never be less that the minimum interest rate permitted under state law. At the
end of the initial guarantee period, the first renewal rate will be guaranteed
to the end of the calendar year. The second and all subsequent renewal rates
will be declared each January 1 thereafter, and will be guaranteed through
December 31 of that year. The rates of interest credited will affect a contract
or account's Cash Value. (See Cash Values.) Such rates may also be used to
determine amounts payable upon termination of the contracts. (See Surrenders --
Contract Termination.)
The Company may offer the Fixed Account Option with guaranteed rates that are
declared on a calendar quarterly basis and applied to all Purchase Payments for
the remainder of the calendar quarter. At the end of the calendar quarter, the
Company will declare a new guarantee rate that will be applied to all new
Purchase Payments allocated to the Fixed Account Option for the following
calendar quarter, as well as Purchase Payments that were previously applied to
the Fixed Account Option.
Generally, the Company intends to invest assets directed to the Fixed Account
Option in investment-grade securities. The Company has no specific formula for
determining the initial interest rates or renewal interest rates. However, such
a determination will generally reflect interest rates available on the types of
debt instruments in which the Company intends to invest the amounts directed to
the Fixed Account Option. In addition, the Company's management may also
consider various other factors in determining these rates for a given period,
including regulatory and tax requirements; sales commission and administrative
expenses borne by the Company; general economic trends; and competitive factors.
(See Investments by the Company.)
The Contract Owner may, during the Accumulation Period, direct all or a portion
of a contract or account's Cash Value under the Fixed Account Option to one or
more of the investment options of the Separate Account. No Sales Charges will be
deducted on such transfers. However, there are restrictions which may limit the
amount that may be so directed and transfers may be deferred in certain cases.
(See Transfers from the Fixed Account.)
Distributions and transfers from the Fixed Account Option are made on a last-in,
first-out basis. We will determine the Cash Surrender Value as of the next
valuation date after we receive a written request at our Home
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Office. We reserve the right to defer payment of the Fixed Account Option for up
to six months from the date we receive the written request. If a payment is
deferred for more than 30 days after we receive the request, we will pay a
minimum interest rate on the amount.
THE INSURANCE COMPANY
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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 1864
in the state of Connecticut and has been continuously engaged in the insurance
business since that time. The Company is licensed to conduct life insurance
business in all states of the United States, the District of Columbia, Puerto
Rico, Guam, the U.S. and British Virgin Islands and the Bahamas. The Company is
an indirect wholly owned subsidiary of Citigroup Inc. The Company's home office
is located at One Cityplace, Hartford, Connecticut 06103-3415.
The 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 for 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 FIXED ACCOUNT OPTION
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The Fixed Account Option is available only in conjunction with the purchase of a
variable annuity contract (Travelers Gold Track, Travelers Gold Track Select or
Travelers Retirement Account; "Gold Track", "Gold Track Select" and "Travelers
Retirement Account") issued by the Company. The Contracts are available as
individual or group Contracts. Participants under group Contracts are issued
Certificates summarizing the provisions of the group Contract. For convenience,
we refer to both individual Contract Owners and Participants as Contract Owners.
Where permitted by state law, we reserve the right to restrict purchase payments
into the Fixed Account Option under your Travelers Retirement Account contract
whenever the credited interest rate on the Fixed Account is equal to the minimum
guaranteed interest rate specified under your contract.
The contracts provide for both an Accumulation Period and an Annuity Period.
During the Accumulation Period, the Employee /Trustee may direct Purchase
Payments to the Fixed Account (part of the Company's general account). During
the Annuity Period, the value of the Annuity Contract is used to purchase Fixed
or Variable Annuities. The operation of the contract during the Annuity Period
is described in the contract prospectus accompanying this prospectus.
THE ACCUMULATION PERIOD
PURCHASE PAYMENTS
During the Accumulation Period, all or a portion of Purchase Payments (less any
premium taxes), may be allocated to the Fixed Account Option.
DECLARED INTEREST RATES OF THE INITIAL AND SUBSEQUENT RENEWAL PERIODS
The Fixed Account guarantees an initial interest rate for a 12-month period. For
the following contracts we will declare initial interest rates quarterly:
o Gold Track Select contracts issued in connection with a plan
established under Sections 401, 457 or 403 (b) of the Code
o Gold Track contracts for plans established under Sections 401, 457
For the following, we will declare initial interest rates monthly:
o Travelers Retirement Account contracts
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o Gold Track contracts issued in connection with a plan established
under Section 403 (b) or combination contracts under Sections 403 (b)
/401
At the end of the 12-month guarantee period, a renewal interest rate will be
determined. The rate will never be less than the minimum interest rate permitted
under state law. At the end of the initial guarantee period, the first renewal
rate will be guaranteed to the end of that calendar year. The second and all
future renewal rates will be declared each subsequent January 1 and guaranteed
through December 31 of each year.
The Company may offer the Fixed Account Option with guaranteed rates that are
declared on a calendar quarterly basis and applied to all Purchase Payments for
the remainder of the calendar quarter. At the end of the calendar quarter, the
Company will declare a new guarantee rate that will be applied to all new
Purchase Payments allocated to the Fixed Account Option for the following
calendar quarter, as well as Purchase Payments that were previously applied to
the Fixed Account Option.
The Company has no specific formula for determining the rate (s) of interest
that it will declare. Generally, the rates we determine will reflect interest
rates available on the types of debt instruments in which we intend to invest
the amounts directed to the Fixed Account Option (See Investments by the
Company.) In addition, the Company's management may also consider various other
factors in determining interest rates for a given period, including regulatory
and tax requirements; sales commission and administrative expenses borne by the
Company; general economic trends; and competitive factors. THE COMPANY'S
MANAGEMENT WILL MAKE THE FINAL DETERMINATION AS TO ANY DECLARED INTEREST RATES
AND ANY INTEREST IN EXCESS OF THE MINIMUM INTEREST RATE ALLOWED UNDER STATE LAW.
THE COMPANY CANNOT PREDICT NOR GUARANTEE THE RATES OF ANY FUTURE DECLARED
INTEREST IN EXCESS OF THE MINIMUM RATE.
CASH VALUES
We will credit amounts held under the Fixed Account Option with interest. The
minimum guaranteed interest rate will never be lower than the minimum rate
permitted under state law. Interest is credited daily. Purchase Payments (other
than the initial Purchase Payment) are allocated to the Fixed Account Option as
of the close of the business day on which we receive the Purchase Payment at the
Home Office. Therefore, Purchase Payments begin earning interest the day after
we receive the Purchase Payment in good order.
TRANSFERS
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No transfers are allowed between the Fixed Account Option and any Competing
Fund.
Where permitted by state law, we reserve the right to restrict transfers from
the Separate Account options in a Travelers Retirement Account contract into the
Fixed Account Option whenever the credited interest rate on the Fixed Account is
equal to the minimum guaranteed interest rate specified under your Contract.
The charges for transfers are described in the contract prospectus which
accompanies this prospectus. No Sales Charges apply when a transfer is made.
Amounts previously transferred from the Fixed Account Option to the Separate
Account Options may not be transferred back to the Fixed Account Option or any
Competing Fund for a period of at least 3 months from the date of the transfer.
The Company may eliminate this restriction in circumstances where guaranteed
interest rates on the Fixed Account Option are declared and credited on a
quarterly basis.
TRANSFERS FROM THE FIXED ACCOUNT
The Contract Owner may transfer amounts in the Fixed Account Option to one or
more of the Separate Account Options subject to the Competing Fund restrictions
described in your Contract. All transfers will be made on a last- in, first-out
basis. That is, the money most recently deposited or transferred into the
account will be transferred or surrendered first.
We reserve the right to limit transfers from the Fixed Account in any calendar
year to 20% of the Contract/ Certificate Cash Value in the Fixed Account Option
as of the end of the preceding Contract/Certificate year. (See also
"Surrenders.")
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TRANSFERS TO THE FIXED ACCOUNT
TRAVELERS RETIREMENT ACCOUNT CONTRACTS
The Contract Owner may transfer amounts in the Separate Account Options to the
Fixed Account Option subject to the Competing Fund restrictions described in
your Contract. In addition, amounts previously transferred from a Competing Fund
to a Separate Account Option which is not a Competing Fund may not be
transferred to the Fixed Account Option for a period of at least 3 months from
the date of transfer.
If the Contract Owner selects the Optional Death Benefit and Credit under the
Contract, the following additional restrictions apply:
o Purchase Payments allocated to a Separate Account Option which is not
a Competing Fund may not be transferred to the Fixed Account for a
period of at least 3 months from the date of the Purchase Payment.
o If a Purchase Payment has been made within the last five Contract
/Certificate years, transfers from the Separate Account Options to
the Fixed Account Option may not exceed 20% per year of the Contract/
Certificate value in the Separate Account Options on the
Contract/Certificate anniversary.
GOLD TRACK AND GOLD TRACK SELECT CONTRACTS
Values held in a Separate Account Option may be transferred to the Fixed Account
Option at any time subject to any Competing Fund restrictions which may apply.
SURRENDERS
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GENERAL
Subject to the termination provisions described below, the Contract Owner may
request a full or partial surrender of Cash Values at any time from the Fixed
Account Option.
PAYMENT OF FULL OR PARTIAL SURRENDERS
In the event of a partial surrender from the Fixed Account Option, we will pay
the requested value less any applicable Sales Charges. All partial surrenders
will be made on a last-in, first-out basis. If an allocated account is
surrendered for reasons other than contract termination, we will pay the Cash
Value less any Premium Tax, the administrative charge, and any Sales Charges, as
applicable. PLEASE CONSULT THE ACCOMPANYING VARIABLE ANNUITY CONTRACT PROSPECTUS
FOR ANY APPLICABLE SALES CHARGES.
CONTRACT TERMINATION
If the Contract is discontinued, no further Purchase Payments or transfers will
be allowed. On the date we receive a written request to terminate the contract,
or within 31 days after we notify you of our intent to terminate the contract,
any amounts transferred from the Fixed Account Option to the Separate Account
Options during the 30 days before the date of discontinuance will be transferred
back to the Fixed Account Option.
If the Contract is discontinued because of Plan termination due to the
dissolution or liquidation of the employer under US Code Title 11 procedures,
the Cash Surrender Value will be distributed directly to the employees entitled
to share in such distributions pursuant to the plan. Distribution may be in the
form of cash payments, annuity options or deferred annuities. This provision
does not apply to plans established under Section 457 of the Code.
MARKET VALUE ADJUSTMENT
The following discussion of Market Adjusted Values applies only to Contract
Owners who are not individuals.
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If the Contract Owner requests a full surrender of the contract or of all
contract values held in the Fixed Account Option for reasons other than listed
above; or if the Company discontinues the contract, the Company will determine
the Market Adjusted Value of the Fixed Account Option.
The amount payable to the Contract Owner if a Contract is discontinued may be
increased or decreased by the application of the Market Value Adjustment
formula. The formula is the following:
Market Adjusted Value = Cash Value x (1 + RO) 5/ (1 + R1 + .0025)5
Where:
RO is the average interest rate credited to amounts in the
Fixed Account Option at the time of termination,
R1 is the interest rate credited on new deposits for this
class of contracts at the time of termination.
FOR CONTRACTS ISSUED IN EVERY STATE EXCEPT NEW YORK:
If, as of the date of discontinuance, the Market Adjusted Value is less than the
Cash Value of the Fixed Account Option, the Contract Owner may select one of the
payment methods described below:
1) The Market Adjusted Value (less any applicable Sales Charge) in one
lump sum within 60 days of the date of discontinuance, or
2) The Cash Surrender Value of the Fixed Account Option in
installments over a 5-year period. The amount deducted on
Surrender, if any, is determined as of the date of discontinuance,
and will apply to all installment payments. Interest will be
credited to the remaining Cash Value of the Fixed Account Option
during this installment Period at a fixed effective annual interest
rate of not less than the minimum rate permitted under state law.
The first payment will be made no later than 60 days following the
Contract Owner's request for surrender or our written notification
of our intent to discontinue the contract. The remaining payments
will be mailed on each anniversary of the discontinuance for four
years. During that period, no additional surrenders are allowed.
If, as of the date of discontinuance, the Market Adjusted Value is greater than
the Cash Value of the Fixed Account Option, the Contract Owner may select one of
the payment methods as described below:
1) the Cash Surrender Value of the Fixed Account Option, in one lump
sum within 60 days of the date of discontinuance, or
2) The Cash Value of the Fixed Account Option in installments over a
5-year period. Interest will be credited to the remaining Cash
Value of the Fixed Account Option during this installment period at
a fixed effective annual interest rate of not less than the minimum
rate permitted under state law. The first payment will be made no
later than 60 days following the Contract Owner's request for
surrender or our written notification of our intent to discontinue
the contract. The remaining payments will be mailed on each
anniversary of the discontinuance for four years. During that
period, no additional surrenders are allowed.
ALLOCATED CONTRACTS ISSUED IN NEW YORK:
If the Market Adjusted Value is less than the Cash Value of the Fixed Account as
of the date of discontinuance, we will pay you the Market Adjusted Value, less
any amounts deducted on surrender, less any loans outstanding in one lump sum.
This amount will never be less than 90% of the Cash Value of the Fixed Account,
less any outstanding loans as of the date of discontinuance. We may defer
payment of this amount for up to six months from the date of discontinuance. If
a payment is deferred more than 10 working days from the date of discontinuance,
we will credit interest during the deferred period in the same manner as
described your Contract.
If the Market Adjusted Value is greater than the Cash Value of the Fixed Account
as of the date of discontinuance, we will pay the Cash Surrender Value of the
Fixed Account as of the date of discontinuance in one lump sum. We may defer
payment of this amount for up to six months from the date of discontinuance. If
a
9
payment is deferred more than 10 working days from the date of discontinuance,
we will credit interest during the deferred period in the same manner as
described in your Contract.
UNALLOCATED CONTRACTS ISSUED IN NEW YORK:
You may select either of the following methods of payout:
a) LUMP SUM PAYMENT OPTION. If the Market Adjusted Value is less than
the Cash Value of the Fixed Account as of the date of
discontinuance, We will pay You the Market Adjusted Value, less any
amounts deducted on Surrender, in one lump sum within 60 days of
the date of discontinuance. If the Market Adjusted Value is greater
than the Cash Value of the Fixed Account as of the date of
discontinuance, We will pay You the Cash Surrender Value of the
Fixed Account within 60 days of the date of discontinuance.
b) INSTALLMENT PAYMENT OPTION. We will pay You the Cash Value of the
Fixed Account in installments over a 5 year period. Interest will
be credited to the remaining Cash Value of the Fixed Account during
this installment period at a fixed effective annual interest rate
of not less than 1.5% below the net effective rate being credited
to the contract on the date of discontinuance. The first payment
will be made no later than 60 days following our mailing the
written notice to You at the most current address available on our
records. The remaining payments will be mailed on each anniversary
of the discontinuance date for 4 years. Allowable distributions
shown on the Contract Specifications page are not permitted during
the 5-year installment period.
ANNUITY PERIOD
We will normally make annuity payments within fifteen business days after we
receive a settlement claim, or any other later specified date. Subsequent
payments will be made periodically on the anniversaries of the first payment.
The Separate Account contract prospectus describes more fully the Annuity Period
and annuity options under the contracts. Please note, however, that
annuitization is irrevocable; once fixed Annuity payments have begun, the
annuity benefit cannot be surrendered for a lump sum settlement.
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. All General Account assets
of the Company would be available to meet the Company's guarantee under the
Fixed Account Option. The proceeds from the Fixed Account Option will become
part of the Company's general assets and are available to fund the claims of all
classes of customers of the Company.
In establishing Declared Interest Rates, the Company will consider the yields
available on the instruments in which it intends to invest the amounts directed
to the Fixed Account Option. The current investment strategy for the Contracts
is to invest in investment-grade 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.
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 1934 Act as a broker-dealer, and is a member
of the National Association of Securities Dealers, Inc.
The principal underwriter enters into selling agreements with certain
broker-dealers registered under the 1934 Act. Under the selling agreements such
broker-dealers may offer Contracts to persons who have established an
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account with the broker-dealer. In connection with the sale of Gold Track and
Gold Track Select Contracts, the Company will pay a maximum commission of 10% of
the Purchase Payment for the sale of a Contract.
In connection with the sale of Travelers Retirement Account Contracts, up-front
compensation will not exceed 10% of the Purchase Payments made under the
Contracts. If asset based compensation is paid, it will not exceed 2% of the
average account value annually. From time to time, the Company may pay or permit
other promotional incentives in cash, credit or other compensation.
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 INCOME TAX CONSIDERATIONS
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TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under Part I of Subchapter L of
the Code. The assets underlying the Fixed Account Option under the contracts
will be owned by the Company. The income earned on such assets will be the
Company's income.
INFORMATION REGARDING THE CONTRACTS
Tax information of the Contracts /Certificates and distributions is briefly
described in the accompanying Contract Prospectus.
AVAILABLE INFORMATION
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The Company files reports and other information with the Securities and Exchange
Commission ("Commission"), as required by law. You may read and copy this
information and other information at the following locations:
o public reference facilities of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C.
o the Commission's Regional Offices located at 233 Broadway, New York,
New York 10279
o the Commission's Regional Offices located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
Under the Securities Act of 1933, the Company has filed with the Commission a
registration statement (the "Registration Statement") relating to the Fixed
Account Option 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
does furnish the Annual Report on Form 10-K for the year ended December 31, 2003
to owners of contracts or certificates, the Company does not plan to furnish
subsequent annual reports containing financial information to the annuity
contract or certificate owners described in this Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- --------------------------------------------------------------------------------
The latest Quarterly Report on Form 10-Q for The Travelers Insurance Company has
been filed with the Commission. This Report is incorporated by reference into
this Prospectus and a copy must accompany this Prospectus. The Travelers
Insurance Company filed its Form 10-Q via Edgar File No. 33-03094 on November
12, 2004.
11
The latest Annual Report on Form 10-K for both The Travelers Insurance Company
and the Travelers Life and Annuity Company have been filed with the Commission.
Each report is incorporated by reference into this Prospectus and a copy must
accompany this Prospectus.
The Form 10-K for the period ended December 31, 2003 contains 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 06103-3145, 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 SEC's website
(http://www.sec.gov).
LEGAL OPINION
- --------------------------------------------------------------------------------
Legal matters in connection with federal laws and regulations affecting the
issue and sale of the Fixed Account Option 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 such Contracts under Connecticut
law have been passed on by the Deputy General Counsel of the Company.
EXPERTS
- --------------------------------------------------------------------------------
The consolidated financial statements and schedules of The Travelers Insurance
Company and subsidiaries as of December 31, 2003 and 2002, and for each of the
years in the three-year period ended December 31, 2003, have been incorporated
by reference herein in reliance upon the reports of KPMG LLP, independent
registered public accounting firm, 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 registered public accounting
firm, 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.
12
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
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)
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 checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2).
Yes X No
-------- --------
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 H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 2004 and 2003 (unaudited)....................................................3
Condensed Consolidated Balance Sheets as of September 30, 2004 (unaudited) and
December 31, 2003......................................................................................................4
Condensed Consolidated Statements of Changes in
Shareholder's Equity for the three and nine months ended September 30, 2004 and 2003 (unaudited).......................5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003 (unaudited)..............................................................6
Notes to Condensed Consolidated Financial Statements (unaudited).......................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................................................17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................................23
ITEM 4. CONTROLS AND PROCEDURES......................................................................................23
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................................24
Signatures............................................................................................................25
2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
($ IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
REVENUES
Premiums $660 $741 $1,634 $1,707
Net investment income 829 782 2,475 2,297
Net realized investment gains (losses) (1) 43 (13) 45
Fee income 197 158 574 447
Other revenues 49 40 103 96
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 1,734 1,764 4,773 4,592
- -----------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 601 683 1,446 1,537
Interest credited to contractholders 336 311 962 933
Amortization of deferred acquisition costs 186 128 481 373
General and administrative expenses 111 115 353 337
- -----------------------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 1,234 1,237 3,242 3,180
- -----------------------------------------------------------------------------------------------------------------------------
Income from operations before federal income taxes 500 527 1,531 1,412
- -----------------------------------------------------------------------------------------------------------------------------
Federal income taxes 154 155 437 364
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $346 $372 $1,094 $1,048
=============================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Investments (including $3,047 and $2,170 subject to securities
lending agreements) $60,382 $56,204
Separate and variable accounts 28,840 26,972
Reinsurance recoverables 4,624 4,470
Deferred acquisition costs 4,788 4,395
Other assets 2,869 3,307
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $101,503 $95,348
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $32,967 $30,252
Future policy benefits and claims 16,555 15,964
Separate and variable accounts 28,840 26,972
Other liabilities 9,340 8,803
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities 87,702 81,991
- ---------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized,
issued and outstanding 100 100
Additional paid-in capital 5,448 5,446
Retained earnings 6,773 6,451
Accumulated other changes in equity from nonowner sources 1,480 1,360
- ---------------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 13,801 13,357
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $101,503 $95,348
=====================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
($ IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $100 $100 $100 $100
Changes in common stock - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $100 $100 $100 $100
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
- ------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $5,447 $5,444 $5,446 $5,443
Stock option tax benefit 1 - 2 1
- ------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $5,448 $5,444 $5,448 $5,444
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
- ------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $6,579 $6,151 $6,451 $5,638
Net income 346 372 1,094 1,048
Dividends to parent (152) (117) (772) (280)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $6,773 $6,406 $6,773 $6,406
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- ------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $815 $1,598 $1,360 $454
Foreign currency translation, net of tax - - 1 2
Unrealized gains (losses), net of tax 681 (242) 75 870
Derivative instrument hedging activity gains (losses),
net of tax (16) 32 44 62
- ------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $1,480 $1,388 $1,480 $1,388
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- ------------------------------------------------------------------------------------------------------------------------------
Net income $346 $372 $1,094 $1,048
Other changes in equity from nonowner sources 665 (210) 120 934
- ------------------------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $1,011 $162 $1,214 $1,982
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $12,941 $13,293 $13,357 $11,635
Changes in nonowner sources 1,011 162 1,214 1,982
Dividends (152) (117) (772) (280)
Changes in additional paid-in capital 1 - 2 1
- ------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $13,801 $13,338 $13,801 $13,338
==============================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
($ IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2004 2003
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $1,064 $476
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 5,220 5,300
Equity securities 81 28
Mortgage loans 500 273
Proceeds from sales of investments
Fixed maturities 5,840 9,957
Equity securities 69 121
Mortgage Loans 29 -
Real estate held for sale 53 5
Purchases of investments
Fixed maturities (14,681) (18,249)
Equity securities (95) (178)
Mortgage loans (744) (193)
Policy loans, net 12 20
Short-term securities (purchases) sales, net (178) 45
Other investment sales, net 382 112
Securities transactions in course of settlement, net 962 (543)
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,550) (3,302)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 7,454 6,647
Contractholder fund withdrawals (5,089) (3,588)
Dividends to parent company (772) (280)
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,593 2,779
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 107 (47)
Cash at beginning of period 149 186
- ---------------------------------------------------------------------------------------------------
Cash at end of period $256 $139
===================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $146 $305
===================================================================================================
See Notes to Condensed Consolidated Financial Statements.
6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. 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). 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 condensed
consolidated financial statements and accompanying footnotes of the Company
are prepared in conformity with accounting principles generally accepted in
the United States of America (GAAP) and are unaudited. 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.
The Company's two reportable business segments are Travelers Life & Annuity
and Primerica. The primary insurance entities of the Company are TIC and
its subsidiary 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. Significant
intercompany transactions and balances have been eliminated. The condensed
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.
In the opinion of management, the interim financial statements reflect all
normal recurring adjustments necessary for a fair presentation of results
for the periods reported. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2003. The condensed consolidated
balance sheet as of December 31, 2003 was derived from the audited balance
sheet included in the Form 10-K. Certain financial information that is
normally included in annual financial statements prepared in accordance
with GAAP, but is not required for interim reporting purposes, has been
condensed or omitted. Certain prior year amounts have been reclassified to
conform to the 2004 presentation.
2. ACCOUNTING STANDARDS
CHANGES IN ACCOUNTING PRINCIPLES
ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS
On January 1, 2004, the Company adopted the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants
Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1). The main components of SOP 03-1 provide
guidance on accounting and reporting by insurance enterprises for separate
account presentation, accounting for an insurer's interest in a separate
account,
7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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.
The following summarizes the more significant aspects of the Company's
adoption of SOP 03-1:
SEPARATE ACCOUNT PRESENTATION. SOP 03-1 requires separate account products
to meet certain criteria in order to be treated as separate account
products. For products not meeting the specified criteria, these assets and
liabilities are included in the reporting entities' general account.
The Company's adoption of SOP 03-1 resulted in the consolidation on the
Company's balance sheet of approximately $500 million of investments
previously held in separate and variable account assets and approximately
$500 million of contractholder funds previously held in separate and
variable account liabilities.
VARIABLE ANNUITY CONTRACTS WITH GUARANTEED MINIMUM DEATH BENEFIT FEATURES.
For variable annuity contracts with guaranteed minimum death benefit
features (GMDB), SOP 03-1 requires the reporting entity to categorize the
contract as either an insurance or investment contract based upon the
significance of mortality or morbidity risk. SOP 03-1 provides explicit
guidance for calculating a reserve for insurance contracts, and provides
that the reporting entity does not hold reserves for investment contracts
(i.e., there is no significant mortality risk).
The Company determined that the mortality risk on its GMDB features was not
a significant component of the overall variable annuity product, and
accordingly continued to classify these products as investment contracts.
Prior to the adoption of SOP 03-1, the Company held a reserve of
approximately $8 million to cover potential GMDB exposure. This reserve was
released during the first quarter of 2004 as part of the implementation of
SOP 03-1.
RESERVING FOR UNIVERSAL LIFE AND VARIABLE UNIVERSAL LIFE CONTRACTS. SOP
03-1 requires that a reserve, in addition to the account balance, be
established for certain insurance benefit features provided under universal
life (UL) and variable universal life (VUL) products if the amounts
assessed against the contract holder each period for the insurance benefit
feature are assessed in a manner that is expected to result in profits in
earlier years and losses in subsequent years from the insurance benefit
function.
The Company's UL and VUL products were reviewed to determine if an
additional reserve is required under SOP 03-1. The Company determined that
SOP 03-1 applied to some of its UL and VUL contracts with these features
and established an additional reserve of approximately $1 million.
SALES INDUCEMENTS TO CONTRACT HOLDERS. SOP 03-1 provides, prospectively,
that sales inducements provided to contract holders meeting certain
criteria are capitalized and amortized over the expected life of the
contract as a component of benefit expense. During the first nine months of
2004, the Company capitalized sales inducements of approximately $34.7
million in accordance with SOP 03-1. These inducements relate to bonuses on
certain products offered by the Company. For the three and nine months
ended September 30, 2004, amortization of these capitalized amounts was
insignificant.
8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
On January 1, 2004, the Company adopted Financial Accounting Standards
Board (FASB) Interpretation No. 46, "Consolidation of Variable Interest
Entities (revised December 2003)," (FIN 46-R), which includes substantial
changes from the original FIN 46. Included in these changes, the
calculation of expected losses and expected residual returns has been
altered to reduce the impact of decision maker and guarantor fees in the
calculation of expected residual returns and expected losses. In addition,
the definition of a variable interest has been changed in the revised
guidance. The Company has evaluated the impact of applying FIN 46-R to
existing VIEs in which it has variable interests. The effect of adopting
FIN 46-R on the Company's consolidated balance sheet is immaterial. See
Note 3.
FIN 46 and FIN 46-R change the method of determining whether certain
entities, including securitization entities, should be included in the
Company's condensed consolidated financial statements. An entity is subject
to FIN 46 and FIN 46-R 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.
For any VIEs that must be consolidated under FIN 46 that were created
before February 1, 2003, the assets, liabilities, and noncontrolling
interests 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 interests of the VIE.
In October 2003, 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 total assets and total 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.
STOCK-BASED COMPENSATION
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
December 31, 2002. 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
stockholders' equity under SFAS 123 is recorded equal to the amount of
compensation expense charged. During the 2004 first quarter, the Company
changed its option valuation from the Black-Scholes model to the Binomial
Method. The impact of this change was
9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
immaterial. Compensation expense and proforma compensation expense had the
Company applied SFAS 123 to stock awards granted prior to 2003 was
insignificant for the three and nine month periods ended September 30, 2004
and 2003.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
OTHER-THAN-TEMPORARY IMPAIRMENTS OF CERTAIN INVESTMENTS
On September 30, 2004, the FASB voted unanimously to delay the effective
date of Emerging Issues Task Force (EITF) No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments"
(EITF 03-1). The delay applies to both debt and equity securities and
specifically applies to impairments caused by interest rate and sector
spreads. In addition, the provisions of EITF 03-1 that have been delayed
relate to the requirements that a company declare its intent to hold the
security to recovery and designate a recovery period in order to avoid
recognizing an other-than-temporary impairment charge through earnings.
The FASB will be issuing proposed implementation guidance shortly. The
Company is closely monitoring this issue and will evaluate the impact of
adopting EITF 03-1 once the implementation guidance is available.
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities were
as follows:
--------------------------------------------------------------------------------------------------------
GROSS GROSS
SEPTEMBER 30, 2004 AMORTIZED UNREALIZED UNREALIZED FAIR
($ IN MILLIONS) COST GAINS LOSSES VALUE
--------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $8,205 $332 $14 $8,523
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 1,988 91 - 2,079
Obligations of states, municipalities and
political subdivisions 376 40 1 415
Debt securities issued by foreign governments 802 59 3 858
All other corporate bonds 25,313 1,454 48 26,719
Other debt securities 7,361 396 19 7,738
Redeemable preferred stock 168 49 2 215
--------------------------------------------------------------------------------------------------------
Total Available For Sale $44,213 $2,421 $87 $46,547
--------------------------------------------------------------------------------------------------------
10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
---------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2003 AMORTIZED UNREALIZED UNREALIZED FAIR
($ IN MILLIONS) COST GAINS LOSSES VALUE
---------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $8,061 $326 $18 $8,369
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 2,035 22 12 2,045
Obligations of states, municipalities and
political subdivisions 379 21 2 398
Debt securities issued by foreign governments
690 51 1 740
All other corporate bonds 23,098 1,507 64 24,541
Other debt securities 5,701 377 22 6,056
Redeemable preferred stock 155 20 1 174
---------------------------------------------------------------------------------------------------------
Total Available For Sale $40,119 $2,324 $120 $42,323
---------------------------------------------------------------------------------------------------------
AGING OF GROSS UNREALIZED LOSSES ON AVAILABLE FOR SALE
The aging of gross unrealized losses on fixed maturity investments is as
follows:
TOTAL FIXED MATURITIES
WITH UNREALIZED LOSS
TOTAL FIXED MATURITIES TOTALING 20% OR MORE
-------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2004 AMORTIZED UNREALIZED AMORTIZED UNREALIZED
($ IN MILLIONS) COST LOSS COST LOSS
-------------------------------------------------------------------------------------------------------------------------
Six months or less $ 4,392 $ 46 $ 18 $ 4
Greater than six months to nine months 522 11 - -
Greater than nine months to twelve months 182 3 - -
Greater than twelve months 781 27 - -
-------- -------- -------- -------
Total $ 5,877 $ 87 $ 18 $ 4
======== ======== ======== =======
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES WITH
UNREALIZED LOSS TOTALING 20% OR
TOTAL FIXED MATURITIES MORE
----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 AMORTIZED UNREALIZED AMORTIZED UNREALIZED
($ IN MILLIONS) COST LOSS COST LOSS
----------------------------------------------------------------------------------------------------------------------------
Six months or less $4,356 $ 68 $24 $7
Greater than six months to nine months 558 17 - -
Greater than nine months to twelve months 199 6 2 -
Greater than twelve months 650 29 3 1
------ ---- --- --
Total $5,763 $120 $29 $8
====== ==== === ===
11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NET REALIZED CAPITAL GAINS (LOSSES)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ -----------------------------
($ IN MILLIONS) 2004 2003 2004 2003
-------------- --------------- -------------- --------------
NET REALIZED CAPITAL GAINS (LOSSES)
BY ASSET CLASS:
Fixed maturities $29 $(40) $(23) $(4)
Equities 1 3 13 9
Derivatives:
Guaranteed minimum withdrawal
benefit derivatives, net 18 -- 27 --
Other derivatives (49) 34 (30) 13
Other -- 46 -- 27
--- ---- ---- ---
Total $(1) $ 43 $(13) $45
=== ==== ==== ===
VARIABLE INTEREST ENTITIES
The following table represents the carrying amounts and classification of
consolidated assets that are collateral for VIE obligations.
$ IN MILLIONS SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------- ------------------ -----------------
Investments $389 $400
Cash 2 11
Other 3 4
---- ----
Total assets of consolidated VIEs $394 $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. 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 Company's ultimate parent,
Citigroup.
12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
TRAVELERS LIFE & ANNUITY (TLA) core offerings include retail annuities,
individual life insurance, corporate owned life insurance (COLI) and
institutional annuity insurance products distributed by TIC and TLAC
principally under the Travelers Life & Annuity name. The retail annuities
products offered include fixed and variable deferred annuities and payout
annuities. The individual life insurance products include term, universal
and variable life insurance. The COLI product is a variable universal life
product distributed through independent specialty brokers. The
institutional annuity products include institutional pensions, including
guaranteed investment contracts (GICs), payout annuities, group annuities
sold to employer-sponsored retirement and savings plans and structured
settlements and funding agreements.
The PRIMERICA business segment consolidates the business 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 108,000 agents. A great
majority of the domestic licensed sales force works on a part-time basis.
For a detailed description of accounting policies of the segments, see the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.
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.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
REVENUES BY SEGMENT
TLA $1,297 $1,352 $3,457 $3,359
Primerica 437 412 1,316 1,233
------ ------ ------ ------
Total Revenues $1,734 $1,764 $4,773 $4,592
====== ====== ====== ======
NET INCOME BY SEGMENT
TLA $223 $ 265 $ 727 $ 725
Primerica 123 107 367 323
---- ------ ------ ------
Net Income $346 $ 372 $1,094 $1,048
==== ====== ====== ======
AT SEPTEMBER 30, AT DECEMBER 31,
2004 2003
ASSETS BY SEGMENT
TLA $ 91,661 $85,881
Primerica 9,842 9,467
-------- -------
Total Assets $101,503 $95,348
======== =======
13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
The following tables contain key segment measurements:
BUSINESS SEGMENT INFORMATION:
FOR THE THREE MONTHS ENDED 2004 2003
-------------------------------------------------------------------
SEPTEMBER 30, ($ IN MILLIONS) TLA PRIMERICA TLA PRIMERICA
- --------------------------------------------------------------------------------------------------------------------------------
Premiums $333 $327 $428 $313
Net investment income 746 83 706 76
Interest credited to contractholders 336 - 311 -
Amortization of deferred acquisition costs 123 63 68 60
Capitalized deferred acquisition costs 209 107 156 90
Federal income taxes 90 64 100 55
FOR THE NINE MONTHS ENDED 2004 2003
-------------------------------------------------------------------
SEPTEMBER 30, ($ IN MILLIONS) TLA PRIMERICA TLA PRIMERICA
- --------------------------------------------------------------------------------------------------------------------------------
Premiums $ 656 $978 $ 780 $927
Net investment income 2,225 250 2,065 232
Interest credited to contractholders 962 - 933 -
Amortization of deferred acquisition costs 291 190 200 173
Capitalized deferred acquisition costs 586 288 406 276
Federal income taxes 261 176 197 167
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 an operating 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 three months ended September 30, 2004 and 2003,
deposits collected amounted to $4.0 billion and $3.5 billion, respectively. For
the nine months ended September 30, 2004 and 2003, deposits amounted to $11.0
billion and $9.2 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.
14
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
5. DEPOSIT FUNDS AND RESERVES
At September 30, 2004 and December 31, 2003, the Company had $46.8 billion
and $43.5 billion of life and annuity deposit funds and reserves
respectively, as follows:
($ IN MILLIONS) SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Subject to discretionary withdrawal:
With fair value adjustments $ 7,529 $ 6,974
Subject to surrender charges 4,611 6,057
Surrenderable without charge 8,126 5,756
------- -------
Total $20,266 $18,787
Not subject to discretionary withdrawal: $26,575 $24,693
------- -------
Total $46,841 $43,480
======= =======
There are $511 million and $526 million of life insurance reserves included
in surrenderable without charge at September 30, 2004 and December 31,
2003, respectively. The life insurance risks would have to be underwritten
again if transferred to another carrier, which is considered a significant
deterrent for long-term policyholders. Insurance liabilities that are
surrendered or withdrawn from the Company are reduced by outstanding policy
loans and related accrued interest prior to payout.
Included in contractholder funds and in the preceding paragraph are GICs
totaling $13.8 billion. The scheduled maturities for these GICs are as
follows:
($ IN MILLIONS) FIXED GIC VARIABLE GIC TOTAL
--------------------- ---------------------- ----------------------
2004 remaining $ 185 $ 690 $ 875
2005 1,245 2,928 4,173
2006 1,879 - 1,879
2007 1,541 - 1,541
2008 1,329 - 1,329
2009 and thereafter 3,972 - 3,972
------- ------ ------
Total $10,151 $3,618 $13,769
======= ====== =======
6. SHAREHOLDER'S EQUITY
Statutory capital and surplus of the Company was $7.6 billion at December
31, 2003. The Company is subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to its parent
without prior approval of insurance regulatory authorities. 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. TLAC may not pay a
dividend to TIC without such approval. 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 $467 million, $153
million and $152 million, totaling $772 million, to its parent on March 30,
2004, June 30, 2004 and September 30, 2004, respectively. Due to the timing
of the payments, these dividends were considered extraordinary. The State
of Connecticut Insurance Department approved these extraordinary dividends.
15
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
In August 1999, an amended putative class action complaint captioned LISA
MACOMBER, ET AL. VS. TRAVELERS PROPERTY CASUALTY CORPORATION, ET AL. was
filed in New Britain, Connecticut Superior Court against the Company, its
parent corporation, certain of the Company's affiliates (collectively TLA),
and the Company's former affiliate, Travelers Property Casualty
Corporation. The amended complaint alleges Travelers Property Casualty
Corporation purchased structured settlement annuities from the Company and
spent less on the purchase of those structured settlement annuities than
agreed with claimants; and that commissions paid to brokers of structured
settlement annuities, including an affiliate of the Company, were paid, in
part, to Travelers Property Casualty Corporation. The amended complaint was
dismissed and following an appeal by the plaintiff in September 2002 the
Connecticut Supreme Court reversed the dismissal of several of the
plaintiff's claims. On May 26, 2004, the Connecticut Superior Court
certified a nation wide class action involving the following claims against
TLA: violation of the Connecticut Unfair Trade Practice Statute, unjust
enrichment and civil conspiracy. On June 15, 2004, the Defendants,
including TLA, appealed the Connecticut Superior Court's May 26, 2004 class
certification order.
The Company is continuing to assess its potential exposure in connection
with this matter, but does not currently believe that its ultimate
resolution is likely to have a material adverse effect on the Company's
financial condition.
The Company is a defendant or co-defendant in various other 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 September 30, 2004 is $1 billion, included in contractholder funds. The
Company holds $56.9 million of common stock of the Bank, included in
Investments.
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 September 30, 2004 is $269 million. The Company
does not hold any collateral related to this guarantee.
16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations (MDA), pursuant to General Instruction H (2)(a) of Form 10-Q. This
MDA should be read in conjunction with the MDA included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
The Company's Annual Report on Form 10-K, its quarterly reports on Form 10-Q and
any current reports on Form 8-K, and all amendments to these reports, are
available on the Travelers Life & Annuity website at
http://www.travelerslife.com by selecting the "Financial Information" page and
selecting "SEC Filings."
CONSOLIDATED OVERVIEW ($ IN MILLIONS)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
Revenues $1,734 $1,764 $4,773 $4,592
Insurance benefits and interest credited 937 994 2,408 2,470
Operating expenses 297 243 834 710
------ ------ ------ ------
Income before taxes 500 527 1,531 1,412
Income taxes 154 155 437 364
------ ------ ------ ------
Net income $ 346 $ 372 $1,094 $1,048
====== ====== ====== ======
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company), is comprised of two business segments, Travelers Life & Annuity (TLA)
and Primerica. Net income decreased 7% to $346 million for the quarter ended
September 30, 2004 from $372 million in the prior year quarter. Net income
increased 4% to $1,094 million for the nine months ended September 30, 2004 from
$1,048 million in the prior year period. Net income by segment was:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
($ IN MILLIONS) 2004 2003 2004 2003
---- ---- ---- ----
TLA $223 $265 $ 727 $ 725
Primerica 123 107 367 323
---- ---- ------ ------
$346 $372 $1,094 $1,048
==== ==== ====== ======
TLA core offerings include retail annuities, individual life insurance,
corporate owned life insurance (COLI) and institutional annuity insurance
products distributed by TIC and The Travelers Life and Annuity Company (TLAC)
principally under the Travelers Life & Annuity name. The Company has a license
from The St. Paul Travelers Companies, Inc. to use the names "Travelers Life &
Annuity," "The Travelers Insurance Company," "The Travelers Life and Annuity
Company" and related names in connection with the Company's business. Among the
range of retail annuity products offered are fixed and variable deferred
annuities and payout annuities. Individual life insurance products offered
include term, universal and variable life insurance. The COLI product is a
variable universal life product distributed through independent specialty
brokers. The institutional annuity products include institutional pensions,
including guaranteed investment contracts (GICs), payout annuities, group
annuities sold to employer-sponsored retirement and savings plans and structured
settlements and funding agreements.
The Primerica business segment offers individual life products, primarily term
insurance, to customers through a sales force of approximately 108,000 agents. A
great majority of the domestic licensed sales force works on a part-time basis.
17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
The following discussion presents in more detail each business segment's
performance.
TRAVELERS LIFE & ANNUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 2003
---- ----
($ IN MILLIONS)
Revenues $1,297 $1,352
Insurance benefits and interest credited 797 859
Operating expenses 187 128
------ ------
Income before taxes 313 365
Income taxes 90 100
------ ------
Net income $ 223 $ 265
====== ======
Net income of $223 million in the third quarter of 2004 decreased 16% from $265
million in the third quarter of 2003. The decrease reflects the absence of prior
year after-tax realized investment gains of $29 million, higher expenses due to
increased business volumes and higher deferred acquisition cost (DAC)
amortization, partially offset by the impact of higher business volumes and $13
million after-tax reserve releases from the settlement of litigation.
Net investment income (NII) increased $40 million to $746 million for the third
quarter of 2004 from $706 million in the third quarter of 2003. This increase
was driven by a larger invested asset base from continued growth in business
volumes, partially offset by reduced investment yields, which were 6.37% and
6.63% in the three-month periods ended September 30, 2004 and 2003,
respectively.
The majority of the annuity business and a substantial portion of the life
business written by TLA are accounted for as investment contracts, with the
result that the deposits collected are reported as liabilities. Deposits
represent an operating statistic used for measuring business volumes, which
management of the Company uses to manage the life insurance and annuities
operations, and may not be comparable to similarly captioned measurements used
by other life insurance companies. The following table shows net written
premiums and deposits by product type for each of the quarters ended September,
2004 and 2003.
2004 2003
---- ----
($ IN MILLIONS) PREMIUMS DEPOSITS PREMIUMS DEPOSITS
--------- -------- --------- --------
Retail annuities
Fixed $ -- $ 155 $ -- $ 114
Variable -- 1,233 -- 1,096
Individual payout 28 10 5 6
---- ------ ---- ------
Total retail annuities 28 1,398 5 1,216
Institutional annuities 278 2,291 389 2,020
Individual life insurance:
Direct periodic premiums & deposits 32 201 35 168
Single premium deposits -- 184 -- 125
Reinsurance (13) (31) (10) (26)
---- ------ ---- ------
Total individual life insurance 19 354 25 267
Other 8 -- 9 --
---- ------ ---- ------
Total $333 $4,043 $428 $3,503
==== ====== ==== ======
Retail annuity deposits of $1.4 billion in the third quarter of 2004 increased
15% from the third quarter of 2003, reflecting strong variable annuity sales due
to improved equity market conditions in 2004 and sales of variable annuity
products with a guaranteed minimum withdrawal benefit feature. Retail annuity
account balances were $34.9 billion at September 30, 2004, up from $30.8 billion
at September 30, 2003. This increase reflects equity market growth in variable
annuity investments of $2.2 billion subsequent to September 30, 2003, primarily
$1.8
18
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
billion in the fourth quarter of 2003, and $2.1 billion of net sales over the
previous twelve months, due to sales growth and lower surrender rates.
Institutional annuities deposits (excluding the Company's employee pension plan
deposits) increased 13% in the third quarter of 2004 to $2.3 billion from the
comparable period of 2003, reflecting strong third quarter 2004 GIC sales
compared to the prior year quarter. Institutional annuities premiums declined
$111 million to $278 million in the three months ended September 30, 2004 versus
the prior year period, reflecting the absence of a $291 million pension close
out sale in the third quarter of 2003. Institutional annuity account balances
and benefits reserves reached $27.2 billion at September 30, 2004, up 9% from
$24.9 billion at September 30, 2003. This volume growth reflects an increase in
GIC and payout institutional annuities benefit reserves over the last 12 months.
Deposits for the individual life insurance business for the third quarter of
2004 increased 33% to $354 million from the 2003 third quarter, primarily due to
an increase of $59 million in universal life single deposits and a $33 million
increase in direct periodic premium deposits. Life insurance in force was $97.1
billion at September 30, 2004, up from $89.5 billion at December 31, 2003.
TLA insurance benefits and interest credited decreased 7.2% to $797 million for
the three months ended September 30, 2004 from $859 million in the prior year
period, primarily related to the absence of the $291 million pension close out
reserve in the prior year period and lower credited rates offset by higher
business volumes.
In the third quarter of 2004, TLA operating expenses of $187 million increased
46% from $128 million in the prior year quarter, primarily due to DAC
amortization. The amortization of capitalized DAC is a significant component of
TLA expenses and totaled $123 million and $68 million for the three months ended
September 30, 2004 and 2003, respectively. The increase related to a
retrospective adjustment of $39 million to universal life (UL) DAC and volume
growth in the UL and retail annuity lines of business. This UL adjustment
relates to the changing of the estimated gross profit pattern in the UL product
line related to mortality charges. Re-estimates of gross profits, which are
performed at least annually, result in retrospective adjustments to earnings by
a cumulative charge or credit to income.
PRIMERICA
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 2003
---- ----
($ IN MILLIONS)
Revenues $437 $412
Insurance benefits 140 135
Operating expenses 110 115
---- ----
Income before taxes 187 162
Income taxes 64 55
---- ----
Net income $123 $107
==== ====
Net income of $123 million in the third quarter of 2004 increased 15% from $107
million in the third quarter of 2003, reflecting favorable business volumes, NII
and expenses largely due to the release of a $10 million legal reserve no longer
deemed necessary. NII increased 9% to $83 million in the third quarter of 2004
from the prior year quarter, primarily related to increased income from private
equities and hedge funds of $3 million and an increase of $8 million from growth
in volume of fixed maturities, partially offset by lower yields.
Total life insurance in force reached $534 billion at September 30, 2004, up
from $503 billion at December 31, 2003, reflecting good in-force policy
retention and higher volume of sales. The face amount of new term life insurance
sales was $23 billion for the three-month period ended September 30, 2004,
compared to $20 billion for the prior year period.
19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
The amortization of capitalized DAC, which increased from $60 million in the
third quarter of 2003 to $63 million in the third quarter of 2004, is a
significant component of Primerica's expenses. All of Primerica's DAC is
associated with traditional life products, which are amortized in relation to
anticipated premiums. The increase in the amount of amortization over the third
quarter of 2003 is associated with growth in sales and in-force business.
Earned premiums net of reinsurance were $327 million in the third quarter of
2004 compared to $313 million in the prior year period, including $311 million
and $297 million, respectively, for Primerica individual term life policies.
TRAVELERS LIFE & ANNUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 2003
---- ----
($ IN MILLIONS)
Revenues $3,457 $3,359
Insurance benefits and interest credited 1,995 2,070
Operating expenses 474 367
------ ------
Income before taxes 988 922
Income taxes 261 197
------ ------
Net income $ 727 $ 725
====== ======
Net income for the nine months ended September 30, 2004 remained level with the
prior year period, primarily related to higher business volumes and higher
retained investment margins, partially offset by a $36 million after-tax
increase in realized investment losses, higher DAC amortization and lower tax
benefits related to an adjustment to a dividends received deduction (DRD), which
was $23 million in the first nine months of 2004 compared to $39 million in the
prior year period. The DRD benefit reduced the effective tax rate to 21% for the
prior year nine-month period ended September 30, 2003 and to 26% in the current
year nine-month period ended September 30, 2004.
NII was $2.2 billion and $2.1 billion for the nine months ended September 30,
2004 and 2003, respectively. This increase was driven by a larger invested asset
base from increased business volumes, partially offset by reduced investment
yields, which were 6.48% and 6.61% for the nine-month periods ended September
30, 2004 and 2003, respectively.
The majority of the annuity business and a substantial portion of the life
business written by TLA are accounted for as investment contracts, such that the
premiums are considered deposits and are not included in revenues. Deposits
represent a statistic integral to managing TLA operations, which management uses
for measuring business volumes, and may not be comparable to similarly captioned
measurements used by other life insurance companies.
20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
The following table shows net written premiums and deposits by product type for
the nine months ended September 30, 2004 and 2003.
2004 2003
---- ----
($ IN MILLIONS) Premiums Deposits Premiums Deposits
-------- -------- -------- --------
Retail annuities
Fixed $ - $ 437 $ - $ 424
Variable - 3,704 - 2,852
Individual payout 44 26 20 22
---- ------ ----- ------
Total retail annuities 44 4,167 20 3,298
Institutional annuities 523 5,751 658 5,223
Individual life insurance:
Direct periodic premiums & deposits 102 625 104 494
Single premium deposits - 526 - 254
Reinsurance (38) (82) (28) (72)
---- ------- ----- ------
Total individual life insurance 64 1,069 76 676
Other 25 - 26 -
---- ------- ----- ------
Total $656 $10,987 $ 780 $9,197
==== ======= ===== ======
Retail annuity deposits in the first nine months of 2004 increased 26% from the
prior year period, reflecting strong variable annuity sales due to improved
equity market conditions in 2004 and sales of variable annuity products with a
guaranteed minimum withdrawal benefit feature. Weak equity markets and
competitive pressures adversely affected the first half of 2003.
Institutional annuities deposits (excluding the Company's employee pension plan
deposits) of $5.8 billion in the first nine months of 2004 were up 10% from $5.2
billion in the comparable period of 2003, driven by strong third quarter 2004
GIC sales. The nine-month 2003 sales included $1 billion in funding agreements
sold to the Federal Home Loan Bank of Boston.
Deposits for the life insurance business in the first nine months of 2004 were
up 58% from the comparable period of 2003, driven by very strong universal life
single deposits and higher direct periodic premium sales.
For the first nine months of 2004, TLA operating expenses increased 29% from the
comparable prior year nine-month period, primarily due to an increase of $91
million of DAC amortization, due to growth in business volumes and the UL DAC
retrospective adjustment.
PRIMERICA
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 2003
---- ----
($ IN MILLIONS)
Revenues $1,316 $1,233
Insurance benefits 413 400
Operating expenses 360 343
------ ------
Income before taxes 543 490
Income taxes 176 167
------ ------
Net income $ 367 $ 323
====== ======
Net income for the nine months ended September 30, 2004 increased 14% to $367
million from $323 million for the nine months ended September 30, 2003,
primarily due to an increase in earned premiums and NII, as well as the release
of a $10 million legal reserve that was no longer deemed necessary. These were
partially offset by volume-related increases in DAC amortization.
Earned premiums net of reinsurance were $978 million in the first nine months of
2004 compared to $927 million in the prior year period, including $926 million
and $879 million, respectively, for Primerica Life individual term life
policies.
21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NII increased 8% to $250 million for the nine months of 2004 from the prior
year, primarily related to income of $12 million from private equities and hedge
funds and an increase of $12 million from a growth in volume of fixed
maturities, offset by slightly lower yields.
The amortization of capitalized DAC increased to $190 million in the first nine
months of 2004 from $173 million in the prior year period. Amortized DAC has
increased slightly as a percentage of direct premiums. The increase in the
amount of amortization over 2003 is associated with growth in sales and in-force
business.
OUTLOOK
The Company'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 products. Declines in credit quality
of issuers will have a negative effect on earnings. This statement is a
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on this page.
INSURANCE REGULATIONS
Risk-based capital requirements are used as minimum capital requirements by the
National Association of Insurance Commissioners and the states to identify
companies that merit further regulatory action. At December 31, 2003, the
Company had adjusted capital in excess of amounts requiring any regulatory
action.
The Company is subject to various regulatory restrictions that limit the maximum
amount of dividends available to be paid to its parent without prior approval of
insurance regulatory authorities in the state of domicile. A maximum of $845
million is available by the end of 2004 for such dividends without prior
approval of the State of Connecticut Insurance Department, depending upon the
amount and timing of the payments. TLAC may not pay a dividend to TIC without
such approval. Primerica may pay up to $242 million to TIC without prior
approval of the Commonwealth of Massachusetts Insurance Department. The Company
paid dividends of $467 million, $153 million and $152 million to its parent,
totaling $772 million, on March 30, 2004, June 30, 2004 and September 30, 2004,
respectively. Due to the timing of the payments, these dividends were considered
extraordinary. The State of Connecticut Insurance Department approved these
extraordinary dividends. The Company may seek approval from the State of
Connecticut Insurance Department for additional extraordinary dividend payments
during the remainder of 2004. This statement is a forward-looking statement
within the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" on this page.
FUTURE APPLICATIONS OF ACCOUNTING STANDARDS
See Note 2 of Notes to Condensed Consolidated Financial Statements for a
discussion of recently issued accounting pronouncements.
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," "predict," 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 and the
potential impact of a decline in credit quality of investments on earnings.
22
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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 September
30, 2004 and December 31, 2003. The current duration of invested assets as of
September 30, 2004 is 4.8 years. The sensitivity analysis model used by the
Company produces a loss in fair value of interest rate sensitive invested assets
of approximately $2.4 billion and $2.2 billion based on a 100 basis point
increase in interest rates as of September 30, 2004 and December 31, 2003,
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 duration of liabilities as of September
30, 2004 is 5.1 years. 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 $1.8 billion and $1.7 billion based on a
100 basis point increase in interest rates as of September 30, 2004 and December
31, 2003, 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 September 30, 2004 and December 31, 2003 is not
material.
ITEM 4. 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 to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
23
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
3.01 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").
3.02 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.
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.
(B) REPORTS ON FORM 8-K
None
+Filed herewith
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TRAVELERS INSURANCE COMPANY
(Registrant)
Date November 12, 2004 /s/ Glenn D. Lammey
----------------------- --------------------------------------------
Glenn D. Lammey
Senior Executive Vice President,
Chief Financial Officer and Chief
Accounting Officer
(Principal Financial Officer and Principal
Accounting Officer)
25
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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
THIS PAGE INTENTIONALLY LEFT BLANK.
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER PART I PAGE
1. Business...................................................................................................2
A.
General....................................................................................................2
B. Business by Segment
Travelers Life & Annuity...........................................................................2
Primerica..........................................................................................4
C. Insurance Regulations...................................................................................4
2. Properties.................................................................................................6
3. Legal Proceedings..........................................................................................6
4. Submission of Matters to a Vote of Security Holders........................................................7
PART II
-------
5. Market for Registrant's Common Equity and Related Stockholder Matters......................................7
6. Selected Financial Data....................................................................................7
7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................7
7A. Quantitative and Qualitative Disclosures About Market Risk................................................15
8. Financial Statements and Supplementary Data...............................................................18
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................64
9A. Controls and Procedures...................................................................................64
PART III
--------
10. Directors and Executive Officers of the Registrant........................................................64
11. Executive Compensation....................................................................................64
12. Security Ownership of Certain Beneficial Owners and Management............................................64
13. Certain Relationships and Related Transactions............................................................64
14. Principal Accountant Fees and Services....................................................................64
PART IV
-------
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................................66
Exhibit Index.............................................................................................67
Signatures................................................................................................68
Index to Financial Statements and Financial Statement Schedules...........................................69
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS.
GENERAL
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company), is a wholly owned subsidiary of Citigroup Insurance Holding
Corporation (CIHC), an indirect wholly owned subsidiary of Citigroup Inc.
(Citigroup). Citigroup is a diversified global financial services holding
company whose businesses provide a broad range of financial services to consumer
and corporate customers around the world. The periodic reports of Citigroup
provide additional business and financial information concerning it and its
consolidated subsidiaries. TIC was incorporated in 1863.
The Company's two reportable business segments are Travelers Life & Annuity and
Primerica. The primary insurance entities of the Company are TIC and its
subsidiaries The Travelers Life and Annuity Company (TLAC), included in the
Travelers Life & Annuity segment, and Primerica Life Insurance Company
(Primerica Life) and its subsidiaries, Primerica Life Insurance Company of
Canada, CitiLife Financial Limited (CitiLife) and National Benefit Life
Insurance Company (NBL), included in the Primerica segment. The consolidated
financial statements include the accounts of the insurance entities of the
Company and Tribeca Citigroup Investments Ltd., among others, on a fully
consolidated basis.
At December 31, 2001, the Company was a wholly owned subsidiary of The Travelers
Insurance Group, Inc. (TIGI). On February 4, 2002, TIGI changed its name to
Travelers Property Casualty Corp. (TPC). TPC completed its initial public
offering (IPO) on March 27, 2002 and on August 20, 2002 Citigroup made a
tax-free distribution of the majority of its remaining interest in TPC to
Citigroup's stockholders. Prior to the IPO, the common stock of TIC was
distributed by TPC to CIHC so that TIC would remain an indirect wholly owned
subsidiary of Citigroup. See Note 14 of Notes to Consolidated Financial
Statements.
Additional information about the Company is available on the Citigroup website
at http://www.citigroup.com by selecting the "Investor Relations" page and
selecting "SEC Filings."
BUSINESS BY SEGMENT
TRAVELERS LIFE & ANNUITY
Travelers Life & Annuity (TLA) core offerings include individual annuity,
individual life, corporate owned life insurance (COLI) and group annuity
insurance products distributed by TIC and TLAC principally under the Travelers
Life & Annuity name. The Company has a license from TPC to use the names
"Travelers Life & Annuity," "The Travelers Insurance Company," "The Travelers
Life and Annuity Company" and related names in connection with the Company's
business. Among the range of individual products offered are deferred fixed and
variable annuities, payout annuities and term, universal and variable life
insurance. The COLI product is a variable universal life product distributed
through independent specialty brokers. The group products include institutional
pensions, including guaranteed investment contracts (GICs), payout annuities,
group annuities sold to employer-sponsored retirement and savings plans,
structured settlements and funding agreements.
2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Individual deferred fixed and variable annuities are primarily used for
retirement funding purposes. Variable annuities permit policyholders to direct
retirement funds into a number of separate accounts, which offer differing
investment options. Individual payout annuities offer a guaranteed payment
stream over a specified or life contingent period.
Individual annuity products are distributed through affiliated channels and
non-affiliated channels. The affiliated channels include CitiStreet Retirement
Services, a division of CitiStreet LLC, (CitiStreet), a joint venture between
Citigroup and State Street Bank; Smith Barney (SB), a division of Citigroup
Global Markets Inc.; Primerica Financial Services (PFS); and Citibank. The
non-affiliated channels primarily include a nationwide network of independent
financial professionals and independent broker-dealers. CitiStreet is a sales
organization of personal retirement planning specialists focused primarily on
the qualified periodic deferred compensation marketplace. CitiStreet's share of
total individual annuity premiums and deposits was 30% in 2003. SB distributes
TLA's individual annuities and individual life products, and accounted for 18%
of total individual annuity premiums and deposits in 2003. Sales by PFS and
Citibank accounted for 16% and 8%, respectively, of total individual annuity
premiums and deposits in 2003. The non-affiliated channels accounted for 28% of
individual annuity premiums and deposits.
Individual life insurance is used to meet estate, business planning and
retirement needs and also to provide protection against financial loss due to
death. Individual life products are primarily marketed by the independent
financial professionals, by SB and by Citibank, who accounted for 81% , 11% and
5%, respectively, of total individual life sales for 2003.
Group annuity products, including fixed and variable rate GICs, which provide a
guaranteed return on investment, continue to be a popular investment choice for
employer-sponsored retirement and savings plans. Annuities purchased by
employer-sponsored plans fulfill retirement obligations to individual employees.
Payout annuities are used primarily as a pension close-out investment for
companies. Structured settlements are purchased as a means of settling certain
indemnity claims and making other payments to policyholders over a period of
time. Funding agreement transactions offer fixed term and fixed or variable rate
investment options with policyholder status to domestic and foreign
institutional investors. These group annuity products are sold through direct
sales and various intermediaries.
TIC is licensed to sell and market its individual products in all 50 states, the
District of Columbia, Puerto Rico, Guam, the Bahamas and the U.S. and British
Virgin Islands.
The Company operates Tower Square Securities, Inc., which is an introducing
broker-dealer offering a full line of brokerage services. Tower Square
Securities facilitates the sale of individual variable life and annuity
insurance products by the independent financial professionals. Travelers
Distribution LLC, a limited purpose broker-dealer, is the principal underwriter
and distributor for TLA variable products.
3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PRIMERICA
Primerica Life and its subsidiaries, Primerica Life Insurance Company of Canada,
CitiLife and NBL, are the insurance operations of PFS. Their primary product is
individual term life insurance marketed through a sales force composed of
approximately 107,000 representatives. A great majority of the domestic licensed
sales force works on a part-time basis. NBL also provides statutory disability
benefit insurance and other insurance, primarily in New York, as well as direct
response student term life insurance nationwide. CitiLife was established in
September 2000 to underwrite insurance in Europe. Primerica, directly or through
its subsidiaries, is licensed or otherwise authorized to sell and market term
life insurance in all 50 states, the District of Columbia, Puerto Rico, Guam,
the U.S. Virgin Islands, Northern Mariana Islands, Canada, the United Kingdom
and Spain.
INSURANCE REGULATIONS
INSURANCE REGULATORY INFORMATION SYSTEM
The National Association of Insurance Commissioners (NAIC) Insurance Regulatory
Information System (IRIS) was developed to help state regulators identify
companies that may require special attention. The IRIS system consists of a
statistical phase and an analytical phase whereby financial examiners review
annual statements and financial ratios. The statistical phase consists of 12 key
financial ratios based on year-end data that are generated from the NAIC
database annually; each ratio has an established "usual range" of results. These
ratios assist state insurance departments in executing their statutory mandate
to oversee the financial condition of insurance companies.
A ratio result falling outside the usual range of IRIS ratios is not considered
a failing result; rather, unusual values are viewed as part of the regulatory
early monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges for four or more of the ratios. No regulatory
action has been taken by any state insurance department or the NAIC with respect
to IRIS ratios during the two years ended December 31, 2003.
RISK-BASED CAPITAL (RBC) REQUIREMENTS
In order to enhance the regulation of insurer solvency, the NAIC adopted a
formula and model law to implement RBC requirements for most life and annuity
insurance companies, which are designed to determine minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. For this purpose, an insurer's total
adjusted capital is measured in relation to its specific asset and liability
profiles. A company's risk-based capital is calculated by applying factors to
various asset, premium and reserve items, where the factor is higher for those
items with greater underlying risk and lower for less risky items.
4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The RBC formula for life insurers measures four major areas of risk:
o asset risk (i.e., the risk of asset default),
o insurance risk (i.e., the risk of adverse mortality and morbidity
experience),
o interest rate risk (i.e., the risk of loss due to changes in interest
rates) and
o business risk (i.e., normal business and management risk).
Under laws adopted by the states, insurers having less total adjusted capital
than that required by the RBC calculation will be subject to varying degrees of
regulatory action, depending upon the level of capital inadequacy.
The RBC law provides for four levels of regulatory action as defined by the
NAIC. The extent of regulatory intervention and action increases as the level of
total adjusted capital to RBC falls. The first level, the company action level,
requires an insurer to submit a plan of corrective actions to the regulator if
total adjusted capital falls below 200% of the RBC amount. The second level, the
regulatory action level, requires an insurer to submit a plan containing
corrective actions and requires the relevant insurance commissioner to perform
an examination or other analysis and issue a corrective order if total adjusted
capital falls below 150% of the RBC amount. The third level, the authorized
control level, authorizes the relevant commissioner to take whatever regulatory
actions are considered necessary to protect the best interest of the
policyholders and creditors of the insurer which may include the actions
necessary to cause the insurer to be placed under regulatory control, I.E.,
rehabilitation or liquidation, if total adjusted capital falls below 100% of the
RBC amount. The fourth level, the mandatory control level, requires the relevant
insurance commissioner to place the insurer under regulatory control if total
adjusted capital falls below 70% of the RBC amount.
The formulas have not been designed to differentiate among adequately
capitalized companies, which operate with higher levels of capital. Therefore,
it is inappropriate and ineffective to use the formula to rate or rank
companies. At December 31, 2003, the Company's principal domestic insurance
entities all had total adjusted capital in excess of amounts requiring company
action or any level of regulatory action at any prescribed RBC level.
INSURANCE REGULATION CONCERNING DIVIDENDS
TIC is domiciled in the State of Connecticut. The insurance holding company law
of Connecticut requires notice to, and approval by, the State of Connecticut
Insurance Department for the declaration or payment of any dividend which,
together with other distributions made within the preceding twelve months,
exceeds the greater of (i) 10% of the insurer's surplus or (ii) the insurer's
net gain from operations for the twelve-month period ending on the preceding
December 31st, in each case determined in accordance with statutory accounting
practices. Such declaration or payment is further limited by adjusted unassigned
funds (surplus), reduced by 25% of the change in net unrealized capital gains,
as determined in accordance with statutory accounting practices. The insurance
holding company laws of other states in which the Company's insurance
subsidiaries are domiciled generally contain similar (although in certain
instances somewhat more restrictive) limitations on the payment of dividends. A
maximum of $845 million is available by the end of the year 2004 for such
dividends without prior approval of the State of Connecticut Insurance
Department, depending upon the amount and timing of the payments. In accordance
with the Connecticut statute, TLAC, after reducing its unassigned funds
(surplus) by 25% of the change in unrealized capital gains, may not pay a
dividend to TIC without prior approval of the State of Connecticut Insurance
Department. Primerica may pay up to $242 million to TIC in 2004 without prior
approval of the Commonwealth of Massachusetts Insurance Department.
5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
In February 2004, the Company requested prior approval of the State of
Connecticut Insurance Department to pay a proposed extraordinary dividend in
March 2004. Under Connecticut law, the ordinary dividend limitation amount is
based upon the cumulative total of all dividend payments made within the
preceding twelve months. The Company's proposed dividend payment of $467.5
million payable on March 30 would exceed the ordinary dividend limitation by
approximately $103 million. The State of Connecticut Insurance Department
approved the request on March 12, 2004. The Company may seek approval from the
Connecticut Insurance Department for additional extraordinary dividend payments
during 2004. This statement is a forward-looking statement within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 15.
CODE OF ETHICS
The Company has adopted a code of ethics for financial professionals which
applies to the Company's principal executive officer and principal financial and
accounting officer. The code of ethics for financial professionals has been
included as an exhibit to this Form 10-K and can be found on the Citigroup
website by selecting the "Corporate Governance" page.
ITEM 2. PROPERTIES.
The Company's executive offices are located in Hartford, Connecticut. The
Company moved its executive offices to One Cityplace, Hartford, Connecticut,
during the first quarter of 2003. The Company occupies 373,000 square feet at
this location under an operating lease that runs through October 31, 2008. At
December 31, 2002 the Company leased approximately 284,000 square feet from TPC
at One Tower Square, Hartford, Connecticut under a lease that ran through March
31, 2003. The Company previously owned the complex of buildings at One Tower
Square, and sold it as well as a building in Norcross, Georgia housing TPC's
information systems department, to TPC for $68 million in 2002 in connection
with the TPC spin-off from Citigroup. See Note 14 of Notes to Consolidated
Financial Statements.
Other leasehold interests of the Company include approximately 760,000 square
feet of office space in 25 locations throughout the United States.
Management believes that these facilities are suitable and adequate for the
Company's current needs. See Note 10 of Notes to Consolidated Financial
Statements for additional information regarding these facilities.
The preceding discussion does not include information on investment properties.
ITEM 3. LEGAL PROCEEDINGS.
In 2003, several issues in the mutual fund and variable insurance product
industries have come under the scrutiny of federal and state regulators. Like
many other companies in our industry, the Company has received a request for
information from the Securities and Exchange Commission (SEC) and a subpoena
from the New York Attorney General regarding market timing and late trading. In
March 2004 the SEC requested additional information about the Company's variable
product operations on market timing, late trading and revenue sharing. The
Company is cooperating fully with all of these reviews and is not able to
predict their outcomes.
In the ordinary course of business, TIC and its subsidiaries are defendants or
co-defendants in various litigation matters incidental to and typical of the
businesses in which they are engaged. These include civil actions, arbitration
proceedings and other matters arising in the normal course of business out of
activities as an insurance company, a broker and dealer in securities or
otherwise. In the opinion of the Company's management, the ultimate resolution
of these legal proceedings would not be likely to have a material adverse effect
on the Company's results of operations, financial condition or liquidity.
Certain of these statements are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 15.
6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company has 40,000,000 authorized shares of common stock, all of which are
issued and outstanding as of December 31, 2003. All shares are held by an
indirect subsidiary of Citigroup, and there exists no established public trading
market for the common equity of the Company. The Company paid dividends to its
parent of $545 million and $586 million in 2003 and 2002, respectively. See Note
8 of Notes to Consolidated Financial Statements for certain information
regarding dividend restrictions.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction I(2)(a) of Form 10-K.
SEGMENTS
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company) is composed of two business segments, Travelers Life & Annuity (TLA)
and Primerica.
CRITICAL ACCOUNTING POLICIES
The Notes to Consolidated Financial Statements contain a summary of the
Company's significant accounting policies, including a discussion of recently
issued accounting pronouncements. Certain of these policies are considered to be
critical to the portrayal of the Company's financial condition, since they
require management to make difficult, complex or subjective judgments, some of
which may relate to matters that are inherently uncertain.
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life, universal life, COLI, deferred annuities
and payout annuities are deferred. These deferred acquisition costs (DAC)
include principally commissions and certain expenses related to policy issuance,
underwriting and marketing, all of which vary with and are primarily related to
the production of new business. The method for determining amortization of
deferred acquisition costs varies by product type based upon three different
accounting pronouncements: Statement of Financial Accounting Standards (SFAS)
No. 60, "Accounting and Reporting by Insurance Enterprises" (SFAS 60), SFAS No.
91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long Duration
Contracts and for Realized Gains and Losses from the Sale of Investments"
(SFAS 97).
7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
DAC for deferred annuities, both fixed and variable, and payout annuities is
amortized employing a level effective yield methodology per SFAS 91 as indicated
by AICPA Practice Bulletin 8. An amortization rate is developed using the
outstanding DAC balance and projected account balances. This rate is applied to
actual account balances to determine the amount of DAC amortization. The
projected account balances are derived using a model that contains assumptions
related to investment returns and persistency. The model rate is evaluated at
least annually, and changes in underlying lapse and interest rate assumptions
are to be treated retrospectively. Variances in expected equity market returns
versus actual returns are treated prospectively and a new amortization pattern
is developed so that the DAC balances will be amortized over the remaining
estimated life of the business. DAC for these products is currently being
amortized over 10-15 years.
DAC for universal life and COLI is amortized in relation to estimated gross
profits from surrender charges, investment, mortality, and expense margins per
SFAS 97. Actual profits can vary from management's estimates, resulting in
increases or decreases in the rate of amortization. Re-estimates of gross
profits, performed at least annually, result in retrospective adjustments to
earnings by a cumulative charge or credit to income. DAC for these products is
currently being amortized over 16-25 years.
DAC relating to traditional life, including term insurance, and health insurance
is amortized in relation to anticipated premiums per SFAS 60. Assumptions as to
the anticipated premiums are made at the date of policy issuance or acquisition
and are consistently applied over the life of the policy. DAC for these products
is currently being amortized over 5-20 years.
All DAC is reviewed at least annually to determine if it is recoverable from
future income, including investment income, and, if not recoverable, is charged
to expense. All other acquisition expenses are charged to operations as
incurred.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life products. The annuity payout
reserves are calculated using the mortality and interest assumptions used in the
actual pricing of the benefit. Mortality assumptions are based on the Company's
experience and are adjusted to reflect deviations such as substandard mortality
in structured settlement benefits. The interest rates range from 2.0% to 9.0%,
with a weighted average rate of 7.02% for these annuity products. Traditional
life products include whole life and term insurance. Future policy benefits for
traditional life products are estimated on the basis of actuarial assumptions as
to mortality, persistency and interest, established at policy issue. Actuarial
and interest assumptions include a margin for adverse deviation and are based on
the Company's experience. Interest assumptions applicable to traditional life
products range from 2.5% to 7.0%, with a weighted average of 5.23%.
INVESTMENTS IN FIXED MATURITIES
Fixed maturities, which comprise 75% and 72% of total investments at December
31, 2003 and 2002, respectively, include bonds, notes and redeemable preferred
stocks. Fixed maturities, including instruments subject to securities lending
agreements (see Note 3 of Notes to Consolidated Financial Statements), are
classified as "available for sale" and are reported at fair value, with
unrealized investment gains and losses, net of income taxes, credited or charged
directly to shareholder's equity. Fair values of investments in fixed maturities
are based on quoted market prices or dealer quotes. If quoted market prices are
not available, discounted expected cash flows using market rates commensurate
with the credit quality and maturity of the investment are used to determine
fair value. Changes in assumptions could affect the fair values of fixed
maturities. Impairments are realized when investment losses in value are deemed
other-than-temporary. The Company conducts a rigorous review each quarter to
identify and evaluate investments that have possible indications of
8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
impairment. An investment in a debt or equity security is impaired if its fair
value falls below its cost and the decline is considered other-than-temporary.
Factors considered in determining whether a loss is temporary include the length
of time and extent to which fair value has been below cost; the financial
condition and near- term prospects of the issuer; and the Company's ability and
intent to hold the investment for a period of time sufficient to allow for any
anticipated recovery. Changing economic conditions - global, regional, or
related to specific issuers or industries - could result in other-than-temporary
losses.
PREMIUMS
Premiums are recognized as revenues when due. Premiums for contracts with a
limited number of premium payments, due over a significantly shorter period than
the period over which benefits are provided, are considered revenue when due.
The portion of premium which is not required to provide for benefits and
expenses is deferred and recognized in revenues in a constant relationship to
insurance benefits in force.
CONSOLIDATED OVERVIEW
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
- -------------------------------- ---- ----
($ IN MILLIONS)
Revenues $6,139 $5,234
Insurance benefits and interest credited 3,350 2,931
Operating expenses 960 800
------ ------
Income before taxes 1,829 1,503
Income taxes 471 421
--- ---
Net income $1,358 $1,082
====== ======
Net income in 2003 increased 26% from 2002, primarily attributable to increased
revenues due to better net pre-tax realized investment portfolio gain (loss)
activity, better fee income and higher net investment income (NII) from
increased business volumes and an increased invested asset base. These increases
were partially offset by higher insurance benefits and claims from the increased
business volumes, higher DAC amortization and lower investment yields. Included
in net income are current year realized investment gains of $24 million compared
to prior year investment losses of $209 million. The 2002 loss reflects
impairments to the fixed maturities portfolio related to WorldCom Inc. of $126
million, as well as other fixed maturities and equity investment impairments.
See the detailed description of each business segment for additional
information.
9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
TRAVELERS LIFE & ANNUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
- -------------------------------- ---- ----
($ IN MILLIONS)
Revenues $4,479 $3,653
Insurance benefits and interest credited 2,816 2,404
Operating expenses 505 364
------ ------
Income before taxes 1,158 885
Income taxes 240 212
------ ------
Net income $ 918 $ 673
====== ======
Net income of $918 million in 2003, which increased 36% from $673 million in
2002, includes net realized investment gains of $20 million compared to net
realized investment losses of $211 million in 2002, largely resulting from the
absence of prior year impairments to the fixed maturities portfolio investments
in WorldCom Inc. of $122 million, as well as other fixed maturities and equity
investment impairments. The increase in 2003 net income was also due to higher
fee revenues and NII from business volumes, and $50 million in tax benefits
related to an adjustment to the Dividends Received Deduction. These increases
were partially offset by higher insurance benefits and claims from the increased
business volumes, higher DAC amortization and lower investment yields.
TLA NII increased 4% to $2,743 million in 2003 from $2,646 million in 2002
despite overall rate deterioration. Fixed maturities suffered from the lower
interest rate environment and credit issues. The increase was driven by a larger
invested asset base from higher business volumes and significant returns from
risk arbitrage activity through the trading portfolio.
10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The following table shows net written premiums and deposits by product line for
each of the years ended December 31, 2003 and 2002. The majority of the annuity
business and a substantial portion of the life business written by TLA are
accounted for as investment contracts, with the result that the deposits
collected are reported as liabilities and are not included in revenues. Deposits
represent a statistic used for measuring business volumes, which management of
the Company uses to manage the life insurance and annuities operations, and may
not be comparable to similarly captioned measurements used by other life
insurance companies.
2003 2002
IN MILLIONS OF DOLLARS Premiums Deposits Premiums Deposits
-------- -------- -------- --------
Individual annuities
Fixed $ - $ 535 $ - $ 1,237
Variable - 3,983 - 4,004
Individual payout 26 28 28 29
------ ------- ------ -------
Total individual annuities 26 4,546 28 5,270
Group annuities 908 6,494 545 5,747
Individual life insurance:
Direct periodic premiums & deposits 140 686 135 636
Single premium deposits - 405 - 285
Reinsurance (40) (99) (28) (85)
------ ------- ------ -------
Total individual life insurance 100 992 107 836
Other 48 - 50 -
----- ------- ------ -------
Total $1,082 $12,032 $ 730 $11,853
====== ======= ====== =======
Individual annuity deposits decreased 14% in 2003 to $4.546 billion from $5.270
billion in 2002. The decrease was primarily driven by a decline in fixed annuity
sales due to competitive pressures and current market perception of fixed rate
products. Variable annuity production declined slightly in 2003, primarily in
the first half of the year, which was the continuation of the weak equity market
conditions from the prior year. Production rebounded in the second half of the
year as equity market conditions improved. Individual annuity account balances
and benefits reserves were $32.9 billion at December 31, 2003, up from $27.5
billion at December 31, 2002. This increase reflects equity market growth in
variable annuity investments of $4.0 billion in 2003 and $1.2 billion of net
sales from good in-force retention.
Group Annuity written premiums increased 67%, primarily related to group payout
sales, which increased 129% due to the sale of a group pension close-out
contract of $290 million. Deposits (excluding the Company's employee pension
plan deposits) in 2003 increased 13% from 2002, reflecting higher fixed and
variable rate guaranteed investment contracts (GIC) sales, including a $1.0
billion fixed rate GIC sale to The Federal Home Loan Bank of Boston. Group
annuity account balances and benefit reserves reached $25.2 billion at December
31, 2003, an increase of $2.9 billion, or 13%, from $22.3 billion at December
31, 2002, reflecting continued strong retention in all products, a $105 million,
or 21%, increase in total structured settlement premiums and deposits, as well
as continued strong GIC and group payout sales.
Deposits for the life insurance business increased 19% from 2002. This increase
was related to a 42% increase in single premium sales and higher direct periodic
deposits for individual life insurance in 2003, driven by independent agent
high-end estate planning, partially offset by a 42% decrease in COLI sales. Life
insurance in force was $89.5 billion at December 31, 2003 up from $82.3 billion
at December 31, 2002.
During 2003, TLA expenses increased primarily due to higher DAC amortization and
volume-related insurance expenses.
11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The amortization of capitalized DAC is a significant component of TLA expenses.
TLA's recording of DAC amortization varies based upon product type. DAC for
deferred annuities, both fixed and variable, and payout annuities employs a
level yield methodology as described in SFAS 91. DAC for universal life (UL) and
COLI is amortized in relation to estimated gross profits as described in SFAS
97, with traditional life, including term insurance and other products amortized
in relation to anticipated premiums as per SFAS 60. The following is a summary
of capitalized DAC by type:
Deferred & Payout Traditional Life
In millions of dollars Annuities UL & COLI & Other Total
- -------------------------------------------------------------------------------------------------------------------
Balance January 1, 2002 $1,137 $430 $106 $1,673
Commissions and expenses deferred & other 347 172 26 545
Amortization expense (142) (24) (19) (185)
Underlying lapse and interest rate adjustment 22 - - 22
Amortization related to SFAS 91 reassessment (11) - - (11)
------------------------------------------------------------------
Balance December 31, 2002 1,353 578 113 2,044
Commissions and expenses deferred 340 221 22 583
Amortization expense (212) (33) (21) (266)
------------------------------------------------------------------
Balance December 31, 2003 $1,481 $766 $114 $2,361
- -------------------------------------------------------------------------------------------------------------------
DAC capitalization increased 5% during 2003, driven by the increase in UL and
COLI, which is consistent with the increase in premiums and deposits for those
lines of business. The increase in amortization expense in 2003 was primarily
attributable to deferred annuities. During the first quarter of 2002, there was
a one-time decrease in deferred annuity DAC amortization of $22 million due to
changes in underlying lapse and interest rate assumptions. In contrast to equity
market performance differences, these adjustments are to be treated
retrospectively as described in SFAS 91 by adjusting the DAC asset through
amortization expense and employing the new assumptions prospectively. In the
fourth quarter of 2002, TLA increased its deferred annuities DAC amortization by
$11 million due to a significant decline in its individual annuity account
balances and benefit reserves, largely resulting from decreases in the stock
market which caused account balances to decline. Under SFAS 91, variances in
expected versus actual market returns are treated prospectively, resulting in a
new amortization pattern over the remaining estimated life of the business. The
2003 UL and COLI amortization also increased 38% over 2002, primarily due to
volume growth.
TLA OUTLOOK
TLA should benefit from growth in the aging population which is becoming more
focused on the need to accumulate adequate savings for retirement, to protect
these savings and to plan for the transfer of wealth to the next generation. TLA
is well positioned to take advantage of the favorable long-term demographic
trends through its strong financial position, widespread brand name recognition
and broad array of competitive life, annuity, retirement and estate planning
products sold through established distribution channels.
However, competition in both product pricing and customer service is
intensifying. There has been consolidation within the industry, and among other
financial services organizations that are increasingly involved in the sale
and/or distribution of insurance products. Also, the annuities business is
interest rate and market sensitive. TLA's business is significantly affected by
movements in the U.S. equity and fixed income credit markets.
12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
U.S. equity and credit market events can have both positive and negative effects
on the deposit, revenue and policy retention performance of the business. A
sustained weakness in the equity markets will decrease revenues and earnings in
variable annuity products. Declines in credit quality of issuers will have a
negative effect on earnings.
In order to strengthen its competitive position, TLA expects to maintain a
current product portfolio, further diversify its distribution channels, and
retain its financial position through strong sales growth and maintenance of an
efficient cost structure. Federal and state regulators have focused on, and
continue to devote substantial attention to, the mutual fund and variable
insurance product industries. As a result of publicity relating to widespread
perceptions of industry abuses, there have been numerous proposals for
legislative and regulatory reforms, including mutual fund governance, new
disclosure requirements concerning mutual fund share classes, commission
breakpoints, revenue sharing, advisory fees, market timing, late trading,
portfolio pricing, annuity products, hedge funds, and other issues. It is
difficult to predict at this time whether changes resulting from new laws and
regulations will affect the industries or the Company's businesses, and, if so,
to what degree.
The statements above are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 15.
PRIMERICA
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
----------------------------------- ---- ----
($ IN MILLIONS)
Revenues $1,660 $1,581
Insurance benefits and interest credited 534 527
Operating expenses 455 436
------ ------
Income before taxes 671 618
Income taxes 231 209
------ ------
Net income $ 440 $ 409
====== ======
Net income increased 8% to $440 million from $409 million in 2002. The increase
in net income reflects growth in life insurance in force from $466.8 billion at
December 31, 2002 to $503.6 billion at December 31, 2003 and higher NII from a
larger invested capital base. The increase in expense for DAC is the result of
an increase in life insurance production. Other general expense increased
slightly consistent with the increase in in-force. Mortality experience was
favorable in 2003, compared to 2002, however, there was an increase in incurred
claims. This increase is provided for by growth in the in-force, associated
premium revenues and policyholders reserve balances.
Net income also includes net realized investment gains of $4 million in 2003
compared to net realized investment gains of $2 million in 2002, including the
impairment of the fixed maturities portfolio investment in WorldCom Inc.
totaling $4 million.
The amortization of capitalized DAC is a significant component of Primerica's
expenses. All of Primerica's DAC is associated with traditional life products.
DAC is amortized in relation to anticipated premiums as per SFAS 60. Amortized
DAC has remained level as a percentage of direct premiums. The increase in the
amount of amortization over 2002 is associated with growth in sales and
in-force.
13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The following is a summary of capitalized DAC:
IN MILLIONS OF DOLLARS
-----------------------------------------------------------
Balance January 1, 2002 $1,788
Deferred expenses and other 323
Amortization expense (219)
-----------------------------------------------------------
Balance December 31, 2002 1,892
-----------------------------------------------------------
Deferred expenses and other 377
Amortization expense (235)
-----------------------------------------------------------
Balance December 31, 2003 $2,034
-----------------------------------------------------------
EARNED PREMIUMS, NET OF REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
----------------------------------- ---- ----
($ IN MILLIONS)
Individual term life $1,179 $1,127
Other 66 67
------ ------
$1,245 $1,194
====== ======
The total face amount of term life insurance issued was $82.2 billion in 2003
compared to $79.3 billion in 2002. This increase in term life production
resulted from the increase in licensed life representatives. Life insurance in
force at year-end 2003 reached $503.6 billion, up from $466.8 billion at
year-end 2002, reflecting consistent in-force policy retention and higher volume
of sales.
PRIMERICA OUTLOOK
Over the last few years, programs including sales and product training have been
designed to maintain high compliance standards, increase the number of producing
agents and customer contacts and, ultimately, increase production levels. A
continuation of these trends could positively influence future operations. This
statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 15.
14
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Consolidated Financial Statements for Future Application
of Accounting Standards.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "may increase," "may fluctuate," and similar expressions or future
or conditional verbs such as "will," "should," "would," and "could." These
forward-looking statements involve risks and uncertainties including, but not
limited to, regulatory matters, the resolution of legal proceedings, the impact
that the adoption of recent legislation may have on the demand for life and
annuity products, the potential impact of a decline in credit quality of
investments on earnings; the Company's market risk and the discussions of the
Company's prospects under "Outlook" on the previous pages.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 2003.
MARKET RISK SENSITIVE INSTRUMENTS ENTERED INTO FOR PURPOSES OTHER THAN TRADING
The primary market risk to the Company's investment portfolio is interest rate
risk associated with investments. The Company's exposure to equity price risk
and foreign exchange risk is not significant. The Company has no direct
commodity risk.
The interest rate risk taken in the investment portfolio is managed relative to
the duration of the liabilities. The portfolio is differentiated by product
line, with each product line's portfolio structured to meet its particular
needs. Potential liquidity needs of the business are also key factors in
managing the investment portfolio. The portfolio duration relative to the
liabilities' duration is primarily managed through cash market transactions. For
additional information regarding the Company's investment portfolio see Note 3
of Notes to Consolidated Financial Statements.
There were no significant changes in the Company's primary market risk exposures
or in how those exposures are managed compared to the year ended December 31,
2002. The Company does not anticipate significant changes in the Company's
primary market risk exposures or in how those exposures are managed in future
reporting periods based upon what is known or expected to be in effect in future
reporting periods. The statements above are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" above.
15
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
SENSITIVITY ANALYSIS
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market-sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near-term" means a period of time going forward up to one year from the
date of the financial statements. Actual results may differ from the
hypothetical change in market rates assumed in this report, especially since
this sensitivity analysis does not reflect the results of any actions that would
be taken by the Company to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, interest-bearing non-redeemable preferred stock,
mortgage loans, short-term securities, cash, investment income accrued, policy
loans, contractholder funds, guaranteed separate account assets and liabilities
and derivative financial instruments. In addition, certain non-financial
instrument liabilities have been included in the sensitivity analysis model.
These non-financial instruments include future policy benefits and policy and
contract claims. The primary market risk to the Company's market-sensitive
instruments is interest rate risk. The sensitivity analysis model uses a 100
basis point change in interest rates to measure the hypothetical change in fair
value of financial instruments and the non-financial instruments included in the
model.
For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and reset
features. Portfolio durations are calculated on a market value weighted basis,
including accrued investment income, using trade date holdings as of December
31, 2003 and 2002. The sensitivity analysis model used by the Company produces a
loss in fair value of interest rate sensitive invested assets of approximately
$2.2 billion and $1.9 billion based on a 100 basis point increase in interest
rates as of December 31, 2003 and 2002, respectively.
Liability durations are determined consistently with the determination of
liability fair values. Where fair values are determined by discounting expected
cash flows, the duration is the percentage change in the fair value for a 100
basis point change in the discount rate. Where liability fair values are set
equal to surrender values, option-adjusted duration techniques are used to
calculate changes in fair values. The sensitivity analysis model used by the
Company produces a decrease in fair value of interest rate sensitive insurance
policy and claims reserves of approximately $1.7 billion and $1.5 billion based
on a 100 basis point increase in interest rates as of December 31, 2003 and
2002, respectively. Based on the sensitivity analysis model used by the Company,
the net loss in fair value of market sensitive instruments, including
non-financial instrument liabilities, as a result of a 100 basis point increase
in interest rates as of December 31, 2003 and 2002 is not material.
MARKET RISK SENSITIVE INSTRUMENTS ENTERED INTO FOR TRADING PURPOSES
The Company maintains a trading portfolio consisting of convertible bonds and
common stocks with carrying values of $1,707 million and $1,531 million as of
December 31, 2003 and 2002, respectively, and $637 million and $598 million of
liabilities resulting from common stocks sold not yet purchased (referred to as
short sales) as of December 31, 2003 and 2002, respectively. The primary market
risk to the trading portfolio is equity risk. Assets are reported as trading
securities and liabilities are reported as trading securities sold not yet
purchased.
16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The Company's primary investment strategy is convertible bond arbitrage where
convertible bonds are paired with short sales of the common stocks of companies
issuing the convertible bonds. These positions are established and maintained so
that general changes in equity markets and interest rates should not materially
impact the value of the portfolio.
TABULAR PRESENTATION
The table below provides information about the trading portfolio's financial
instruments that are primarily exposed to equity price risk. This table presents
the fair values of these instruments as of December 31, 2003 and 2002. Fair
values are based upon quoted market prices.
($ IN MILLIONS)
--------------- Fair value as of Fair value as of
December 31, 2003 December 31, 2002
----------------- ------------------
ASSETS
Trading securities
Convertible bond arbitrage $1,447 $1,442
Other 260 89
------ ------
$1,707 $1,531
====== ======
LIABILITIES
Trading securities sold not yet purchased
Convertible bond arbitrage $ 629 $ 520
Other 8 78
------ ------
$ 637 $ 598
====== ======
The Company's trading portfolio investments and related liabilities are normally
held for periods less than six months. Therefore, expected future cash flows for
these assets and liabilities are expected to be realized in less than one year.
17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report.......................................................................................19
Consolidated Financial Statements:
Consolidated Statements of Income for
the years ended December 31, 2003, 2002 and 2001...............................................................20
Consolidated Balance Sheets - December 31, 2003 and 2002.......................................................21
Consolidated Statements of Changes in Shareholder's Equity
for the years ended December 31, 2003, 2002 and 2001...........................................................22
Consolidated Statements of Cash Flows for
the years ended December 31, 2003, 2002 and 2001...............................................................23
Notes to Consolidated Financial Statements..................................................................24-63
18
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company:
We have audited the accompanying consolidated balance sheets of The Travelers
Insurance Company and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in shareholder's equity, and
cash flows for each of the years in the three-year period ended December 31,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Travelers
Insurance Company and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for variable interest entities in 2003, for
goodwill and intangible assets in 2002, and for derivative instruments and
hedging activities and for securitized financial assets in 2001.
/s/KPMG LLP
Hartford, Connecticut
February 26, 2004
19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
---- ---- ----
REVENUES
Premiums $2,327 $1,924 $2,102
Net investment income 3,058 2,936 2,831
Realized investment gains (losses) 37 (322) 125
Fee income 606 560 537
Other revenues 111 136 107
- ------------------------------------------------------------------------------------------------------------------------------
Total Revenues 6,139 5,234 5,702
- ------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 2,102 1,711 1,862
Interest credited to contractholders 1,248 1,220 1,179
Amortization of deferred acquisition costs 501 393 379
General and administrative expenses 459 407 371
- ------------------------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 4,310 3,731 3,791
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations before federal income taxes and cumulative effects of
changes in accounting principles 1,829 1,503 1,911
- ------------------------------------------------------------------------------------------------------------------------------
Federal income taxes
Current 360 236 471
Deferred 111 185 159
- ------------------------------------------------------------------------------------------------------------------------------
Total Federal Income Taxes 471 421 630
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effects of changes in accounting principles 1,358 1,082 1,281
Cumulative effect of change in accounting for derivative instruments and
hedging activities, net of tax - - (6)
Cumulative effect of change in accounting for securitized financial assets,
net of tax - - (3)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $1,358 $1,082 $1,272
==============================================================================================================================
See Notes to Consolidated Financial Statements.
20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
AT DECEMBER 31, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value (including $2,170 and $2,687
subject to securities lending agreements) (cost $40,119; $35,428) $42,323 $36,434
Equity securities, at fair value (cost $323; $328) 362 332
Mortgage loans 1,886 1,985
Real estate 96 36
Policy loans 1,135 1,168
Short-term securities 3,603 4,414
Trading securities, at fair value 1,707 1,531
Other invested assets 5,092 4,909
- ------------------------------------------------------------------------------------------------------------------------------
Total Investments 56,204 50,809
- ------------------------------------------------------------------------------------------------------------------------------
Cash 149 186
Investment income accrued 567 525
Premium balances receivable 165 151
Reinsurance recoverables 4,470 4,301
Deferred acquisition costs 4,395 3,936
Separate and variable accounts 26,972 21,620
Other assets 2,426 1,467
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $95,348 $82,995
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $30,252 $26,634
Future policy benefits and claims 15,964 15,009
Separate and variable accounts 26,972 21,620
Deferred federal income taxes 2,030 1,448
Trading securities sold not yet purchased, at fair value 637 598
Other liabilities 6,136 6,051
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 81,991 71,360
- ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized, issued and outstanding 100 100
Additional paid-in capital 5,446 5,443
Retained earnings 6,451 5,638
Accumulated other changes in equity from nonowner sources 1,360 454
- ------------------------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 13,357 11,635
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $95,348 $82,995
==============================================================================================================================
See Notes to Consolidated Financial Statements.
21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
COMMON STOCK 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 100 $ 100 $ 100
Changes in common stock -- -- --
- ---------------------------------------------------------------------------------------------------------
Balance, end of year $ 100 $ 100 $ 100
=========================================================================================================
- ---------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
- ---------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 5,443 $ 3,864 $ 3,843
Stock option tax benefit (expense) 3 (17) 21
Capital contributed by parent -- 1,596 --
- ---------------------------------------------------------------------------------------------------------
Balance, end of year $ 5,446 $ 5,443 $ 3,864
=========================================================================================================
- ---------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
- ---------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 5,638 $ 5,142 $ 4,342
Net income 1,358 1,082 1,272
Dividends to parent (545) (586) (472)
- ---------------------------------------------------------------------------------------------------------
Balance, end of year $ 6,451 $ 5,638 $ 5,142
=========================================================================================================
- ---------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- ---------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 454 $ 74 $ 104
Cumulative effect of accounting for
derivative instruments and hedging activities, net
of tax -- -- (29)
Unrealized gains, net of tax 818 455 68
Foreign currency translation, net of tax 4 3 (3)
Derivative instrument hedging activity losses, net
of tax 84 (78) (66)
- ---------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,360 $ 454 $ 74
=========================================================================================================
- ---------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- ---------------------------------------------------------------------------------------------------------
Net income $ 1,358 $ 1,082 $ 1,272
Other changes in equity from nonowner sources 906 380 (30)
- ---------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 2,264 $ 1,462 $ 1,242
=========================================================================================================
- ---------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY
- ---------------------------------------------------------------------------------------------------------
Changes in total shareholder's equity $ 1,722 $ 2,455 $ 791
Balance, beginning of year 11,635 9,180 8,389
- ---------------------------------------------------------------------------------------------------------
Balance, end of year $ 13,357 $ 11,635 $ 9,180
=========================================================================================================
See Notes to Consolidated Financial Statements.
22
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $2,335 $1,917 $2,109
Net investment income received 2,787 2,741 2,430
Other revenues received 335 384 867
Benefits and claims paid (1,270) (1,218) (1,176)
Interest paid to contractholders (1,226) (1,220) (1,159)
Operating expenses paid (1,375) (1,310) (1,000)
Income taxes paid (456) (197) (472)
Trading account investments (purchases), sales, net (232) 76 (92)
Other (84) (105) (227)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 814 1,068 1,280
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 7,446 4,459 3,706
Mortgage loans 358 374 455
Proceeds from sales of investments
Fixed maturities 15,078 15,472 14,110
Equity securities 124 212 112
Real estate held for sale 5 26 6
Purchases of investments
Fixed maturities (26,766) (23,623) (22,556)
Equity securities (144) (134) (50)
Mortgage loans (317) (355) (287)
Policy loans, net 34 39 41
Short-term securities purchases, net 814 (1,320) (914)
Other investments (purchases), sales, net 108 (69) 103
Securities transactions in course of settlement, net (618) 529 1,086
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (3,878) (4,390) (4,188)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 8,326 8,505 8,308
Contractholder fund withdrawals (4,754) (4,729) (4,932)
Capital contribution by parent -- 172 --
Dividends to parent company (545) (586) (472)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 3,027 3,362 2,904
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (37) 40 (4)
Cash at December 31, previous year 186 146 150
- --------------------------------------------------------------------------------------------------------------------------
Cash at December 31, current year $149 $186 $146
==========================================================================================================================
See Notes to Consolidated Financial Statements.
23
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the accompanying
financial statements follow.
BASIS OF PRESENTATION
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company), is a wholly owned subsidiary of Citigroup Insurance Holding
Corporation (CIHC), an indirect wholly owned subsidiary of Citigroup Inc.
(Citigroup), a diversified global financial services holding company whose
businesses provide a broad range of financial services to consumer and
corporate customers around the world. The consolidated financial statements
include the accounts of the Company and its insurance and non-insurance
subsidiaries on a fully consolidated basis. The primary insurance entities
of the Company are TIC and its subsidiaries, The Travelers Life and Annuity
Company (TLAC), Primerica Life Insurance Company (Primerica Life), and its
subsidiaries, Primerica Life Insurance Company of Canada, CitiLife
Financial Limited (CitiLife) and National Benefit Life Insurance Company
(NBL). Significant intercompany transactions and balances have been
eliminated. The Company consolidates entities deemed to be variable
interest entities when the Company is determined to be the primary
beneficiary under Financial Accounting Standards Board (FASB)
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN
46).
At December 31, 2001, the Company was a wholly owned subsidiary of The
Travelers Insurance Group, Inc. (TIGI). On February 4, 2002, TIGI changed
its name to Travelers Property Casualty Corp. (TPC). TPC completed its
initial public offering (IPO) on March 27, 2002 and on August 20, 2002
Citigroup made a tax-free distribution of the majority of its remaining
interest in TPC, to Citigroup's stockholders. Prior to the IPO, the common
stock of TIC was distributed by TPC to CIHC so that TIC would remain an
indirect wholly owned subsidiary of Citigroup. See Note 14.
The financial statements and accompanying footnotes of the Company are
prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and benefits and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain prior year amounts have been reclassified to conform to the 2003
presentation.
ACCOUNTING CHANGES
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FIN 46, which changes the method of
determining whether certain entities, including securitization entities,
should be included in the Company's consolidated financial statements. An
entity is subject to FIN 46 and is called a variable interest entity (VIE)
if it has (1) equity that is insufficient to permit the entity to finance
its activities without additional subordinated financial support from other
parties, or (2) equity investors that cannot make significant decisions
about the entity's operations, or that do not absorb the expected losses or
receive the expected returns of the entity. All other entities are
evaluated for consolidation under Statement of Financial Accounting
Standards (SFAS) No. 94, "Consolidation of All Majority-Owned Subsidiaries"
(SFAS 94). A VIE is consolidated by its primary beneficiary, which is the
party involved with the VIE that has a majority of the expected losses or a
majority of the expected residual returns or both.
24
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For any VIEs that must be consolidated under FIN 46 that were created
before February 1, 2003, the assets, liabilities and noncontrolling
interest of the VIE are initially measured at their carrying amounts with
any difference between the net amount added to the balance sheet and any
previously recognized interest being recognized as the cumulative effect of
an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46 first applies may be used to
measure the assets, liabilities and noncontrolling interest of the VIE. In
October 2003, the FASB announced that the effective date of FIN 46 was
deferred from July 1, 2003 to periods ending after December 15, 2003 for
VIEs created prior to February 1, 2003. TIC elected to implement the
provisions of FIN 46 in the 2003 third quarter, resulting in the
consolidation of VIEs, increasing both assets and liabilities by
approximately $407 million.
The implementation of FIN 46 encompassed a review of numerous entities to
determine the impact of adoption and considerable judgment was used in
evaluating whether or not a VIE should be consolidated. The FASB continues
to provide additional guidance on implementing FIN 46 through FASB Staff
Positions.
In December 2003, the FASB released a revision of FIN 46 (FIN 46-R or the
interpretation), which includes substantial changes from the original. The
calculation of expected losses and expected residual returns have both been
altered to reduce the impact of decision maker and guarantor fees in the
calculation of expected residual returns and expected losses. In addition,
FIN 46-R changes the definition of a variable interest. The interpretation
permits adoption of either the original or the revised versions of FIN 46
until the first quarter of 2004, at which time FIN 46-R must be adopted.
For 2003 year-end, the Company's consolidated financial statements are in
accordance with the original.
The Company is evaluating the impact of applying FIN 46-R to existing VIEs
in which it has variable interests and has not yet completed this analysis.
At this time, it is anticipated that the effect of adopting FIN 46-R on the
Company's consolidated balance sheet would be immaterial. As the Company
continues to evaluate the impact of applying FIN 46-R, additional entities
may be identified that would need to be consolidated. See Note 3.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In particular, this Statement clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative and when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
This Statement is generally effective for contracts entered into or
modified after June 30, 2003 and did not have a significant impact on the
Company's consolidated financial statements.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires
that a liability for costs associated with exit or disposal activities,
other than in a business combination, be recognized when the liability is
incurred. Previous generally accepted accounting principles provided for
the recognition of such costs at the date of management's commitment to an
exit plan. In addition, SFAS 146 requires that the liability be measured at
fair value and be adjusted for changes in estimated cash flows. The
provisions of the new standard are effective for exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS 146 did
not affect the Company's consolidated financial statements.
25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
STOCK-BASED COMPENSATION
The Company and its employees participate in stock option plans of
Citigroup. On January 1, 2003, the Company adopted the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), prospectively for all awards granted, modified,
or settled after January 1, 2003. The prospective method is one of the
adoption methods provided for under SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," issued in December
2002. SFAS 123 requires that compensation cost for all stock awards be
calculated and recognized over the service period (generally equal to the
vesting period). This compensation cost is determined using option pricing
models, intended to estimate the fair value of the awards at the grant
date. Prior to January 1, 2003, the Company applied Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25),
and related interpretations in accounting for its stock-based compensation
plans. Under APB 25, there is generally no charge to earnings for employee
stock option awards because the options granted under these plans have an
exercise price equal to the market value of the underlying common stock on
the grant date. Similar to APB 25, an offsetting increase to shareholder's
equity under SFAS 123 is recorded equal to the amount of compensation
expense charged.
Had the Company applied SFAS 123 prior to 2003 in accounting for Citigroup
stock options, net income would have been the pro forma amounts indicated
below:
-----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003 2002 2001
($ IN MILLIONS)
-----------------------------------------------------------------------------------------------------------------------
Compensation expense related to stock option As reported $2 $- $-
plans, net of tax Pro forma 7 9 15
-----------------------------------------------------------------------------------------------------------------------
Net income As reported $1,358 $1,082 $1,272
Pro forma 1,353 1,073 1,257
-----------------------------------------------------------------------------------------------------------------------
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the FASB SFAS No. 141,
"Business Combinations" (SFAS 141) and No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These standards change the accounting for
business combinations by, among other things, prohibiting the prospective
use of pooling-of-interests accounting and requiring companies to stop
amortizing goodwill and certain intangible assets with an indefinite useful
life created by business combinations accounted for using the purchase
method of accounting. Instead, goodwill and intangible assets deemed to
have an indefinite useful life will be subject to an annual review for
impairment. Other intangible assets that are not deemed to have an
indefinite useful life will continue to be amortized over their useful
lives. See Note 5.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
26
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
liabilities in the consolidated balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
recognized asset or liability or of a forecasted transaction, or (c) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security,
or a foreign-currency-denominated forecasted transaction. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting
designation. The cumulative effect of the adoption of SFAS 133 was an
after-tax charge of $6 million included in net income and an after-tax
charge of $29 million to accumulated other changes in equity from nonowner
sources.
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND RETAINED
BENEFICIAL INTERESTS IN SECURITIZED FINANCIAL ASSETS
In April 2001, the Company adopted the FASB Emerging Issues Task Force
(EITF) 99-20, "Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial Assets" (EITF
99-20). EITF 99-20 establishes guidance on the recognition and measurement
of interest income and impairment on certain investments, e.g., certain
asset-backed securities. The recognition of impairment resulting from the
adoption of EITF 99-20 was recorded as a cumulative catch-up adjustment.
Interest income on a beneficial interest falling within the scope of EITF
99-20 is to be recognized prospectively. As a result of adopting EITF
99-20, the Company recorded an after-tax charge of $3 million in the
consolidated statement of income. The implementation of this EITF did not
have a significant impact on the Company's consolidated financial
statements.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS
In July 2003, Statement of Position 03-01 "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts" (SOP 03-01) was released. SOP 03-01 provides
guidance on accounting and reporting by insurance enterprises for separate
account presentation, accounting for an insurer's interest in a separate
account, transfers to a separate account, valuation of certain liabilities,
contracts with death or other benefit features, contracts that provide
annuitization benefits, and sales inducements to contract holders. SOP
03-01 is effective for financial statements for fiscal years beginning
after December 15, 2003. The adoption of SOP 03-01 will not have a material
impact on the Company's consolidated financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB released a revision of FIN 46 (FIN 46-R). See
"Consolidation of Variable Interest Entities" in the "Accounting Changes"
section of this Note for a discussion of FIN 46-R.
27
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING POLICIES
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities, including instruments subject to securities lending
agreements (see Note 3), are classified as "available for sale" and are
reported at fair value, with unrealized investment gains and losses, net of
income taxes, credited or charged directly to shareholder's equity. Fair
values of investments in fixed maturities are based on quoted market prices
or dealer quotes. If quoted market prices are not available, discounted
expected cash flows using market rates commensurate with the credit quality
and maturity of the investment are used to determine fair value. Changes in
assumptions could affect the fair values of fixed maturities. Impairments
are realized when investment losses in value are deemed
other-than-temporary. The Company conducts a rigorous review each quarter
to identify and evaluate investments that have possible indications of
impairment. An investment in a debt or equity security is impaired if its
fair value falls below its cost and the decline is considered
other-than-temporary. Factors considered in determining whether a loss is
temporary include the length of time and extent to which fair value has
been below cost; the financial condition and near-term prospects of the
issuer; and the Company's ability and intent to hold the investment for a
period of time sufficient to allow for any anticipated recovery. Changing
economic conditions - global, regional, or related to specific issuers or
industries - could result in other-than-temporary losses.
Also included in fixed maturities are loan-backed and structured securities
(including beneficial interests in securitized financial assets).
Beneficial interests in securitized financial assets that are rated "A" and
below are accounted for under the prospective method in accordance with
EITF 99-20. Under the prospective method of accounting, the investments
effective yield and impairment for other-than-temporary losses in value are
based upon projected future cash flows. All other loan-backed and
structured securities are amortized using the retrospective method. The
effective yield used to determine amortization is calculated based upon
actual historical and projected future cash flows.
Equity securities, which include common and non-redeemable preferred
stocks, are classified as "available for sale" and carried at fair value
based primarily on quoted market prices. Changes in fair values of equity
securities are charged or credited directly to shareholder's equity, net of
income taxes.
Mortgage loans are carried at amortized cost. A mortgage loan is considered
impaired when it is probable that the Company will be unable to collect
principal and interest amounts due. For mortgage loans that are determined
to be impaired, a reserve is established for the difference between the
amortized cost and fair market value of the underlying collateral. In
estimating fair value, the Company uses interest rates reflecting the
higher returns required in the current real estate financing market.
Real estate held for sale is carried at the lower of cost or fair value
less estimated cost to sell. Fair value of foreclosed properties is
established at the time of foreclosure by internal analysis or external
appraisers, using discounted cash flow analyses and other accepted
techniques. Thereafter, an impairment for losses on real estate held for
sale is established if the carrying value of the property exceeds its
current fair value less estimated costs to sell. These impairments were
insignificant at December 31, 2003 and 2002.
Policy loans are carried at the amount of the unpaid balances that are not
in excess of the net cash surrender values of the related insurance
policies. The carrying value of policy loans, which have no defined
maturities, is considered to be fair value.
28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Short-term securities, consisting primarily of money market instruments and
other debt issues purchased with a maturity of less than one year, are
carried at amortized cost, which approximates fair value.
Trading securities and related liabilities are normally held for periods
less than six months. These investments are marked to market with the
change recognized in net investment income during the current period.
Other invested assets include equity investments, partnership investments
and real estate joint ventures accounted for on the equity method of
accounting. Undistributed income is reported in net investment income. Also
included in other invested assets is an investment in Citigroup Preferred
Stock, which is recorded at cost. See Note 13.
Accrual of investment income is suspended on fixed maturities or mortgage
loans that are in default, or on which it is likely that future payments
will not be made as scheduled. Interest income on investments in default is
recognized only as payment is received.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, swaps, options and forward contracts, as a means of
hedging exposure to interest rate changes, equity price change, credit and
foreign currency risk. The Company also uses derivative financial
instruments to enhance portfolio income and replicate cash market
investments. The Company, through Tribeca Citigroup Investments Ltd., holds
and issues derivative instruments in conjunction with these investment
strategies. (See Note 11 for a more detailed description of the Company's
derivative use.) Derivative financial instruments in a gain position are
reported in the consolidated balance sheet in other assets, derivative
financial instruments in a loss position are reported in the consolidated
balance sheet in other liabilities and derivatives purchased to offset
embedded derivatives on variable annuity contracts are reported in other
invested assets.
To qualify for hedge accounting, the hedge relationship is designated and
formally documented at inception detailing the particular risk management
objective and strategy for the hedge which includes the item and risk that
is being hedged, the derivative that is being used, as well as how
effectiveness is being assessed. A derivative has to be highly effective in
accomplishing the objective of offsetting either changes in fair value or
cash flows for the risk being hedged.
For fair value hedges, in which derivatives hedge the fair value of assets
and liabilities, changes in the fair value of derivatives are reflected in
realized investment gains and losses, together with changes in the fair
value of the related hedged item. The Company primarily hedges
available-for-sale securities.
For cash flow hedges, the accounting treatment depends on the effectiveness
of the hedge. To the extent that derivatives are effective in offsetting
the variability of the hedged cash flows, changes in the derivatives' fair
value will not be included in current earnings but are reported in the
accumulated other changes in equity from nonowner sources in shareholder's
equity. These changes in fair value will be included in earnings of future
periods when earnings are also affected by the variability of the hedged
cash flows. To the extent these derivatives are not effective, the
ineffective portion of the change in fair value is immediately included in
realized investment gains and losses. The Company primarily hedges
foreign-denominated funding agreements and floating rate available-for-sale
securities.
29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For net investment hedges, in which derivatives hedge the foreign currency
exposure of a net investment in a foreign operation, the accounting
treatment will similarly depend on the effectiveness of the hedge. The
effective portion of the change in fair value of the derivative, including
any premium or discount, is reflected in the accumulated other changes in
equity from nonowner sources as part of the foreign currency translation
adjustment in shareholder's equity. The ineffective portion is reflected in
realized investment gains and losses.
The effectiveness of these hedging relationships is evaluated on a
retrospective and prospective basis using quantitative measures of
correlation. If a hedge relationship is found to be ineffective, it no
longer qualifies as a hedge and any gains or losses attributable to such
ineffectiveness as well as subsequent changes in fair value are recognized
in realized investment gains and losses.
For those fair value and cash flow hedge relationships that are terminated,
hedge designations removed, or forecasted transactions that are no longer
expected to occur, the hedge accounting treatment described in the
paragraphs above will no longer apply. For fair value hedges, any changes
to the hedged item remain as part of the basis of the asset or liability
and are ultimately reflected as an element of the yield. For cash flow
hedges, any changes in fair value of the end-user derivative remain in the
accumulated other changes in equity from nonowner sources in shareholder's
equity and are included in earnings of future periods when earnings are
also affected by the variability of the hedged cash flow. If the hedged
relationship is discontinued because a forecasted transaction will not
occur when scheduled, the accumulated changes in fair value of the end-user
derivative recorded in shareholder's equity are immediately reflected in
realized investment gains and losses.
The Company enters into derivative contracts that are economic hedges but
do not qualify or are not designated as hedges for accounting purposes.
These derivative contracts are carried at fair value, with changes in value
reflected in realized investment gains and losses.
FINANCIAL INSTRUMENTS WITH EMBEDDED DERIVATIVES
The Company bifurcates an embedded derivative where the economic
characteristics and risks of the embedded instrument are not clearly and
closely related to the economic characteristics and risks of the host
contract, the entire instrument would not otherwise be remeasured at fair
value and a separate instrument with the same terms of the embedded
instrument would meet the definition of a derivative under SFAS 133.
The Company purchases investments that have embedded derivatives, primarily
convertible debt securities. These embedded derivatives are carried at fair
value with changes in value reflected in realized investment gains and
losses. Derivatives embedded in convertible debt securities are classified
in the consolidated balance sheet as fixed maturity securities, consistent
with the host instruments.
The Company markets certain investment contracts that have embedded
derivatives, primarily variable annuity contracts with put options. These
embedded derivatives are carried at fair value, with changes in value
reflected in realized investment gains and losses. Derivatives embedded in
variable annuity contracts are classified in the consolidated balance sheet
as future policy benefits and claims.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pre-tax
revenues based upon specific identification of the investments sold on the
trade date. Impairments are realized when investment losses in
30
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
value are deemed other-than-temporary. The Company conducts regular reviews
to assess whether other- than-temporary losses exist. Changing economic
conditions - global, regional, or related to specific issuers or industries
- could result in other-than-temporary losses. Also included in pre-tax
revenues are gains and losses arising from the remeasurement of the local
currency value of foreign investments to U.S. dollars, the functional
currency of the Company. The foreign exchange effects of Canadian
operations are included in unrealized gains and losses.
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life and health insurance, universal life,
corporate owned life insurance (COLI), deferred annuities and payout
annuities are deferred. These deferred acquisition costs (DAC) include
principally commissions and certain expenses related to policy issuance,
underwriting and marketing, all of which vary with and are primarily
related to the production of new business. The method for determining
amortization of deferred acquisition costs varies by product type based
upon three different accounting pronouncements: SFAS No. 60, "Accounting
and Reporting by Insurance Enterprises" (SFAS 60), SFAS No. 91, "Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long
Duration Contracts and for Realized Gains and Losses from the Sale of
Investments" (SFAS 97).
DAC for deferred annuities, both fixed and variable, and payout annuities
is amortized employing a level effective yield methodology per SFAS 91 as
indicated by AICPA Practice Bulletin 8. An amortization rate is developed
using the outstanding DAC balance and projected account balances and is
applied to actual account balances to determine the amount of DAC
amortization. The projected account balances are derived using a model that
contains assumptions related to investment returns and persistency. The
model rate is evaluated at least annually, and changes in underlying lapse
and interest rate assumptions are to be treated retrospectively. Variances
in expected equity market returns versus actual returns are treated
prospectively and a new amortization pattern is developed so that the DAC
balances will be amortized over the remaining estimated life of the
business. DAC for these products is currently being amortized over 10-15
years.
DAC for universal life and COLI is amortized in relation to estimated gross
profits from surrender charges, investment, mortality, and expense margins
per SFAS 97. Actual profits can vary from management's estimates, resulting
in increases or decreases in the rate of amortization. Re-estimates of
gross profits, performed at least annually, result in retrospective
adjustments to earnings by a cumulative charge or credit to income. DAC for
these products is currently being amortized over 16-25 years.
DAC relating to traditional life, including term insurance, and health
insurance is amortized in relation to anticipated premiums per SFAS 60.
Assumptions as to the anticipated premiums are made at the date of policy
issuance or acquisition and are consistently applied over the life of the
policy. DAC for these products is currently being amortized over 5-20
years.
All DAC is reviewed at least annually to determine if it is recoverable
from future income, including investment income, and if not recoverable, is
charged to expenses. All other acquisition expenses are charged to
operations as incurred. See Note 5.
31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
VALUE OF INSURANCE IN FORCE
The value of insurance in force is an asset that represents the actuarially
determined present value of anticipated profits to be realized from life
insurance and annuities contracts at the date of acquisition using the same
assumptions that were used for computing related liabilities where
appropriate. The value of insurance in force was the actuarially determined
present value of the projected future profits discounted at interest rates
ranging from 14% to 18%. Traditional life insurance is amortized in
relation to anticipated premiums; universal life is amortized in relation
to estimated gross profits; and annuity contracts are amortized employing a
level yield method. The value of insurance in force, which is included in
other assets, is reviewed periodically for recoverability to determine if
any adjustment is required. Adjustments, if any, are charged to income. See
Note 5.
SEPARATE AND VARIABLE ACCOUNTS
Separate and variable accounts primarily represent funds for which
investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contractholders. Each account has specific
investment objectives. The assets of each account are legally segregated
and are not subject to claims that arise out of any other business of the
Company. The assets of these accounts are carried at fair value. Certain
other separate accounts provide guaranteed levels of return or benefits and
the assets of these accounts are primarily carried at fair value.
Amounts assessed to the separate account contractholders for management
services are included in revenues. Deposits, net investment income and
realized investment gains and losses for these accounts are excluded from
revenues, and related liability increases are excluded from benefits and
expenses.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are included in other assets. Prior to the
adoption of FASB SFAS No. 141, "Business Combinations" (SFAS 141) and No.
142, "Goodwill and Other Intangible Assets" (SFAS 142) in the first quarter
of 2002, goodwill was being amortized on a straight-line basis principally
over a 40-year period. The carrying amount of goodwill and other intangible
assets is reviewed at least annually for indication of impairment in value
that in the view of management would be other-than-temporary. If it is
determined that goodwill and other intangible assets are unlikely to be
recovered, impairment is recognized on a discounted cash flow basis.
Upon adoption of SFAS 141 and SFAS 142, the Company stopped amortizing
goodwill and intangible assets deemed to have an infinite useful life.
Instead, these assets are subject to an annual review for impairment. Other
intangible assets that are not deemed to have an indefinite useful life
will continue to be amortized over their useful lives. See Note 5.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal
life, COLI, pension investment, guaranteed investment contracts (GICs), and
certain deferred annuity contracts. For universal life and COLI contracts,
contractholder fund balances are increased by receipts for mortality
coverage, contract administration, surrender charges and interest accrued,
where one or more of these elements are not fixed or guaranteed. These
balances are decreased by withdrawals, mortality charges and administrative
expenses
32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
charged to the contractholder. Interest rates credited to contractholder
funds related to universal life and COLI range from 3.50% to 5.95%, with a
weighted average interest rate of 4.52%.
Pension investment, GICs and certain annuity contracts do not contain
significant insurance risks and are considered investment-type contracts.
Contractholder fund balances are increased by receipts and credited
interest, and reduced by withdrawals and administrative expenses charged to
the contractholder. Interest rates credited to those investment type
contracts range from 1.00% to 8.05% with a weighted average interest rate
of 4.46%.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life product. The annuity
payout reserves are calculated using the mortality and interest assumptions
used in the actual pricing of the benefit. Mortality assumptions are based
on Company experience and are adjusted to reflect deviations such as
substandard mortality in structured settlement benefits. The interest rates
range from 2.0% to 9.0% with a weighted average of 7.02% for these
products. Traditional life products include whole life and term insurance.
Future policy benefits for traditional life products are estimated on the
basis of actuarial assumptions as to mortality, persistency and interest,
established at policy issue. Interest assumptions applicable to traditional
life products range from 2.5% to 7.0%, with a weighted average of 5.23%.
Assumptions established at policy issue as to mortality and persistency are
based on the Company's experience, which, together with interest
assumptions, include a margin for adverse deviation. Appropriate
recognition has been given to experience rating and reinsurance.
GUARANTY FUND AND OTHER INSURANCE RELATED ASSESSMENTS
Included in other liabilities is the Company's estimate of its liability
for guaranty fund and other insurance-related assessments. State guaranty
fund assessments are based upon the Company's share of premium written or
received in one or more years prior to an insolvency occurring in the
industry. Once an insolvency has occurred, the Company recognizes a
liability for such assessments if it is probable that an assessment will be
imposed and the amount of the assessment can be reasonably estimated. At
December 31, 2003 and 2002, the Company had a liability of $22.5 million
and $22.6 million, respectively, for guaranty fund assessments and a
related premium tax offset recoverable of $4.6 million and $4.2 million,
respectively. The assessments are expected to be paid over a period of
three to five years and the premium tax offsets are expected to be realized
over a period of 10 to 15 years.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's insurance subsidiaries, domiciled principally in Connecticut
and Massachusetts, prepare statutory financial statements in accordance
with the accounting practices prescribed or permitted by the insurance
departments of the states of domicile. Prescribed statutory accounting
practices are those practices that are incorporated directly or by
reference in state laws, regulations, and general administrative rules
applicable to all insurance enterprises domiciled in a particular state.
Permitted statutory accounting practices include practices not prescribed
by the domiciliary state, but allowed by the domiciliary state regulatory
authority. The Company does not have any permitted statutory accounting
practices.
PREMIUMS
Premiums are recognized as revenue when due. Premiums for contracts with a
limited number of premium payments, due over a significantly shorter period
than the period over which benefits are provided, are
33
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
considered revenue when due. The portion of premium which is not required
to provide for benefits and expenses is deferred and recognized in revenues
in a constant relationship to insurance benefits in force.
FEE INCOME
Fee income is recognized on deferred annuity and universal life contracts
for mortality, administrative and equity protection charges according to
contract due dates. Fee income is recognized on variable annuity and
universal life separate accounts either daily, monthly, quarterly or
annually as per contract terms.
OTHER REVENUES
Other revenues include surrender penalties collected at the time of a
contract surrender, and other miscellaneous charges related to annuity and
universal life contracts recognized when received. Also included are
revenues from unconsolidated non-insurance subsidiaries. Amortization of
deferred income related to reinsured blocks of business are recognized in
relation to anticipated premiums and are reported in other revenues.
CURRENT AND FUTURE INSURANCE BENEFITS
Current and future insurance benefits represent charges for mortality and
morbidity related to fixed annuities, universal life, term life and health
insurance benefits.
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, COLI, pension investment, GICs and certain deferred annuity contracts
in accordance with contract provisions.
FEDERAL INCOME TAXES
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income
taxes arise from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
2. OPERATING SEGMENTS
The Company has two reportable business segments that are separately
managed due to differences in products, services, marketing strategy and
resource management. The business of each segment is maintained and
reported through separate legal entities within the Company. The management
groups of each segment report separately to the common ultimate parent,
Citigroup Inc.
TRAVELERS LIFE & ANNUITY (TLA) core offerings include individual annuity,
individual life, COLI and group annuity insurance products distributed by
TIC and TLAC principally under the Travelers Life & Annuity name. Among the
range of individual products offered are deferred fixed and variable
annuities, payout annuities and term, universal and variable life
insurance. The COLI product is a variable universal life product
distributed through independent specialty brokers. The group products
include institutional pensions, including GICs, payout annuities, group
annuities sold to employer-sponsored retirement and savings plans,
structured settlements and funding agreements.
34
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The PRIMERICA business segment consolidates the businesses of Primerica
Life, Primerica Life Insurance Company of Canada, CitiLife and NBL. The
Primerica business segment offers individual life products, primarily term
insurance, to customers through a sales force of approximately 107,000
representatives. A great majority of the domestic licensed sales force
works on a part-time basis.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). The amount of
investments in equity method investees and total expenditures for additions
to long-lived assets other than financial instruments, long-term customer
relationships of a financial institution, mortgage and other servicing
rights, and deferred tax assets, were not material.
35
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
($ IN MILLIONS)
REVENUES BY SEGMENT 2003 2002 2001
------------------- ---- ---- ----
TLA $4,479 $3,653 $4,089
Primerica 1,660 1,581 1,613
------ ------ ------
Total Revenues $6,139 $5,234 $5,702
====== ====== ======
NET INCOME BY SEGMENT
TLA $918 $673 $826
Primerica 440 409 446
------ ------ ------
Net Income $1,358 $1,082 $1,272
====== ====== ======
ASSETS BY SEGMENT
TLA $85,881 $74,562 $69,836
Primerica 9,467 8,433 8,030
------- ------- -------
Total segments $95,348 $82,995 $77,866
======= ======= =======
The following tables contain key segment measurements.
BUSINESS SEGMENT INFORMATION:
------------------------------------------------------- -------------------- -------------------
FOR THE YEAR
ENDED DECEMBER 31, 2003
($ IN MILLIONS) TLA PRIMERICA
------------------------------------------------------------------------------------------------
Premiums $1,082 $1,245
Net investment income 2,743 315
Interest credited to contractholders 1,248 -
Amortization of deferred acquisition costs 266 235
Expenditures for deferred acquisition costs 583 377
Federal income taxes 240 231
BUSINESS SEGMENT INFORMATION:
------------------------------------------------------------------------------------------------
FOR THE YEAR
ENDED DECEMBER 31, 2002
($ IN MILLIONS) TLA PRIMERICA
------------------------------------------------------------------------------------------------
Premiums $ 730 $1,194
Net investment income 2,646 290
Interest credited to contractholders 1,220 -
Amortization of deferred acquisition costs 174 219
Expenditures for deferred acquisition costs 556 323
Federal income taxes 212 209
36
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
------------------------------------------------------------------------------------------------
FOR THE YEAR
ENDED DECEMBER 31, 2001
($ IN MILLIONS) TLA PRIMERICA
------------------------------------------------------------------------------------------------
Premiums $957 $1,145
Net investment income 2,530 301
Interest credited to contractholders 1,179 -
Amortization of deferred acquisition costs 171 208
Total expenditures for deferred acquisition costs 553 298
Federal income taxes 394 236
The majority of the annuity business and a substantial portion of the life
business written by TLA are accounted for as investment contracts, with the
result that the deposits collected are reported as liabilities and are not
included in revenues. Deposits represent a statistic integral to managing
TLA operations, which management uses for measuring business volumes, and
may not be comparable to similarly captioned measurements used by other
life insurance companies. For the years ended December 31, 2003, 2002 and
2001, deposits collected amounted to $12.0 billion, $11.9 billion and $13.1
billion, respectively.
The Company's revenue was derived almost entirely from U.S. domestic
business. Revenue attributable to foreign countries was insignificant.
The Company had no transactions with a single customer representing 10% or
more of its revenue.
37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities were
as follows:
----------------------------------------------------- --------------- ---------------- --------------- ------------
GROSS GROSS
DECEMBER 31, 2003 AMORTIZED UNREALIZED UNREALIZED FAIR
($ IN MILLIONS) COST GAINS LOSSES VALUE
----------------------------------------------------- --------------- ---------------- --------------- ------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $8,061 $326 $18 $8,369
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 2,035 22 12 2,045
Obligations of states, municipalities and
political subdivisions 379 21 2 398
Debt securities issued by foreign governments
690 51 1 740
All other corporate bonds 23,098 1,507 64 24,541
Other debt securities 5,701 377 22 6,056
Redeemable preferred stock 155 20 1 174
----------------------------------------------------- --------------- ---------------- --------------- ------------
Total Available For Sale $40,119 $2,324 $120 $42,323
----------------------------------------------------- --------------- ---------------- --------------- ------------
----------------------------------------------------- --------------- ---------------- --------------- ------------
GROSS GROSS
DECEMBER 31, 2002 AMORTIZED UNREALIZED UNREALIZED FAIR
($ IN MILLIONS) COST GAINS LOSSES VALUE
----------------------------------------------------- --------------- ---------------- --------------- ------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 6,975 $434 $ 2 $7,407
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 2,402 39 19 2,422
Obligations of states, municipalities and
political subdivisions 297 22 - 319
Debt securities issued by foreign governments 365 30 2 393
All other corporate bonds 20,894 982 608 21,268
Other debt securities 4,348 229 66 4,511
Redeemable preferred stock 147 1 34 114
----------------------------------------------------- --------------- ---------------- --------------- ------------
Total Available For Sale $35,428 $1,737 $731 $36,434
----------------------------------------------------- --------------- ---------------- --------------- ------------
38
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Proceeds from sales of fixed maturities classified as available for sale
were $15.1 billion, $15.5 billion and $14.1 billion in 2003, 2002 and 2001,
respectively. Gross gains of $476 million, $741 million and $633 million
and gross losses of $394 million, $309 million and $273 million in 2003,
2002 and 2001, respectively, were realized on those sales. Additional
losses of $110 million, $639 million and $153 million in 2003, 2002 and
2001, respectively, were realized due to other-than-temporary losses in
value. Impairment activity increased significantly beginning in the fourth
quarter of 2001 and continued throughout 2002. Impairments were
concentrated in telecommunication and energy company investments.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted expected
cash flows using market rates commensurate with the credit quality and
maturity of the investment. The fair value of investments for which a
quoted market price or dealer quote is not available amounted to $6.4
billion and $5.1 billion at December 31, 2003 and 2002, respectively.
The amortized cost and fair value of fixed maturities at December 31, 2003,
by contractual maturity, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
--------------------------------------------------------------------------------------
AMORTIZED
($ IN MILLIONS) COST FAIR VALUE
--------------------------------------------------------------------------------------
MATURITY:
Due in one year or less $2,532 $2,582
Due after 1 year through 5 years 11,559 12,188
Due after 5 years through 10 years 9,866 10,561
Due after 10 years 8,101 8,623
--------------------------------------------------------------------------------------
32,058 33,954
--------------------------------------------------------------------------------------
Mortgage-backed securities 8,061 8,369
--------------------------------------------------------------------------------------
Total Maturity $40,119 $42,323
--------------------------------------------------------------------------------------
The Company makes investments in collateralized mortgage obligations
(CMOs). CMOs typically have high credit quality, offer good liquidity, and
provide a significant advantage in yield and total return compared to U.S.
Treasury securities. The Company's investment strategy is to purchase CMO
tranches which are protected against prepayment risk, including planned
amortization class and last cash flow tranches. Prepayment protected
tranches are preferred because they provide stable cash flows in a variety
of interest rate scenarios. The Company does invest in other types of CMO
tranches if a careful assessment indicates a favorable risk/return
tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 2003 and 2002, the Company held CMOs classified as
available for sale with a fair value of $5.2 billion and $4.7 billion,
respectively. Approximately 30% and 35%, respectively, of the Company's CMO
holdings are fully collateralized by GNMA, FNMA or FHLMC securities at
December 31, 2003 and 2002. In addition, the Company held $3.0 billion and
$2.6 billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities
at December 31, 2003 and 2002, respectively. All of these securities are
rated AAA.
39
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company engages in securities lending transactions whereby certain
securities from its portfolio are loaned to other institutions for short
periods of time. The Company generally receives cash collateral from the
borrower, equal to at least the market value of the loaned securities plus
accrued interest, and invests it in the Company's short-term money market
pool (See Note 13). The loaned securities remain a recorded asset of the
Company, however, the Company records a liability for the amount of the
cash collateral held, representing its obligation to return the cash
collateral related to these loaned securities, and reports that liability
as part of other liabilities in the consolidated balance sheet. At December
31, 2003 and 2002, the Company held cash collateral of $2.4 billion and
$2.8 billion, respectively.
The Company participates in dollar roll repurchase transactions as a way to
generate investment income. These transactions involve the sale of
mortgage-backed securities with the agreement to repurchase substantially
the same securities from the same counterparty. Cash is received from the
sale, which is invested in the Company's short-term money market pool. The
cash is returned at the end of the roll period when the mortgage-backed
securities are repurchased. The Company will generate additional investment
income based upon the difference between the sale and repurchase prices.
These transactions are recorded as secured borrowings. The mortgage-backed
securities remain recorded as assets. The cash proceeds are reflected in
short-term investments and a liability is established to reflect the
Company's obligation to repurchase the securities at the end of the roll
period. The liability is classified as other liabilities in the
consolidated balance sheets and fluctuates based upon the timing of the
repayments. The balances were insignificant at December 31, 2003 and 2002.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as
follows:
-------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES: GROSS UNREALIZED GROSS UNREALIZED FAIR
($ IN MILLIONS) COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003
Common stocks $109 $27 $2 $134
Non-redeemable preferred stocks 214 14 - 228
-------------------------------------------------------------------------------------------------------------------
Total Equity Securities $323 $41 $2 $362
-------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002
Common stocks $48 $8 $6 $50
Non-redeemable preferred stocks 280 9 7 282
-------------------------------------------------------------------------------------------------------------------
Total Equity Securities $328 $17 $13 $332
-------------------------------------------------------------------------------------------------------------------
Proceeds from sales of equity securities were $124 million, $212 million
and $112 million in 2003, 2002 and 2001, respectively. Gross gains of $23
million, $8 million and $10 million and gross losses of $2 million, $4
million and $13 million in 2003, 2002 and 2001, respectively, were realized
on those sales. Additional losses of $11 million, $19 million and $96
million in 2003, 2002 and 2001, respectively, were realized due to
other-than-temporary losses in value.
40
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER-THAN-TEMPORARY LOSSES ON INVESTMENTS
At December 31, 2003, the cost of approximately 670 investments in fixed
maturity and equity securities exceeded their fair value by $122 million.
Of the $122 million, $91 million represents fixed maturity investments that
have been in a gross unrealized loss position for less than a year and of
these 78% are rated investment grade. Fixed maturity investments that have
been in a gross unrealized loss position for a year or more total $29
million and 38% of these are rated investment grade. The gross unrealized
loss on equity securities was $2 million at December 31, 2003.
Management has determined that the unrealized losses on the Company's
investments in fixed maturity and equity securities at December 31, 2003
are temporary in nature. The Company conducts a rigorous review each
quarter to identify and evaluate investments that have possible indications
of impairment. An investment in a debt or equity security is impaired if
its fair value falls below its cost and the decline is considered
other-than-temporary. Factors considered in determining whether a loss is
temporary include the length of time and extent to which fair value has
been below cost; the financial condition and near-term prospects of the
issuer; and the Company's ability and intent to hold the investment for a
period of time sufficient to allow for any anticipated recovery. The
Company's review for impairment generally entails:
o Identification and evaluation of investments that have possible
indications of impairment;
o Analysis of individual investments that have fair values less than 80% of
amortized cost, including
consideration of the length of time the investment has been in an
unrealized loss position; o Discussion of evidential matter, including an
evaluation of factors or triggers that would or could cause
individual investments to qualify as having other-than-temporary
impairments and those that would not support other-than-temporary
impairment;
o Documentation of the results of these analyses, as required under
business policies.
The table below shows the fair value of investments in fixed maturities and
equity securities in an unrealized loss position at December 31, 2003:
GROSS UNREALIZED LOSSES
Less Than One Year One Year or Longer Total
-----------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
($ IN MILLIONS) Value Losses Value Losses Value Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available-for-sale:
Mortgage-backed securities-CMOs and pass-through
securities $1,182 $18 $17 $- $1,199 $18
U.S. Treasury securities and obligations of U.S.
Government and government agencies and authorities 1,180 12 - - 1,180 12
Obligations of states, municipalities and political
subdivisions 45 2 - - 45 2
Debt securities issued by foreign governments 55 1 - - 55 1
All other corporate bonds 1,793 39 503 25 2,296 64
Other debt securities 755 18 89 3 844 22
Redeemable preferred stock 12 1 11 1 23 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities $5,022 $91 $620 $29 $5,642 $120
Equity securities $25 $1 $5 $1 $30 $2
- ------------------------------------------------------------------------------------------------------------------------------------
41
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MORTGAGE LOANS AND REAL ESTATE
At December 31, 2003 and 2002, the Company's mortgage loan and real estate
portfolios consisted of the following:
--------------------------------------------------------------------------------------------------
($ IN MILLIONS) 2003 2002
--------------------------------------------------------------------------------------------------
Current Mortgage Loans $1,841 $1,941
Underperforming Mortgage Loans 45 44
--------------------------------------------------------------------------------------------------
Total Mortgage Loans 1,886 1,985
--------------------------------------------------------------------------------------------------
Real Estate - Foreclosed 63 17
Real Estate - Investment 33 19
--------------------------------------------------------------------------------------------------
Total Real Estate 96 36
--------------------------------------------------------------------------------------------------
Total Mortgage Loans and Real Estate $1,982 $2,021
==================================================================================================
Underperforming mortgage loans include delinquent mortgage loans over 90
days past due, loans in the process of foreclosure and loans modified at
interest rates below market.
Aggregate annual maturities on mortgage loans at December 31, 2003 are
shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to prepay obligations with or without
prepayment penalties.
-----------------------------------------------------------------------
YEAR ENDING DECEMBER 31,
($ IN MILLIONS)
-----------------------------------------------------------------------
2004 $ 173
2005 107
2006 347
2007 131
2008 141
Thereafter 987
-----------------------------------------------------------------------
Total $1,886
=======================================================================
42
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
TRADING SECURITIES
Trading securities of the Company are held primarily in Tribeca Citigroup
Investments Ltd. The assets and liabilities are valued at fair value as
follows:
($ IN MILLIONS) Fair value as of Fair value as of
--------------- December 31, 2003 December 31, 2002
------------------ -----------------
ASSETS
Trading securities
Convertible bond arbitrage $1,447 $1,442
Other 260 89
------ ------
$1,707 $1,531
====== ======
LIABILITIES
Trading securities sold not yet purchased
Convertible bond arbitrage $629 $520
Other 8 78
---- ----
$637 $598
==== ====
The Company's trading portfolio investments and related liabilities are
normally held for periods less than six months. See Note 11.
43
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER INVESTED ASSETS
Other invested assets are composed of the following:
------------------------------------------------------------------------
($ IN MILLIONS) 2003 2002
------------------------------------------------------------------------
Investment in Citigroup Preferred Stock $3,212 $3,212
Private equity and arbitrage investments 1,315 1,006
Real estate investments 327 390
Derivatives 182 263
Other 56 38
------------------------------------------------------------------------
Total $5,092 $4,909
------------------------------------------------------------------------
CONCENTRATIONS
At December 31, 2003 and 2002, the Company had an investment in Citigroup
Preferred Stock of $3.2 billion. See Note 13.
The Company both maintains and participates in a short-term investment pool
for its insurance affiliates. See Note 13.
The Company had concentrations of investments, excluding those in federal
and government agencies, primarily fixed maturities at fair value, in the
following industries:
------------------------------------------------------------------------
($ IN MILLIONS) 2003 2002
------------------------------------------------------------------------
Finance $5,056 $3,681
Electric Utilities 3,552 3,979
Banking 2,830 1,900
------------------------------------------------------------------------
The Company held investments in foreign banks in the amount of $1,018
million and $869 million at December 31, 2003 and 2002, respectively, which
are included in the table above. The Company defines its below investment
grade assets as those securities rated Ba1 by Moody's Investor Services (or
its equivalent) or below by external rating agencies, or the equivalent by
internal analysts when a public rating does not exist. Such assets include
publicly traded below investment grade bonds and certain other privately
issued bonds and notes that are classified as below investment grade. Below
investment grade assets included in the categories of the preceding table
include $1,118 million and $878 million in Electric Utilities at December
31, 2003 and 2002, respectively. Below investment grade assets in Finance
and Banking were insignificant at December 31, 2003 and 2002. Total below
investment grade assets were $5.2 billion and $3.8 billion at December 31,
2003 and 2002, respectively.
Included in mortgage loans were the following group concentrations:
------------------------------------------------------------------------
($ IN MILLIONS) 2003 2002
------------------------------------------------------------------------
STATE
California $732 $788
PROPERTY TYPE
Agricultural $1,025 $1,212
------------------------------------------------------------------------
44
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, credit limits
and other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit. The Company's underwriting standards with respect to
new mortgage loans generally require loan to value ratios of 75% or less at
the time of mortgage origination.
NON-INCOME PRODUCING INVESTMENTS
Investments included in the consolidated balance sheets that were
non-income producing amounted to $104.4 million and $58.5 million at
December 31, 2003 and 2002, respectively.
RESTRUCTURED INVESTMENTS
The Company had mortgage loans and debt securities that were restructured
at below market terms at December 31, 2003 and 2002. The balances of the
restructured investments were insignificant. The new terms typically defer
a portion of contract interest payments to varying future periods. Gross
interest income on restructured assets that would have been recorded in
accordance with the original terms of such loans was insignificant in 2003,
2002 and 2001. Interest on these assets, included in net investment income,
was also insignificant in 2003, 2002 and 2001.
NET INVESTMENT INCOME
------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
($ IN MILLIONS)
------------------------------------------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $2,465 $2,359 $2,328
Mortgage loans 158 167 210
Trading 222 9 131
Other invested assets 58 203 71
Citigroup Preferred Stock 203 178 53
Other, including policy loans 82 104 165
------------------------------------------------------------------------------------------------------
Total gross investment income 3,188 3,020 2,958
------------------------------------------------------------------------------------------------------
Investment expenses 130 84 127
------------------------------------------------------------------------------------------------------
Net Investment Income $3,058 $2,936 $2,831
------------------------------------------------------------------------------------------------------
45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the periods were as follows:
------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
($ IN MILLIONS)
------------------------------------------------------------------------------------------------------
REALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $(28) $(207) $207
Equity securities 10 (15) (99)
Mortgage loans (14) - 5
Real estate held for sale 1 8 3
Other invested assets 49 (19) -
Derivatives 20 (87) 14
Other (1) (2) (5)
------------------------------------------------------------------------------------------------------
Total realized investment gains (losses) $37 $(322) $125
------------------------------------------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are reported in
accumulated other changes in equity from nonowner sources were as follows:
-------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
($ IN MILLIONS)
-------------------------------------------------------------------------------------------------------------
UNREALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $1,198 $664 $85
Equity securities 35 3 40
Other 6 31 (20)
-------------------------------------------------------------------------------------------------------------
Total unrealized investment gains (losses) 1,239 698 105
-------------------------------------------------------------------------------------------------------------
Related taxes 421 243 37
-------------------------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) 818 455 68
Balance beginning of year 626 171 103
-------------------------------------------------------------------------------------------------------------
Balance end of year $1,444 $626 $171
-------------------------------------------------------------------------------------------------------------
VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FIN 46, which changes the method of
determining whether certain entities, including securitization entities,
should be included in the Company's consolidated financial statements.
The implementation of FIN 46 encompassed a review of numerous entities to
determine the impact of adoption and considerable judgment was used in
evaluating whether or not a VIE should be consolidated. In December 2003,
the FASB released a revision of FIN 46 (FIN 46-R or the interpretation),
which includes substantial changes from the original. The calculation of
expected losses and expected residual returns have both been altered to
reduce the impact of decision maker and guarantor fees in the calculation
of expected residual returns and expected losses. In addition, FIN 46-R
changes the definition of a variable interest. The interpretation permits
adoption of either the original or the revised versions of FIN 46 until the
first quarter of 2004, at which time FIN 46-R must be adopted. For 2003
year-end, the Company's consolidated financial statements are in accordance
with the original. (See "Consolidation of Variable Interest Entities" in
the "Accounting Changes" section of Note 1.)
46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table represents the carrying amounts and classification of
consolidated assets that are collateral for VIE obligations. The assets in
this table represent two investment vehicles that the Company was involved
with prior to February 1, 2003. These two VIEs are a collateralized debt
obligation and a real estate joint venture:
$ IN MILLIONS DECEMBER 31, 2003
-----------------------------------------------------------------
Investments $ 400
Cash 11
Other 4
-----------------------
Total assets of consolidated VIEs $415
-----------------------------------------------------------------
The debt holders of these VIEs have no recourse to the Company. The
Company's maximum exposure to loss is limited to its investment of
approximately $8 million. The Company regularly becomes involved with VIEs
through its investment activities. This involvement is generally restricted
to small passive debt and equity investments.
4. REINSURANCE
Reinsurance is used in order to limit losses, minimize exposure to large
risks, provide additional capacity for future growth and to effect
business-sharing arrangements. Reinsurance is accomplished through various
plans of reinsurance, primarily yearly renewable term (YRT), coinsurance
and modified coinsurance. Reinsurance involves credit risk and the Company
monitors the financial condition of these reinsurers on an ongoing basis.
The Company remains primarily liable as the direct insurer on all risks
reinsured.
Since 1997 the majority of universal life business has been reinsured under
an 80%/20% YRT quota share reinsurance program and term life business has
been reinsured under a 90%/10% YRT quota share reinsurance program.
Beginning in September 2002, newly issued term life business has been
reinsured under a 90%/10% coinsurance quota share reinsurance program.
Maximum retention of $2.5 million is generally reached on policies in
excess of $12.5 million for universal life and $25.0 million for term
insurance. For other plans of insurance, it is the policy of the Company to
obtain reinsurance for amounts above certain retention limits on individual
life policies, which limits vary with age and underwriting classification.
Generally, the maximum retention on an ordinary life risk is $2.5 million.
Total in-force business ceded under reinsurance contracts is $356.3 billion
and $321.9 billion at December 31, 2003 and 2002, respectively.
Effective July 1, 2000 the Company sold 90% of its individual long-term
care insurance business to General Electric Capital Assurance Company and
its subsidiary in the form of indemnity reinsurance arrangements. Written
premiums ceded per these arrangements were $226.8 million, $231.8 million
and $233.3 million in 2003, 2002 and 2001, respectively, and earned
premiums ceded were $226.7 million, $233.8 million and $240.1 million in
2003, 2002 and 2001, respectively.
On January 3, 1995, the Company sold its group life business to The
Metropolitan Life Insurance Company (MetLife) under the form of an
indemnity insurance arrangement. Premiums written and earned in 2003, 2002
and 2001 were insignificant.
47
TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Prior to April 1, 2001, the Company also reinsured substantially all of the
guaranteed minimum death benefit (GMDB) on its variable annuity product.
Total variable annuity account balances with GMDB were $23.5 billion, of
which $12.9 billion, or 55%, was reinsured, and $19.1 billion, of which
$12.4 billion, or 65%, was reinsured at December 31, 2003 and 2002,
respectively. GMDB is payable upon the death of a contractholder. When the
benefit payable is greater than the account value of the variable annuity,
the difference is called the net amount at risk (NAR). NAR totals $1.7
billion, of which $1.4 billion, or 81%, is reinsured and $4.6 billion, of
which $3.8 billion, or 82%, is reinsured at December 31, 2003 and 2002,
respectively.
TIC writes workers' compensation business. This business is reinsured
through a 100% quota-share agreement with The Travelers Indemnity Company,
an insurance subsidiary of TPC.
A summary of reinsurance financial data reflected within the consolidated
statements of income and balance sheets is presented below ($ in millions):
FOR THE YEARS ENDING DECEMBER 31,
WRITTEN PREMIUMS 2003 2002 2001
------------------------------------------------------------------------------------------------------
Direct $2,979 $2,610 $2,848
Assumed 1 - 1
Ceded to:
The Travelers Indemnity Company 2 (83) (146)
Other companies (638) (614) (591)
------------------------------------------------------------------------------------------------------
Total Net Written Premiums $2,344 $1,913 $2,112
======================================================================================================
EARNED PREMIUMS 2003 2002 2001
------------------------------------------------------------------------------------------------------
Direct $3,001 $2,652 $2,879
Assumed 1 - 1
Ceded to:
The Travelers Indemnity Company (21) (109) (180)
Other companies (654) (619) (598)
------------------------------------------------------------------------------------------------------
Total Net Earned Premiums $2,327 $1,924 $2,102
======================================================================================================
The Travelers Indemnity Company was an affiliate in 2001 and for part of
2002. See Note 14.
Reinsurance recoverables at December 31, 2003 and 2002 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
REINSURANCE RECOVERABLES 2003 2002
---------------------------------------------------------------------------------------
Life and accident and health business $2,885 $2,589
Property-casualty business:
The Travelers Indemnity Company 1,585 1,712
---------------------------------------------------------------------------------------
Total Reinsurance Recoverables $4,470 $4,301
=======================================================================================
Reinsurance recoverables for the life and accident and health business
include $1,617 million and $1,351 million at December 31, 2003 and 2002,
respectively, from General Electric Capital Assurance Company. Assets
collateralizing these receivables are held in trust for the purpose of
paying Company claims.
48
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reinsurance recoverables also include $435 million and $472 million at
December 31, 2003 and 2002, respectively, from MetLife.
5. INTANGIBLE ASSETS
The Company's intangible assets are DAC, goodwill and the value of
insurance in force. DAC and the value of insurance in force are
amortizable. The following is a summary of capitalized DAC by type.
Deferred & Payout Traditional Life &
In millions of dollars Annuities UL & COLI Other Total
-----------------------------------------------------------------------------------------------------------------
Balance January 1, 2002 $1,137 $430 $1,894 $3,461
Deferred expenses & other 347 172 349 868
Amortization expense (142) (24) (238) (404)
Underlying lapse and interest
rate adjustment 22 - - 22
Amortization related to SFAS
91 reassessment (11) - - (11)
--------------------------------------------------------------------------------
Balance December 31, 2002 1,353 578 2,005 3,936
Deferred expenses & other 340 221 399 960
Amortization expense (212) (33) (256) (501)
--------------------------------------------------------------------------------
Balance December 31, 2003 $1,481 $766 $2,148 $4,395
-----------------------------------------------------------------------------------------------------------------
The value of insurance in force totaled $112 million and $130 million at
December 31, 2003 and 2002, respectively, and is included in other assets.
Amortization expense on the value of insurance in force was $18 million,
$25 million and $26 million for the year ended December 31, 2003, 2002 and
2001, respectively. Amortization expense related to the value of insurance
in force is estimated to be $18 million in 2004, $17 million in 2005, $14
million in 2006, $12 million in 2007 and $8 million in 2008. In 2002 there
was an opening balance sheet reclassification between DAC and the value of
insurance in force in the amount of $11 million. This had no impact on
results of operations or shareholder's equity.
The Company stopped amortizing goodwill on January 1, 2002. During 2001,
the Company reversed $8 million of negative goodwill. Net income adjusted
to exclude the impact of goodwill amortization for the year ended December
31, 2001 is as follows:
Year Ended
($ 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
($ IN MILLIONS) ON INVESTMENT TRANSLATION INSTRUMENTS AND FROM NONOWNER
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 mllion 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 (960) (879) (851)
costs
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)
(George C. Kokulis)
/s/ Glenn D. Lammey Director, Chief Financial Officer and
- ------------------------ Chief Accounting Officer
(Glenn D. Lammey) (Principal Financial Officer and
Principal Accounting Officer)
/s/ Kathleen L. Preston Director
- ------------------------
(Kathleen L. Preston)
/s/ Marla Berman Lewitus Director
- ------------------------
(Marla Berman Lewitus)
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities pursuant to
Section 12 of the Act: NONE
No Annual Report to Security Holders covering the registrant's last fiscal year
or proxy material with respect to any meeting of security holders has been sent,
or will be sent, to security holders.
68
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
The Travelers Insurance Company and Subsidiaries
Independent Auditors' Report *
Consolidated Statements of Income *
Consolidated Balance Sheets *
Consolidated Statements of Changes In Shareholder's Equity *
Consolidated Statements of Cash Flows *
Notes to Consolidated Financial Statements *
Independent Auditors' Report 70
Schedule I - Summary of Investments - Other than Investments
in Related Parties 2003 71
Schedule III - Supplementary Insurance Information 2001-2003 72
Schedule IV - Reinsurance 2001-2003 73
All other schedules are inapplicable for this filing.
* See index on page 18
69
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company:
Under date of February 26, 2004, we reported on the consolidated balance sheets
of The Travelers Insurance Company and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of income, changes in
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 2003, which are included in the Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules as listed in the accompanying index. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for variable interest entities in 2003, for
goodwill and intangible assets in 2002, and for derivative instruments and
hedging activities and for securitized financial assets in 2001.
/s/KPMG LLP
Hartford, Connecticut
February 26, 2004
70
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2003
($ IN MILLIONS)
- -----------------------------------------------------------------------------------------------------------------------------
TYPE OF INVESTMENT AMOUNT SHOWN IN
COST VALUE BALANCE SHEET(1)
- -----------------------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and
Authorities $6,487 $6,642 $6,642
States, municipalities and political subdivisions 379 398 398
Foreign governments 690 740 740
Public utilities 2,702 2,901 2,901
Convertible bonds and bonds with warrants attached 187 208 208
All other corporate bonds 29,519 31,260 31,260
- -----------------------------------------------------------------------------------------------------------------------------
Total Bonds 39,964 42,149 42,149
Redeemable preferred stocks 155 174 174
- -----------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 40,119 42,323 42,323
- -----------------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Banks, trust and insurance companies 14 16 16
Industrial, miscellaneous and all other 95 118 118
- -----------------------------------------------------------------------------------------------------------------------------
Total Common Stocks 109 134 134
Nonredeemable preferred stocks 214 228 228
- -----------------------------------------------------------------------------------------------------------------------------
Total Equity Securities 323 362 362
- -----------------------------------------------------------------------------------------------------------------------------
Mortgage Loans 1,886 1,886
Real Estate Held For Sale 96 96
Policy Loans 1,135 1,135
Short-Term Securities 3,603 3,603
Trading Securities 1,707 1,707
Other Investments(2)(3)(4) 1,465 1,465
- -----------------------------------------------------------------------------------------------------------------------------
Total Investments $50,334 $52,577
=============================================================================================================================
(1) Determined in accordance with methods described in Notes 1 and 3 of the
Notes to Consolidated Financial Statements.
(2) Excludes $3.2 billion of Citigroup Inc. preferred stock. See Note 13 of
Notes to Consolidated Financial Statements.
(3) Also excludes $415 million fair value of investment in affiliated
partnership interests.
(4) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
71
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
($ IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
FUTURE
POLICY OTHER
BENEFITS, POLICY AMORTIZATION
DEFERRED LOSSES, CLAIMS BENEFITS, OF DEFERRED
POLICY CLAIMS AND NET CLAIMS POLICY OTHER
ACQUISITION 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)
- ------------------------------------------------------------------------------------------
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER 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
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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
THIS PAGE INTENTIONALLY LEFT BLANK.
THE TRAVELERS LIFE AND ANNUITY COMPANY
TABLE OF CONTENTS
-----------------
FORM 10-K
ITEM NUMBER PART I PAGE
1. Business.............................................................2
2. Properties...........................................................4
3. Legal Proceedings....................................................5
4. Submission of Matters to a Vote of Security Holders..................5
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................................5
6. Selected Financial Data..............................................5
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................5
7A. Quantitative and Qualitative Disclosures About Market Risk..........11
8. Financial Statements and Supplementary Data.........................13
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................46
9A. Controls and Procedures.............................................46
PART III
10. Directors and Executive Officers of the Registrant..................47
11. Executive Compensation..............................................47
12. Security Ownership of Certain Beneficial Owners and Management......47
13. Certain Relationships and Related Transactions......................47
14. Principal Accountant Fees and Services..............................47
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....49
Exhibit Index.......................................................50
Signatures .........................................................51
Index to Financial Statements and Financial Statement Schedules.....52
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
PART I
------
ITEM 1. BUSINESS.
GENERAL
The Travelers Life and Annuity Company (the Company) is a wholly owned
subsidiary of The Travelers Insurance Company (TIC), an indirect wholly owned
subsidiary of Citigroup Inc. (Citigroup). Citigroup is a diversified global
financial services holding company whose businesses provide a broad range of
financial services to consumer and corporate customers around the world. The
periodic reports of Citigroup and TIC provide additional business and financial
information concerning those companies and their consolidated subsidiaries. On
March 27, 2002, Travelers Property Casualty Corp. (TPC), TIC's parent at
December 31, 2001, completed its initial public offering (IPO). On August 20,
2002, Citigroup made a tax-free distribution of the majority of its remaining
interest in TPC to Citigroup's stockholders. Prior to the IPO, the common stock
of TIC was distributed by TPC to Citigroup Insurance Holding Corporation (CIHC)
so that TIC and the Company would remain indirect wholly owned subsidiaries of
Citigroup. TIC has a license from TPC to use the names "Travelers Life &
Annuity," "The Travelers Insurance Company," "The Travelers Life and Annuity
Company" and related names in connection with the Company's business.
The Company is a stock insurance company chartered in 1973 in the State of
Connecticut and has been continuously engaged in the insurance business since
that time. The Company is licensed to conduct life and annuity insurance
business in all the states except New York. The Company is also licensed to
conduct life and annuity insurance business in the District of Columbia and
Puerto Rico.
The Company offers individual annuity and life insurance products to individuals
and small businesses. Among the range of individual annuity products offered are
deferred fixed and variable annuities and payout annuities. Individual life
insurance products include term, universal and variable life insurance. These
products are distributed primarily through Smith Barney (SB), a division of
Citigroup Global Markets Inc., and Primerica Financial Services (PFS), both
affiliates of the Company. Individual annuity sales by SB accounted for 32% of
total individual annuity sales in 2003 and 2002. Sales by PFS accounted for 29%
and 26% in 2003 and 2002, respectively. In addition, the Company distributes
these products through CitiStreet Retirement Services, a division of CitiStreet
LLC, (CitiStreet) and Citibank, N.A. (Citibank), also affiliates of the Company,
a nationwide network of independent agents and the outside broker-dealer
channel.
In the past, the Company offered group pension close-out business. The Company
no longer actively markets this product and all new sales are reported in TIC.
Periodically, premiums are collected from the business that remains on the
books. Reserves related to this block of business remain recorded in the
Company's balance sheets.
The Company has assets held in a separate account related to reserves on
structured settlement contracts that provide guarantees for the contractholders
independent of the investment performance of the separate account assets. The
assets held in this separate account are owned by the Company and
contractholders do not share in their investment performance. The assets,
liabilities and earnings related to the structured settlements are classified
consistently with general account assets, liabilities and earnings. These
contracts were purchased by TPC in connection with the settlement of certain of
their policyholder obligations. Effective April 1998, the Company no longer
writes structured settlement contracts.
2
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K, its quarterly reports on Form 10-Q and
any current reports on Form 8-K, and all amendments to these reports are
available on the Citigroup website at http://www.citigroup.com by selecting the
"Investor Relations" page and selecting "SEC Filings".
INSURANCE REGULATIONS
INSURANCE REGULATORY INFORMATION SYSTEM
The National Association of Insurance Commissioners (NAIC) Insurance Regulatory
Information System (IRIS) was developed to help state regulators identify
companies that may require special attention. The IRIS system consists of a
statistical phase and an analytical phase whereby financial examiners review
annual statements and financial ratios. The statistical phase consists of 12 key
financial ratios based on year-end data that are generated from the NAIC
database annually; each ratio has an established "usual range" of results. These
ratios assist state insurance departments in executing their statutory mandate
to oversee the financial condition of insurance companies.
A ratio result falling outside the usual range of IRIS ratios is not considered
a failing result; rather, unusual values are viewed as part of the regulatory
early monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges for four or more of the ratios. No regulatory
action has been taken by any state insurance department or the NAIC with respect
to IRIS ratios of the Company during the years ended December 31, 2003 and 2002.
RISK-BASED CAPITAL (RBC) REQUIREMENTS
In order to enhance the regulation of insurer solvency, the NAIC adopted a
formula and model law to implement RBC requirements for most life and annuity
insurance companies, which are designed to determine minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. For this purpose, an insurer's total
adjusted capital is measured in relation to its specific asset and liability
profiles. A company's risk-based capital is calculated by applying factors to
various asset, premium and reserve items, where the factor is higher for those
items with greater underlying risk and lower for less risky items.
The RBC formula for life insurers measures four major areas of risk:
o asset risk (i.e., the risk of asset default),
o insurance risk (i.e., the risk of adverse mortality and morbidity
experience),
o interest rate risk (i.e., the risk of loss due to changes in
interest rates) and
o business risk (i.e., normal business and management risk).
Under laws adopted by the states, insurers having less total adjusted capital
than that required by the RBC calculation will be subject to varying degrees of
regulatory action, depending upon the level of capital inadequacy.
The RBC law provides for four levels of regulatory action as defined by the
NAIC. The extent of regulatory intervention and action increases as the level of
total adjusted capital to RBC falls. The first level, the company action level,
requires an insurer to submit a plan of corrective actions to the regulator if
total adjusted capital falls below 200% of the RBC amount. The second level, the
regulatory action
3
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
level, requires an insurer to submit a plan containing corrective actions and
requires the relevant insurance commissioner to perform an examination or other
analysis and issue a corrective order if total adjusted capital falls below 150%
of the RBC amount. The third level, the authorized control level, authorizes the
relevant commissioner to take whatever regulatory actions are considered
necessary to protect the best interest of the policyholders and creditors of the
insurer which may include the actions necessary to cause the insurer to be
placed under regulatory control, i.e., rehabilitation or liquidation, if total
adjusted capital falls below 100% of the RBC amount. The fourth level, the
mandatory control level, requires the relevant insurance commissioner to place
the insurer under regulatory control if total adjusted capital falls below 70%
or the RBC amount.
The formulas have not been designed to differentiate among adequately
capitalized companies, which operate with higher levels of capital. Therefore,
it is inappropriate and ineffective to use the formula to rate or rank
companies. At December 31, 2003, the Company had total adjusted capital in
excess of amounts requiring company action or any level of regulatory action at
any prescribed RBC level.
INSURANCE REGULATION CONCERNING DIVIDENDS
The Company is domiciled in the State of Connecticut. The insurance holding
company law of Connecticut requires notice to, and approval by, the State of
Connecticut Insurance Department for the declaration or payment of any dividend
which, together with other distributions made within the preceding twelve
months, exceeds the greater of (i) 10% of the insurer's surplus or (ii) the
insurer's net gain from operations for the twelve-month period ending on the
preceding December 31st, in each case determined in accordance with statutory
accounting practices. Such declaration or payment is further limited by adjusted
unassigned funds (surplus), reduced by 25% of the change in net unrealized
capital gains, as determined in accordance with statutory accounting practices.
In accordance with the Connecticut statute, after reducing the Company's
unassigned funds (surplus) by 25% of the change in net unrealized capital gains,
the Company may not pay dividends during 2004 without prior approval of the
State of Connecticut Insurance Department.
CODE OF ETHICS
The Company has adopted a code of ethics for financial professionals which
applies to the Company's principal executive officer and principal financial and
accounting officer. The code of ethics for financial professionals has been
included as an exhibit to this Form 10-K and can be found on the Citigroup
website by selecting the "Corporate Governance" page.
ITEM 2. PROPERTIES.
The Company's executive offices are located in Hartford, Connecticut. The
Company and TIC moved their executive offices to One Cityplace, Hartford,
Connecticut, during the first quarter of 2003. The Company and TIC occupy
373,000 square feet at this location under an operating lease (in which TIC is
the lessee) that runs through October 31, 2008.
At December 31, 2002 TIC leased approximately 284,000 square feet from TPC at
One Tower Square, Hartford, Connecticut under a lease that ran through March 31,
2003. The Company also occupied this space leased by TIC and was allocated
expense according to cost sharing agreements. Management believes that these
facilities are suitable and adequate for the Company's current needs.
The preceding discussion does not include information on investment properties.
4
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
ITEM 3. LEGAL PROCEEDINGS.
In 2003, several issues in the mutual fund and variable insurance product
industries have come under the scrutiny of federal and state regulators. Like
many other companies in our industry, the Company has received a request for
information from the Securities and Exchange Commission (SEC) and a subpoena
from the New York Attorney General regarding market timing and late trading. In
March 2004 the SEC requested additional information about the Company's variable
product operations on market timing, late trading and revenue sharing. The
Company is cooperating fully with all of these reviews and is not able to
predict their outcomes.
In the ordinary course of business, the Company is a defendant or co-defendant
in various litigation matters incidental to and typical of the businesses in
which it is engaged. In the opinion of the Company's management, the ultimate
resolution of these legal proceedings would not be likely to have a material
adverse effect on the Company's results of operations, financial condition or
liquidity. This statement is a forward-looking statement within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 10.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company has 100,000 authorized shares of common stock, of which 30,000 are
issued and outstanding as of December 31, 2003. All outstanding shares of the
Company's common stock are held by TIC, and there exists no established public
trading market for the common stock of the Company. The Company did not pay
dividends in 2003 or 2002. See Note 7 of Notes to Financial Statements for
dividend restrictions.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction I(2)(a) of Form 10-K.
CRITICAL ACCOUNTING POLICIES
The Notes to Financial Statements contain a summary of the Company's significant
accounting policies, including a discussion of recently issued accounting
pronouncements. Certain of these policies are considered to be critical to the
portrayal of the Company's financial condition since they require management to
make difficult, complex or subjective judgments, some of which may relate to
matters that are inherently uncertain, which are discussed below.
5
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life, universal life (UL) and deferred annuities
are deferred. These deferred acquisition costs (DAC) include principally
commissions and certain expenses related to policy issuance, underwriting and
marketing, all of which vary with and are primarily related to the production of
new business. The method for determining amortization of deferred acquisition
costs varies by product type based upon three different accounting
pronouncements: Statement of Financial Accounting Standards (SFAS) No. 60,
"Accounting and Reporting by Insurance Enterprises" (SFAS 60), SFAS No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long Duration
Contracts and for Realized Gains and Losses from the Sale of Investments" (SFAS
97).
DAC for deferred annuities, both fixed and variable, is amortized employing a
level effective yield methodology per SFAS 91 as indicated by AICPA Practice
Bulletin 8. An amortization rate is developed using the outstanding DAC balance
and projected account balances. This rate is applied to actual account balances
to determine the amount of DAC amortization. The projected account balances are
derived using a model that contains assumptions related to investment returns
and persistency. The model rate is evaluated at least annually, and changes in
underlying lapse and interest rate assumptions are to be treated
retrospectively. Variances in expected equity market returns versus actual
returns are treated prospectively and a new amortization pattern is developed so
that the DAC balances will be amortized over the remaining estimated life of the
business. DAC for these products is currently being amortized over 10-15 years.
DAC for UL is amortized in relation to estimated gross profits from surrender
charges, investment, mortality, and expense margins per SFAS 97. Actual profits
can vary from management's estimates, resulting in increases or decreases in the
rate of amortization. Re-estimates of gross profits, performed at least
annually, result in retrospective adjustments to earnings by a cumulative charge
or credit to income. DAC for this product is currently being amortized over
16-25 years.
DAC relating to traditional life, including term insurance and other products,
is amortized in relation to anticipated premiums per SFAS 60. Assumptions as to
the anticipated premiums are made at the date of policy issuance or acquisition
and are consistently applied over the life of the policy. DAC for this product
is currently being amortized over 5-20 years.
All DAC is reviewed, at least annually, to determine if it is recoverable from
future income, including investment income, and, if not recoverable, is charged
to expense. All other acquisition expenses are charged to operations as
incurred.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life products. The annuity payout
reserves are calculated using the mortality and interest assumptions used in the
actual pricing of the benefit. Mortality assumptions are based on Company
experience and are adjusted to reflect deviations such as substandard mortality
in structured settlement benefits. The interest rates range from 2.07% to 7.85%
for these annuity products with a weighted average interest rate of 6.6%,
including adverse deviation. Traditional life products include whole life and
term insurance. Future policy benefits for traditional life products are
estimated on the basis of
6
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
actuarial assumptions as to mortality, persistency and interest, established at
policy issue and are based on the Company's experience, which, together with
interest assumptions, include a margin for adverse deviation. Appropriate
recognition has been given to experience rating and reinsurance. Interest
assumptions applicable to traditional life products range from 3.0% to 7.0%,
with a weighted average of 5.8%.
INVESTMENTS IN FIXED MATURITIES
Fixed maturities, which comprise 88% and 82% of total investments at December
31, 2003 and 2002, respectively, include bonds, notes and redeemable preferred
stocks. Fixed maturities, including financial instruments subject to securities
lending agreements (see Note 2 of Notes to Financial Statements), are classified
as "available for sale" and are reported at fair value, with unrealized
investment gains and losses, net of income taxes, credited or charged directly
to shareholder's equity. Fair values of investments in fixed maturities are
based on quoted market prices or dealer quotes. If quoted market prices are not
available, discounted expected cash flows using market rates commensurate with
the credit quality and maturity of the investment are used to determine fair
value. Changes in the assumptions could affect the fair values of investments of
fixed maturities. Impairments are realized when investment losses in value are
deemed other-than-temporary. The Company conducts a rigorous review each quarter
to identify and evaluate investments that have possible indications of
impairment. An investment in a debt or equity security is impaired if its fair
value falls below its cost and the decline is considered other-than-temporary.
Factors considered in determining whether a loss is temporary include the length
of time and extent to which fair value has been below cost; the financial
condition and near-term prospects of the issuer; and the Company's ability and
intent to hold the investment for a period of time sufficient to allow for any
anticipated recovery. Changing economic conditions - global, regional, or
related to specific issuers or industries - could result in other-than-temporary
losses.
PREMIUMS
Premiums are recognized as revenues when due. Premiums for contracts with a
limited number of premium payments, due over a significantly shorter period than
the period over which benefits are provided, are considered revenue when due.
The portion of premium which is not required to provide for benefits and
expenses is deferred and recognized in revenues in a constant relationship to
insurance benefits in force.
RESULTS OF OPERATIONS ($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002
------------------------------- ------ ------
Revenues $646.3 $533.5
Benefits and interest credited 306.7 275.1
Operating expenses 185.6 99.4
------ ------
Income before taxes 154.0 159.0
Income taxes 34.6 55.6
------ ------
Net income $119.4 $103.4
====== ======
Net income was $119.4 million for the year ended December 31, 2003, compared to
$103.4 million for the year ended December 31, 2002. This 15% increase resulted
from lower realized investment
7
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
losses, higher business volumes and favorable income taxes, partially offset by
an 87% increase in operating expenses, due to an increase in amortization of DAC
and lower fixed income yields. Net income ncluded net realized investment losses
of $4.7 million and $19.9 million for the years ended December 31, 2003 and
2002, respectively. This decrease was primarily the result of the absence of
prior-year impairments on WorldCom Inc. investments of $12.9 million. A tax
benefit related to an adjustment to the Dividends Received Deduction in 2003 of
$13.1 million for the year ended December 31, 2003 contributed to a 22.5%
effective tax rate for the year compared to 35% in the prior year period.
Revenues increased 21% in 2003 over prior year. This increase was driven by net
investment income (NII) and fee income. NII was $356.5 million in 2003 compared
to $311.9 million in 2002. This increase was primarily due to a larger invested
asset base created from higher business volumes. Fee income in the individual
annuity and individual life product lines together increased $47.7 million, or
25%, in the current year compared to that of 2002, reflecting increased business
volumes from in-force policy retention related to lower surrender rates,
positive net sales and variable annuity equity market growth.
Insurance benefits and interest credited were 11.5% higher in 2003 versus 2002,
primarily related to the volume growth in individual annuity and universal life
contractholder funds. Operating expenses in 2003 were up $86.2 million, or 87%,
over the prior year due to an increase in the amortization of DAC, which was
$136.3 million in 2003 versus $67.0 million in 2002 and other expenses related
to business volume.
The amortization of capitalized DAC is a significant component of the Company's
expenses. The Company's recording of DAC amortization varies based upon product
type. DAC for deferred annuities, both fixed and variable employs a level yield
methodology. DAC for UL is amortized in relation to estimated gross profits,
with traditional life, including term insurance and other products, amortized in
relation to anticipated premiums.
The following is a summary of capitalized DAC by type:
Traditional Deferred
($ in millions) Life Annuity UL Total
- --------------------------------------------------------------------------------
Beginning balance January 1, 2002 $47.7 $511.5 $255.2 $ 814.4
Commissions and expenses deferred 16.5 169.4 130.8 316.7
Amortization expense (8.9) (72.6) (9.3) (90.8)
Underlying lapse and interest
rate assumptions -- 29.8 -- 29.9
Amortization related to
SFAS 91 reassessment -- (6.0) -- (6.0)
- --------------------------------------------------------------------------------
Balance December 31, 2002 55.3 632.1 376.7 1,064.1
Commissions and expenses deferred 14.3 172.1 164.9 351.3
Amortization expense (10.2) (107.6) (18.5) (136.3)
- --------------------------------------------------------------------------------
Balance December 31, 2003 $59.4 $696.6 $523.1 $1,279.1
- --------------------------------------------------------------------------------
DAC capitalization increased 11% in 2003 versus 2002. The 2003 growth was driven
by a 26% increase in universal life capitalization related to a significant
increase in production. During the first quarter of 2002 there was a one-time
decrease in deferred annuity DAC amortization of $29.8 million due to changes in
underlying lapse and interest rate assumptions. These adjustments are to be
treated
8
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
retrospectively as per SFAS 91 by adjusting the DAC asset through amortization
expense and employing the new assumptions prospectively. In the fourth quarter
of 2002, the Company increased its deferred annuity DAC amortization by $6.0
million due to a significant decline in its individual annuities account
balances and benefit reserves, largely resulting from decreases in the stock
market which caused account balances to decline. In contrast to lapse and
interest rate assumptions, variances in expected versus actual market returns
are treated prospectively, resulting in a new amortization pattern over the
remaining estimated life of the business. The new amortization pattern is the
primary reason for the increase in deferred annuity DAC amortization in 2003
over 2002.
The following table shows net written premiums and deposits by product line for
the years ended December 31, 2003 and 2002. The majority of the annuity business
and a substantial portion of the life business written by the Company are
accounted for as investment contracts, with the result that the deposits
collected are reported as liabilities and are not included in revenues. Deposits
represent a statistic used for measuring business volumes, which management of
the Company uses to manage the life insurance and annuities operations, and may
not be comparable to similarly captioned measurements used by other life
insurance companies.
PREMIUMS AND DEPOSITS ($ IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
-------------------------------- ------ ------
PREMIUMS
Individual Life $ 37 $ 38
Other Annuity 4 5
------ ------
Total Premiums $ 41 $ 43
------ ------
DEPOSITS
Individual Annuity - Fixed $ 606 $1,244
Individual Annuity - Variable 1,581 1,343
Individual Life 599 433
Other Annuity 4 4
------ ------
Total Deposits $2,790 $3,024
------ ------
Individual annuity deposits collected for the year ended December 31, 2003
decreased 15% from the prior year primarily driven by a 51% decline in fixed
annuity sales due to competitive pressures and current market perception of
fixed rate products. This decrease was offset by an increase in variable annuity
sales which improved as equity market conditions improved. Individual annuity
account balances were $13.0 billion and $10.0 billion at December 31, 2003 and
2002, respectively. This increase is reflective of market appreciation over the
past year and in-force retention related to lower surrender rates and positive
net sales.
The 38% increase in individual life deposits for the twelve months ended
December 31, 2003 versus 2002 was the result of record universal life production
in the third and fourth quarters of 2003. Life insurance in force was $44
billion at December 31, 2003, up from $36 billion at December 31, 2002.
OUTLOOK
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on the following page.
9
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
The Company is included in the Travelers Life & Annuity (TLA) segment of TIC and
its outlook should be considered within that context. TLA should benefit from
growth in the aging population which is becoming more focused on the need to
accumulate adequate savings for retirement, to protect these savings and to plan
for the transfer of wealth to the next generation. TLA is well positioned to
take advantage of the favorable long-term demographic trends through its strong
financial position, widespread brand name recognition and broad array of
competitive life, annuity, retirement and estate planning products sold through
established distribution channels.
However, competition in both product pricing and customer service is
intensifying. There has been consolidation within the industry, and among other
financial services organizations that are increasingly involved in the sale
and/or distribution of insurance products. Also, the annuities business is
interest rate and market sensitive. TLA's business is significantly affected by
movements in the U.S. equity and fixed income credit markets. U.S. equity and
credit market events can have both positive and negative effects on the deposit,
revenue and policy retention performance of the business. A sustained weakness
in the equity markets will decrease revenues and earnings in variable annuity
products. Declines in credit quality of issuers will have a negative effect on
earnings.
In order to strengthen its competitive position, TLA expects to maintain a
current product portfolio, further diversify its distribution channels, and
retain its financial position through strong sales growth and maintenance of an
efficient cost structure. Federal and state regulators have focused on, and
continue to devote substantial attention to, the mutual fund and variable
insurance product industries. As a result of publicity relating to widespread
perceptions of industry abuses, there have been numerous proposals for
legislative and regulatory reforms, including mutual fund governance, new
disclosure requirements concerning mutual fund share classes, commission
breakpoints, revenue sharing, advisory fees, market timing, late trading,
portfolio pricing, annuity products, hedge funds, and other issues. It is
difficult to predict at this time whether changes resulting from new laws and
regulations will affect the industries or the Company's businesses, and, if so,
to what degree.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Financial Statements for Future Application of Accounting
Standards.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "may increase,"
10
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
"may fluctuate," and similar expressions or future or conditional verbs such as
"will," "should," "would," and "could." These forward-looking statements involve
risks and uncertainties including, but not limited to, regulatory matters, the
resolution of legal proceedings, the impact that the adoption of recent
legislation may have on the demand for life and annuity products, the potential
impact of a decline in credit quality of investments on earnings; the Company's
market risk and the discussions of the Company's prospects under "Outlook" on
the page 9.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 2003.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.
The primary market risk to the Company's investment portfolio is interest rate
risk. The Company's exposure to equity price risk and foreign exchange risk is
not significant. The Company has no direct commodity risk.
The interest rate risk taken in the investment portfolio is managed relative to
the duration of the liabilities. The portfolio is differentiated by business
unit, with each unit's portfolio structured to meet its particular needs.
Potential liquidity needs of the business are also key factors in managing the
investment portfolio. The portfolio duration relative to the liabilities'
duration is primarily managed through cash market transactions. For additional
information regarding the Company's investment portfolio see Note 2 of Notes to
Financial Statements.
There were no significant changes in the Company's primary market risk exposures
or in how those exposures are managed compared to the year ended December 31,
2002. The Company does not anticipate significant changes in the Company's
primary market risk exposures or in how those exposures are managed in future
reporting periods based upon what is known or expected to be in effect in future
reporting periods. The statements above are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" on the previous page.
SENSITIVITY ANALYSIS
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near-term" means a period of time going forward up to one year from the
date of the financial statements. Actual results may differ from the
hypothetical change in market rates assumed in this report, especially since
this sensitivity analysis does not reflect the results of any actions that would
be taken by the Company to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, mortgage loans, short-term securities, cash,
investment income accrued, policy loans, contractholder funds, and derivative
financial instruments. In addition, certain non-financial instrument liabilities
have been included in the
11
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
sensitivity analysis model. These non-financial instruments include future
policy benefits and policy and contract claims. The primary market risk to the
Company's market sensitive instruments is interest rate risk. The sensitivity
analysis model uses a 100 basis point change in interest rates to measure the
hypothetical change in fair value of financial instruments and the non-financial
instruments included in the model.
For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and reset
features. Portfolio durations are calculated on a market value weighted basis,
including accrued investment income, using trade date holdings as of December
31, 2003 and 2002. The sensitivity analysis model used by the Company produces a
loss in fair value of interest rate sensitive invested assets of approximately
$299 million and $262 million based on a 100 basis point increase in interest
rates as of December 31, 2003 and 2002, respectively.
Liability durations are determined consistently with the determination of
liability fair values. Where fair values are determined by discounting expected
cash flows, the duration is the percentage change in the fair value for a 100
basis point change in the discount rate. Where liability fair values are set
equal to surrender values, option-adjusted duration techniques are used to
calculate changes in fair values. The sensitivity analysis model used by the
Company produces a decrease in fair value of interest rate sensitive insurance
policy and claims reserves of approximately $254 million and $242 million based
on a 100 basis point increase in interest rates as of December 31, 2003 and
2002, respectively. Based on the sensitivity analysis model used by the Company,
the net loss in fair value of market sensitive instruments as a result of a 100
basis point increase in interest rates as of December 31, 2003 and 2002 is not
material.
12
THE TRAVELERS LIFE AND ANNUITY COMPANY
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report.............................................14
Financial Statements:
Statements of Income for the years ended
December 31, 2003, 2002 and 2001.....................................15
Balance Sheets as of December 31, 2003 and 2002......................16
Statements of Changes in Shareholder's Equity for the years
ended December 31, 2003, 2002 and 2001...............................17
Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.....................................18
Notes to Financial Statements........................................19
13
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Life and Annuity Company:
We have audited the accompanying balance sheets of The Travelers Life and
Annuity Company as of December 31, 2003 and 2002, and the related statements of
income, changes in shareholder's equity, and cash flows for each of the years in
the three-year period ended December 31, 2003. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Travelers Life and Annuity
Company as of December 31, 2003 and 2002, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for goodwill and intangible assets in 2002 and for
derivative instruments and hedging activities and for securitized financial
assets in 2001.
/s/KPMG LLP
Hartford, Connecticut
February 26, 2004
14
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF INCOME
($ IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
---- ---- ----
REVENUES
Premiums $ 40,866 $ 42,893 $ 39,222
Net investment income 356,463 311,946 251,054
Realized investment gains (losses) (7,202) (30,584) 26,144
Fee income 237,366 189,686 173,113
Other revenues 18,834 19,530 14,317
- --------------------------------------------------------------------------------
Total Revenues 646,327 533,471 503,850
- --------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 89,729 94,513 88,842
Interest credited to contractholders 216,952 180,610 125,880
Amortization of deferred acquisition costs 136,310 66,972 89,475
General and administrative expenses 49,288 32,352 23,404
- --------------------------------------------------------------------------------
Total Benefits and Expenses 492,279 374,447 327,601
- --------------------------------------------------------------------------------
Income before federal income taxes and
cumulative effect of change in
accounting principle 154,048 159,024 176,249
- --------------------------------------------------------------------------------
Federal income taxes
Current 73,423 (31,143) (19,007)
Deferred (38,835) 86,797 80,096
- --------------------------------------------------------------------------------
Total Federal Income Taxes 34,588 55,654 61,089
- --------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 119,460 103,370 115,160
Cumulative effect of change in accounting
for derivative instruments and hedging
activities, net of tax -- -- (62)
- --------------------------------------------------------------------------------
Net Income $119,460 $103,370 $115,098
================================================================================
See Notes to Financial Statements.
15
THE TRAVELERS LIFE AND ANNUITY COMPANY
BALANCE SHEETS
($ IN THOUSANDS)
AT DECEMBER 31, 2003 2002
- --------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value
(including $130,895 and $144,284 subject to
securities lending agreements) (cost $5,033,778
and $4,385,801) $ 5,357,225 $ 4,520,299
Equity securities, at fair value (cost $8,253
and $14,939) 8,307 14,495
Mortgage loans 135,347 134,078
Short-term securities 195,279 475,365
Other invested assets 392,638 384,616
- --------------------------------------------------------------------------------
Total Investments 6,088,796 5,528,853
- --------------------------------------------------------------------------------
Separate and variable accounts 9,690,455 6,862,009
Deferred acquisition costs 1,279,118 1,064,118
Premiums and fees receivable 67,272 59,636
Other assets 312,546 179,558
- --------------------------------------------------------------------------------
Total Assets $17,438,187 $13,694,174
- --------------------------------------------------------------------------------
LIABILITIES
Future policy benefits and claims $ 1,097,704 $ 1,145,692
Contractholder funds 4,511,813 3,886,083
Separate and variable accounts 9,690,455 6,862,009
Deferred federal income taxes 224,821 199,350
Other liabilities 514,718 441,249
- --------------------------------------------------------------------------------
Total Liabilities 16,039,511 12,534,383
- --------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $100; 100,000 shares
authorized, 30,000 issued and outstanding 3,000 3,000
Additional paid-in capital 417,316 417,316
Retained earnings 763,994 644,534
Accumulated other changes in equity from
nonowner sources 214,366 94,941
- --------------------------------------------------------------------------------
Total Shareholder's Equity 1,398,676 1,159,791
- --------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $17,438,187 $13,694,174
================================================================================
See Notes to Financial Statements.
16
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
($ IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
- --------------------------------------------------------------------------------
COMMON STOCK 2003 2002 2001
- --------------------------------------------------------------------------------
Balance, beginning of year $3,000 $3,000 $3,000
Changes in common stock -- -- --
- --------------------------------------------------------------------------------
Balance, end of year $3,000 $3,000 $3,000
================================================================================
- --------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
- --------------------------------------------------------------------------------
Balance, beginning of year $417,316 $417,316 $417,316
Capital contributed by parent -- -- --
- --------------------------------------------------------------------------------
Balance, end of year $417,316 $417,316 $417,316
================================================================================
- --------------------------------------------------------------------------------
RETAINED EARNINGS
- --------------------------------------------------------------------------------
Balance, beginning of year $644,534 $541,164 $426,066
Net income 119,460 103,370 115,098
- --------------------------------------------------------------------------------
Balance, end of year $763,994 $644,534 $541,164
================================================================================
- --------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- --------------------------------------------------------------------------------
Balance, beginning of year $94,941 $16,084 $13,622
Cumulative effect of change in accounting
principle for derivative instruments
and hedging activities, net of tax -- -- 62
Unrealized gains (losses), net of tax 120,993 73,750 (924)
Derivative instrument hedging activity
gains (losses), net of tax (1,568) 5,107 3,324
- --------------------------------------------------------------------------------
Balance, end of year $214,366 $94,941 $16,084
================================================================================
- --------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- --------------------------------------------------------------------------------
Net income $119,460 $103,370 $115,098
Other changes in equity from nonowner sources 119,425 78,857 2,462
- --------------------------------------------------------------------------------
Total changes in equity from nonowner sources $238,885 $182,227 $117,560
================================================================================
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY
- --------------------------------------------------------------------------------
Balance, beginning of year $1,159,791 $977,564 $860,004
Changes in total shareholder's equity 238,885 182,227 117,560
- --------------------------------------------------------------------------------
Balance, end of year $1,398,676 $1,159,791 $977,564
================================================================================
See Notes to Financial Statements.
17
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $43,903 $43,490 $37,915
Net investment income received 319,629 276,813 211,179
Fee and other income received 265,410 238,970 211,885
Benefits and claims paid (105,867) (103,513) (103,224)
Interest paid to contractholders (216,952) (180,610) (125,880)
Operating expenses paid (437,335) (343,932) (354,506)
Income taxes (paid) received (134,927) 88,888 45,257
Other 41,239 (21,047) (31,175)
- --------------------------------------------------------------------------------
Net Cash Used in Operating Activities (224,900) (941) (108,549)
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 519,960 255,009 97,712
Mortgage loans 22,628 36,193 20,941
Proceeds from sales of investments
Fixed maturities 1,657,663 1,689,931 938,987
Equity securities 7,769 35,556 6,363
Real estate held for sale 794 -- (36)
Purchases of investments
Fixed maturities (2,823,940) (3,018,069) (2,022,618)
Equity securities (3,506) (35,735) (2,274)
Mortgage loans (27,456) (44,632) (14,494)
Policy loans, net 665 (11,201) (3,395)
Short-term securities (purchases)
sales, net 280,086 (268,606) 40,618
Other investment (purchases)
sales, net (45,906) (20,915) (6,334)
Securities transactions in course of
settlement, net (3,561) 117,806 64,698
- --------------------------------------------------------------------------------
Net Cash Used in Investing Activities (414,804) (1,264,663) (879,832)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 913,546 1,486,056 1,178,421
Contractholder fund withdrawals (287,816) (224,542) (185,464)
- --------------------------------------------------------------------------------
Net Cash Provided by Financing
Activities 625,730 1,261,514 992,957
- --------------------------------------------------------------------------------
Net increase (decrease) in cash (13,974) (4,090) 4,576
Cash at beginning of year 15,424 19,514 14,938
- --------------------------------------------------------------------------------
Cash at December 31, $1,450 $15,424 $19,514
================================================================================
See Notes to Financial Statements.
18
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the accompanying
financial statements follow.
BASIS OF PRESENTATION
---------------------
The Travelers Life and Annuity Company (the Company) is a wholly owned
subsidiary of The Travelers Insurance Company (TIC), an indirect wholly
owned subsidiary of Citigroup Inc. (Citigroup), a diversified global
financial services holding company whose businesses provide a broad range
of financial services to consumer and corporate customers around the world.
On March 27, 2002, Travelers Property Casualty Corp. (TPC), TIC's parent at
December 31, 2001, completed its initial public offering (IPO). On August
20, 2002, Citigroup made a tax-free distribution of the majority of its
remaining interest in TPC to Citigroup Stockholders. Prior to the IPO, the
common stock of TIC was distributed by TPC to Citigroup Insurance Holding
Corporation (CIHC) so that TIC and the Company would remain indirect wholly
owned subsidiaries of Citigroup. TIC has a license from TPC to use the
names "Travelers Life & Annuity," "The Travelers Insurance Company," "The
Travelers Life and Annuity Company" and related names in connection with
the Company's business.
The financial statements and accompanying footnotes of the Company are
prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and benefits and expenses
during the reporting period. Actual results could differ from those
estimates.
The Company offers a variety of variable annuity products where the
investment risk is borne by the contractholder, not the Company, and the
benefits are not guaranteed. The premiums and deposits related to these
products are reported in separate accounts. The Company considers it
necessary to differentiate, for financial statement purposes, the results
of the risks it has assumed from those it has not.
Certain prior year amounts have been reclassified to conform to the 2003
presentation.
ACCOUNTING CHANGES
------------------
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board (FASB) released
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46). FIN 46 changes the method of determining whether certain
entities, including securitization entities, should be included in the
Company's financial statements. An entity is subject to FIN 46 and is
called a variable interest entity (VIE) if it has (1) equity that is
insufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, or (2) equity
investors that cannot make significant decisions about the entity's
operations, or that do not absorb the expected losses or receive the
expected returns of the entity. All other entities are evaluated for
consolidation under Statement of Financial Accounting Standards (SFAS) No.
94, "Consolidation of All Majority-Owned Subsidiaries" (SFAS 94). A VIE is
consolidated by its primary beneficiary,
19
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
which is the party involved with the VIE that has a majority of the
expected losses or a majority of the expected residual returns or both.
For any VIEs that must be consolidated under FIN 46 that were created
before February 1, 2003, the assets, liabilities and noncontrolling
interest of the VIE are initially measured at their carrying amounts with
any difference between the net amount added to the balance sheet and any
previously recognized interest being recognized as the cumulative effect of
an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46 first applies may be used to
measure the assets, liabilities and noncontrolling interest of the VIE. In
October 2003, the FASB announced that the effective date of FIN 46 was
deferred from July 1, 2003 to periods ending after December 15, 2003 for
VIEs created prior to February 1, 2003. The Company elected to implement
the provisions of FIN 46 in the 2003 third quarter. Based upon the
implementation guidance, the Company is not considered a primary
beneficiary of any VIEs, thus no consolidations were required due to the
implementation of FIN 46 on July 1, 2003. The Company does, however, hold a
significant interest in other VIEs, none of which were material to the
Company's financial statements.
The implementation of FIN 46 encompassed a review of numerous entities to
determine the impact of adoption and considerable judgment was used in
evaluating whether or not a VIE should be consolidated. The FASB continues
to provide additional guidance on implementing FIN 46 through FASB Staff
Positions.
In December 2003, the FASB released a revision of FIN 46 (FIN 46-R or the
interpretation), which includes substantial changes from the original. The
calculation of expected losses and expected residual returns have both been
altered to reduce the impact of decision maker and guarantor fees in the
calculation of expected residual returns and expected losses. In addition,
FIN 46-R changes the definition of a variable interest. The interpretation
permits adoption of either the original or the revised versions of FIN 46
until the first quarter of 2004, at which time FIN 46-R must be adopted.
For 2003 year-end, the Company's financial statements are in accordance
with the original.
The Company is evaluating the impact of applying FIN 46-R to existing VIEs
in which it has variable interests and has not yet completed this analysis.
At this time, it is anticipated that the effect on the Company's balance
sheet will be immaterial. As the Company continues to evaluate the impact
of applying FIN 46-R, entities may be identified that would need to be
consolidated.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In particular, this Statement clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative and when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
This Statement is generally effective for contracts entered into or
modified after June 30, 2003 and did not have an impact on the Company's
financial statements.
20
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires
that a liability for costs associated with exit or disposal activities,
other than in a business combination, be recognized when the liability is
incurred. Previous generally accepted accounting principles provided for
the recognition of such costs at the date of management's commitment to an
exit plan. In addition, SFAS 146 requires that the liability be measured at
fair value and be adjusted for changes in estimated cash flows.
The provisions of the new standard are effective for exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS 146 did
not have an impact on the Company's financial statements.
STOCK-BASED COMPENSATION
The Company and its employees participate in stock option plans of
Citigroup. On January 1, 2003, the Company adopted the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), prospectively for all awards granted, modified,
or settled after January 1, 2003. The prospective method is one of the
adoption methods provided for under SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", issued in December
2002.
SFAS 123 requires that compensation cost for all stock awards be calculated
and recognized over the service period (generally equal to the vesting
period). This compensation cost is determined using option pricing models,
intended to estimate the fair value of the awards at the grant date.
Similar to Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", the alternative method of accounting, an
offsetting increase to shareholder's equity under SFAS 123 is recorded
equal to the amount of compensation expense charged. The adoption of SFAS
123 did not have a significant impact on the Company's financial
statements.
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations" (SFAS 141) and No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). These standards change the accounting for business
combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting and requiring companies to stop amortizing
goodwill and certain intangible assets with an indefinite useful life
created by business combinations accounted for using the purchase method of
accounting. Instead, goodwill and intangible assets deemed to have an
indefinite useful life will be subject to an annual review for impairment.
All goodwill was fully amortized at December 31, 2001 and the Company did
not have any other intangible assets with an indefinite useful life. Other
intangible assets that are not deemed to have an indefinite useful life
will continue to be amortized over their useful lives. See Note 4.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
21
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the consolidated balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
recognized asset or liability or of a forecasted transaction, or (c) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security,
or a foreign-currency-denominated forecasted transaction. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting
designation. The cumulative effect of adopting SFAS 133 was an after-tax
charge of $62 thousand included in net income and an after-tax benefit of
$62 thousand included in accumulated other changes in equity from nonowner
sources.
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND RETAINED
BENEFICIAL INTEREST IN SECURITIZED FINANCIAL ASSETS
In April 2001, the Company adopted the FASB Emerging Issues Task Force
(EITF) 99-20, "Recognition of Interest Income and Impairment of Purchased
and Retained Beneficial Interests in Securitized Financial Assets" (EITF
99-20). EITF 99-20 establishes guidance on the recognition and measurement
of interest income and impairment on certain investments, e.g., certain
asset-backed securities. Interest income on a beneficial interest falling
within the scope of EITF 99-20 is to be recognized prospectively. The
adoption of EITF 99-20 had no effect on the Company's financial statements.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
------------------------------------------
ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS
In July 2003, Statement of Position 03-01 "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts" (SOP 03-01) was released. SOP 03-01 provides
guidance on accounting and reporting by insurance enterprises for separate
account presentation, accounting for an insurer's interest in a separate
account, transfers to a separate account, valuation of certain liabilities,
contracts with death or other benefit features, contracts that provide
annuitization benefits, and sales inducements to contract holders. SOP
03-01 is effective for financial statements for fiscal years beginning
after December 15, 2003. The adoption of SOP 03-01 will not have a material
impact on the Company's financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB released a revision of FIN 46 (FIN 46-R). See
"Consolidation of Variable Interest Entities" in the "Accounting Changes"
section of this Note for a discussion of FIN 46-R.
22
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING POLICIES
-------------------
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities, including financial instruments subject to securities
lending agreements (see Note 2), are classified as "available for sale" and
are reported at fair value, with unrealized investment gains and losses,
net of income taxes, credited or charged directly to shareholder's equity.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes. If these are not available, discounted 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 investments is reported in net
investment income. Also included in other invested assets are policy loans
which are carried at the amount of the unpaid balances that are not in
excess of the net cash
23
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
surrender values of the related insurance policies. The carrying value of
policy loans, which have no defined maturities, is considered to be fair
value.
Accrual of investment income, included in other assets, is suspended on
fixed maturities or mortgage loans that are in default, or on which it is
likely that future payments will not be made as scheduled. Interest income
on investments in default is recognized only as payment is received.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, swaps, options and forward contracts as a means of
hedging exposure to interest rate changes, equity price change and foreign
currency risk. The Company does not hold or issue derivative instruments
for trading purposes. (See Note 9 for a more detailed description of the
Company's derivative use.) Derivative financial instruments in a gain
position are reported in the balance sheet in other assets, derivative
financial instruments in a loss position are reported in the balance sheet
in other liabilities and derivatives purchased to offset embedded
derivatives on variable annuity contracts are reported in other invested
assets.
To qualify for hedge accounting, the hedge relationship is designated and
formally documented at inception detailing the particular risk management
objective and strategy for the hedge which includes the item and risk that
is being hedged, the derivative that is being used, as well as how
effectiveness is being assessed. A derivative has to be highly effective in
accomplishing the objective of offsetting either changes in fair value or
cash flows for the risk being hedged.
For fair value hedges, in which derivatives hedge the fair value of assets
and liabilities, changes in the fair value of derivatives are reflected in
realized investment gains and losses, together with changes in the fair
value of the related hedged item. The net amount is reflected in current
earnings. The Company's fair value hedges are primarily of
available-for-sale securities.
For cash flow hedges, the accounting treatment depends on the effectiveness
of the hedge. To the extent that derivatives are effective in offsetting
the variability of the hedged cash flows, changes in the derivatives' fair
value will not be included in current earnings but are reported in the
accumulated other changes in equity from nonowner sources. These changes in
fair value will be included in earnings of future periods when earnings are
also affected by the variability of the hedged cash flows. To the extent
these derivatives are not effective, the ineffective portion of the changes
in fair value is immediately included in realized investment gains and
losses. The Company's cash flow hedges primarily include hedges of foreign
denominated funding agreements and floating rate available-for-sale
securities.
The effectiveness of these hedging relationships is evaluated on a
retrospective and prospective basis using quantitative measures of
correlation. If a hedge relationship is found to be ineffective, it no
longer qualifies as a hedge and any gains or losses attributable to such
ineffectiveness as well as subsequent changes in fair value are recognized
in realized investment gains and losses.
For those fair value and cash flow hedge relationships that are terminated,
hedge designations removed, or forecasted transactions that are no longer
expected to occur, the hedge accounting treatment described in the
paragraphs above will no longer apply. For fair value hedges, any changes
to the hedged item remain as part of the basis of the asset or liability
and are ultimately reflected as an element of the yield. For cash flow
hedges, any changes in fair value of the end-user derivative
24
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
remain in the accumulated other changes in equity from nonowner sources in
shareholder's equity and are included in earnings of future periods when
earnings are also affected by the variability of the hedged cash flow. If
the hedged relationship is discontinued because a forecasted transaction
will not occur when scheduled, the accumulated changes in fair value of the
end-user derivative recorded in shareholder's equity are immediately
reflected in realized investment gains and losses.
The Company enters into derivative contracts that are economic hedges but
do not qualify or are not designated as hedges for accounting purposes.
These derivatives are carried at fair value, with changes in value
reflected in realized investment gains and losses.
FINANCIAL INSTRUMENTS WITH EMBEDDED DERIVATIVES
The Company bifurcates an embedded derivative where the economic
characteristics and risks of the embedded instrument are not clearly and
closely related to the economic characteristics and risks of the host
contract, the entire instrument would not otherwise be remeasured at fair
value and a separate instrument with the same terms of the embedded
instrument would meet the definition of a derivative under SFAS 133.
The Company purchases investments that have embedded derivatives, primarily
convertible debt securities. These embedded derivatives are carried at fair
value with changes in value reflected in realized investment gains and
losses. Derivatives embedded in convertible debt securities are classified
in the consolidated balance sheet as fixed maturity securities, consistent
with the host instruments.
The Company markets certain investment contracts that have embedded
derivatives, primarily variable annuity contracts with put options. These
embedded derivatives are carried at fair value, with changes in value
reflected in realized investment gains and losses. Derivatives embedded in
variable annuity contracts are classified in the consolidated balance sheet
as future policy benefits and claims.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pre-tax
revenues based upon specific identification of the investments sold on the
trade date. Impairments are realized when investment losses in value are
deemed other-than-temporary. The Company conducts regular reviews to assess
whether other-than-temporary losses exist. Changing economic conditions -
global, regional, or related to specific issuers or industries - could
result in other-than-temporary losses. Also included are gains and losses
arising from the remeasurement of the local currency value of foreign
investments to U.S. dollars, the functional currency of the Company.
SEPARATE ACCOUNTS
The Company has separate accounts that primarily represent funds for which
investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contractholders. Each of these accounts
has specific investment objectives. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company. The assets of these accounts are carried at fair
value.
25
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Amounts assessed to the separate account contractholders for management
services are included in revenues. Deposits, net investment income and
realized investment gains and losses for these accounts are excluded from
revenues, and related liability increases are excluded from benefits and
expenses.
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life, universal life (UL) and deferred
annuities are deferred. These deferred acquisition costs (DAC) include
principally commissions and certain expenses related to policy issuance,
underwriting and marketing, all of which vary with and are primarily
related to the production of new business. The method for determining
amortization of DAC varies by product type based upon three different
accounting pronouncements: SFAS No. 60, "Accounting and Reporting by
Insurance Enterprises" (SFAS 60), SFAS No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97, "Accounting
and Reporting by Insurance Enterprises for Certain Long Duration Contracts
and for Realized Gains and Losses from the Sale of Investments" (SFAS 97).
DAC for deferred annuities, both fixed and variable, is amortized employing
a level effective yield methodology per SFAS 91 as indicated by AICPA
Practice Bulletin 8. An amortization rate is developed using the
outstanding DAC balance and projected account balances. This rate is
applied to actual account balances to determine the amount of DAC
amortization. The projected account balances are derived using a model that
contains assumptions related to investment returns and persistency. The
model rate is evaluated at least annually, and changes in underlying lapse
and interest rate assumptions are to be treated retrospectively. Variances
in expected equity market returns versus actual returns are treated
prospectively and a new amortization pattern is developed so that the DAC
balances will be amortized over the remaining estimated life of the
business. DAC for these products is currently being amortized over 10-15
years.
DAC for UL is amortized in relation to estimated gross profits from
surrender charges, investment, mortality, and expense margins per SFAS 97.
Actual profits can vary from management's estimates resulting in increases
or decreases in the rate of amortization. Re-estimates of gross profits,
performed at least annually, result in retrospective adjustments to
earnings by a cumulative charge or credit to income. DAC for this product
is currently being amortized over 16-25 years.
DAC relating to traditional life, including term insurance, is amortized in
relation to anticipated premiums per SFAS 60. Assumptions as to the
anticipated premiums are made at the date of policy issuance or acquisition
and are consistently applied over the life of the policy. DAC for this
product is currently being amortized over 5-20 years.
All DAC is reviewed, at least annually, to determine if it is recoverable
from future income, including investment income, and, if not recoverable,
is charged to expense. All other acquisition expenses are charged to
operations as incurred. See Note 4.
VALUE OF INSURANCE IN FORCE
The value of insurance in force, reported in other assets, is an asset that
represents the actuarially determined present value of anticipated profits
to be realized from annuity contracts at the date of acquisition using the
same assumptions that were used for computing related liabilities, where
26
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
appropriate. The value of insurance in force was the actuarially determined
present value of the projected future profits discounted at an interest
rate of 16% for the annuity business acquired. The annuity contracts are
amortized employing a level yield method over 31 years. The value of
insurance in force is reviewed periodically for recoverability to determine
if any adjustment is required. Adjustments, if any, are charged to income.
See Note 4.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life products. The annuity
payout reserves are calculated using the mortality and interest assumptions
used in the actual pricing of the benefit. Mortality assumptions are based
on Company experience and are adjusted to reflect deviations such as
substandard mortality in structured settlement benefits. The interest rates
range from 2.07% to 7.85% for these annuity products with a weighted
average interest rate of 6.6%, including adverse deviation. Traditional
life products include whole life and term insurance. Future policy benefits
for traditional life products are estimated on the basis of actuarial
assumptions as to mortality, persistency and interest, established at
policy issue and are based on the Company's experience, which, together
with interest assumptions, include a margin for adverse deviation.
Appropriate recognition has been given to experience rating and
reinsurance. Interest assumptions applicable to traditional life products
range from 3.0% to 7.0%, with a weighted average of 5.8%.
CONTRACTHOLDER FUNDS
Contractholder funds represent deposits from the issuance of UL pension
investment and certain deferred annuity and structured settlement
contracts. For UL contracts, contractholder fund balances are increased by
receipts for mortality coverage, contract administration, surrender charges
and interest accrued where one or more elements are not fixed or
guaranteed. These balances are decreased by withdrawals, mortality charges
and administrative expenses charged to the contractholders where these
charges and expenses may not be fixed or guaranteed. Interest rates
credited to contractholder funds related to universal life range from 4.0%
to 5.95%, with a weighted average interest rate of 5.01%.
Pension investment and certain annuity contracts do not contain significant
insurance risk and are considered investment-type contracts. Contractholder
fund balances are increased by receipts and credited interest, and reduced
by withdrawals and administrative expenses charged to the contractholder.
Interest rates credited to these investment-type contracts range from 1.0 %
to 7.75% with a weighted average interest rate of 5.35%.
GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS
Included in other liabilities is the Company's estimate of its liability
for guaranty fund and other insurance-related assessments. State guaranty
fund assessments are based upon the Company's share of premiums written or
received in one or more years prior to an insolvency occurring in the
industry. Once an insolvency has occurred, the Company recognizes a
liability for such assessments if it is probable that an assessment will be
imposed and the amount of the assessment can be reasonably estimated. At
December 31, 2003 and 2002, the Company's liability for guaranty fund
assessments was not significant.
27
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company, domiciled in the State of Connecticut, prepares statutory
financial statements in accordance with the accounting practices prescribed
or permitted by the State of Connecticut Insurance Department. Prescribed
statutory accounting practices are those practices that are incorporated
directly or by reference in state laws, regulations, and general
administrative rules applicable to all insurance enterprises domiciled in a
particular state. Permitted statutory accounting practices include
practices not prescribed by the domiciliary state, but allowed by the
domiciliary state regulatory authority. The Company does not have any
permitted statutory accounting practices.
PREMIUMS
Premiums are recognized as revenues when due. Premiums for contracts with a
limited number of premium payments, due over a significantly shorter period
than the period over which benefits are provided, are considered revenue
when due. The portion of premium which is not required to provide for
benefits and expenses is deferred and recognized in revenues in a constant
relationship to insurance benefits in force.
FEE INCOME
Fee income is recognized on deferred annuity and UL contracts for
mortality, administrative and equity protection charges according to
contract due dates. Fee income is recognized on variable annuity and
universal life separate accounts either daily, monthly, quarterly or
annually as per contract terms.
OTHER REVENUES
Other revenues include surrender penalties collected at the time of a
contract surrender, and other miscellaneous charges related to annuity and
universal life contracts recognized when received.
CURRENT AND FUTURE INSURANCE BENEFITS
Current and future insurance benefits represent charges for mortality and
morbidity related to fixed annuities, universal life and term life
insurance benefits.
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, pension investment and certain deferred annuity contracts in
accordance with contract provisions.
FEDERAL INCOME TAXES
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income
taxes arise from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
28
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
2. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair values of investments in fixed maturities were
as follows:
GROSS GROSS
DECEMBER 31, 2003 AMORTIZED UNREALIZED UNREALIZED FAIR
($ IN THOUSANDS) COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $644,362 $18,352 $1,598 $661,116
U.S. Treasury securities and obligations
of U.S. Government and government agencies
and authorities 192,271 4,756 731 196,296
Obligations of states and political
subdivisions 52,867 6,151 -- 59,018
Debt securities issued by foreign
governments 57,656 3,386 83 60,959
All other corporate bonds 3,179,328 240,472 5,329 3,414,471
All other debt securities 903,211 59,113 3,105 959,219
Redeemable preferred stock 4,083 2,155 92 6,146
-------------------------------------------------------------------------------------------------------------------
Total Available For Sale $5,033,778 $334,385 $10,938 $5,357,225
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2002 AMORTIZED UNREALIZED UNREALIZED FAIR
($ IN THOUSANDS) COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $423,318 $21,809 $90 $445,037
U.S. Treasury securities and obligations
of U.S. Government and government agencies
and authorities 217,602 5,958 2,115 221,445
Obligations of states and political
subdivisions 49,472 7,170 -- 56,642
Debt securities issued by foreign
governments 21,530 2,146 296 23,380
All other corporate bonds 2,932,069 157,225 82,175 3,007,119
All other debt securities 737,215 35,255 10,926 761,544
Redeemable preferred stock 4,595 1,785 1,248 5,132
-------------------------------------------------------------------------------------------------------------------
Total Available For Sale $4,385,801 $231,348 $96,850 $4,520,299
-------------------------------------------------------------------------------------------------------------------
Proceeds from sales of fixed maturities classified as available for sale
were $1.7 billion, $1.7 billion and $939 million in 2003, 2002 and 2001,
respectively. Gross gains of $48.2 million, $85.6 million
29
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
and $67.0 million and gross losses of $52.4 million, $29.9 million and
$22.4 million in 2003, 2002 and 2001, respectively, were realized on those
sales. Additional losses of $10.2 million, $66.9 million and $11.5 million
were realized due to other-than-temporary losses in value in 2003, 2002 and
2001, respectively. Impairment activity increased significantly in 2002.
These prior year impairments were concentrated in telecommunication and
energy company investments.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted expected
cash flows using market rates commensurate with the credit quality and
maturity of the investment. The fair value of investments for which a
quoted market price or dealer quote is not available amounted to $1.0
billion and $840.4 million at December 31, 2003 and 2002, respectively.
The amortized cost and fair value of fixed maturities available for sale at
December 31, 2003, by contractual maturity, are shown below. Actual
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
---------------------------------------------------------------------
AMORTIZED FAIR
($ IN THOUSANDS) COST VALUE
---------------------------------------------------------------------
MATURITY:
Due in one year or less $210,086 $214,645
Due after 1 year through 5 years 1,529,425 1,634,709
Due after 5 years through 10 years 1,821,121 1,963,235
Due after 10 years 828,784 883,520
---------------------------------------------------------------------
4,389,416 4,696,109
---------------------------------------------------------------------
Mortgage-backed securities 644,362 661,116
---------------------------------------------------------------------
Total Maturity $5,033,778 $5,357,225
---------------------------------------------------------------------
The Company makes significant investments in collateralized mortgage
obligations (CMOs). CMOs typically have high credit quality, offer good
liquidity, and provide a significant advantage in yield and total return
compared to U.S. Treasury securities. The Company's investment strategy is
to purchase CMO tranches which are protected against prepayment risk,
including planned amortization class tranches and last cash flow tranches.
Prepayment protected tranches are preferred because they provide stable
cash flows in a variety of interest rate scenarios. The Company does invest
in other types of CMO tranches if an assessment indicates a favorable
risk/return tradeoff. The Company does not purchase residual interests in
CMOs.
At December 31, 2003 and 2002, the Company held CMOs classified as
available for sale with a fair value of $332.4 million and $265.5 million,
respectively. Approximately 34% and 33%, respectively, of the Company's CMO
holdings are fully collateralized by GNMA, FNMA or FHLMC securities at
December 31, 2003 and 2002. In addition, the Company held $327.7 million
and $177.8 million of GNMA, FNMA or FHLMC mortgage-backed pass-through
securities at December 31, 2003 and 2002, respectively. All of these
securities are rated AAA.
30
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The Company engages in securities lending transactions whereby certain
securities from its portfolio are loaned to other institutions for short
periods of time. The Company generally receives cash collateral from the
borrower, equal to at least the market value of the loaned securities plus
accrued interest, and invests in a short-term investment pool. See Note 11.
The loaned securities remain a recorded asset of the Company. The Company
records a liability for the amount of the cash collateral held,
representing its obligation to return the cash collateral related to these
loaned securities, and reports that liability as part of other liabilities
in the consolidated balance sheet. At December 31, 2003 and 2002, the
Company held cash collateral of $154.0 million and $149.0 million,
respectively.
The Company participates in dollar roll repurchase transactions as a way to
generate investment income. These transactions involve the sale of
mortgage-backed securities with the agreement to repurchase substantially
the same securities from the same counterparty. Cash is received from the
sale, which is invested in the Company's short-term money market pool. The
cash is returned at the end of the roll period when the mortgage-backed
securities are repurchased. The Company will generate additional investment
income based upon the difference between the sale and repurchase prices.
These transactions are recorded as secured borrowings. The mortgage-backed
securities remain recorded as assets. The cash proceeds are reflected in
short-term investments and a liability is established to reflect the
Company's obligation to repurchase the securities at the end of the roll
period. This liability is classified as other liabilities in the balance
sheets and fluctuates based upon the timing of the repayments. The balances
were insignificant at December 31, 2003 and 2002, respectively.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as
follows:
------------------------------------------------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
($ IN THOUSANDS) COST GAINS LOSSES FAIR 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 FINANCIAL STATEMENTS
(CONTINUED)
fixed maturity investments that have been in a gross unrealized loss
position for less than a year and of these 87% are rated investment grade.
Fixed maturity investments that have been in a gross unrealized loss
position for a year or more total $1.8 million and 32% of these are rated
investment grade. The gross unrealized loss on equity securities was $.3
million at December 31, 2003.
Management has determined that the unrealized losses on the Company's
investments in fixed maturity and equity securities at December 31, 2003
are temporary in nature. The Company conducts a rigorous review each
quarter to identify and evaluate investments that have possible indications
of impairment. An investment in a debt or equity security is impaired if
its fair value falls below its cost and the decline is considered
other-than-temporary. Factors considered in determining whether a loss is
temporary include the length of time and extent to which fair value has
been below cost; the financial condition and near-term prospects of the
issuer; and the Company's ability and intent to hold the investment for a
period of time sufficient to allow for any anticipated recovery. The
Company's review for impairment generally entails:
o Identification and evaluation of investments that have possible
indications of impairment;
o Analysis of individual investments that have fair values less
than 80% of amortized cost, including consideration of length of
time the investment has been in an unrealized loss position.
o Discussion of evidential matter, including an evaluation of
factors or triggers that would or could cause individual
investments to qualify as having other-than-temporary impairments
and those that would not support other-than-temporary impairment;
o Documentation of the results of these analyses, as required under
business policies.
The table below shows the fair value of investments in fixed maturities and
equity securities in an unrealized loss position at December 31, 2003:
Gross Unrealized Losses
-----------------------
Less Than One Year One Year or Longer Total
-----------------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
($ IN THOUSANDS) Value Losses Value Losses Value Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available-for-sale:
Mortgage-backed securities-CMO's and
pass-through securities $142,683 $1,598 $-- $-- $142,683 $1,598
U.S. Treasury securities and obligations of
U.S. Government and government agencies
and authorities 132,402 731 -- -- 132,402 731
Debt securities issued by foreign governments 2,183 83 -- -- 2,183 83
All other corporate bonds 237,621 4,266 19,461 1,063 257,082 5,329
All other debt securities 122,769 2,461 20,054 644 142,823 3,105
Redeemable preferred stock 650 41 659 51 1,309 92
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities $638,308 $9,180 $40,174 $1,758 $678,482 $10,938
Equity securities $2,642 $56 $946 $263 $3,588 $319
- ------------------------------------------------------------------------------------------------------------------------------------
32
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
MORTGAGE LOANS
At December 31, 2003 and 2002, the Company's mortgage loan portfolios
consisted of the following:
---------------------------------------------------------------------------
($ IN THOUSANDS) 2003 2002
---------------------------------------------------------------------------
Current Mortgage Loans $135,347 $130,303
Underperforming Mortgage Loans -- 3,775
---------------------------------------------------------------------------
Total $135,347 $134,078
---------------------------------------------------------------------------
Underperforming assets include delinquent mortgage loans over 90 days past
due, loans in the process of foreclosure and loans modified at interest
rates below market.
Aggregate annual maturities on mortgage loans at December 31, 2003 are as
shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to prepay obligations with or without
prepayment penalties.
----------------------------------------------------------------
YEAR ENDING DECEMBER 31,
($ IN THOUSANDS)
----------------------------------------------------------------
2004 $11,301
2005 6,137
2006 27,827
2007 5,155
2008 5,804
Thereafter 79,123
----------------------------------------------------------------
Total $135,347
================================================================
OTHER INVESTED ASSETS
Other invested assets are composed of the following:
--------------------------------------------------------------------------
($ IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Private equity and arbitrage investments $203 $142
Derivatives 115 162
Trading Securities 33 27
Policy Loans 27 28
Real estate investments 15 26
--------------------------------------------------------------------------
Total $393 $385
--------------------------------------------------------------------------
33
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
CONCENTRATIONS
The Company participates in a short-term investment pool maintained by TIC.
See Note 11.
The Company's industry concentrations of investments, excluding those in
federal and government agencies, primarily fixed maturities at fair value,
were as follows:
---------------------------------------------------------------------
($ IN THOUSANDS) 2003 2002
---------------------------------------------------------------------
Finance $555,067 $562,179
Electric Utilities 454,960 512,950
Banking 364,094 265,442
Media 354,213 324,008
Telecommunications 287,955 304,171
Insurance 261,198 200,525
---------------------------------------------------------------------
The Company held investments in foreign banks in the amount of $152 million
and $147 million at December 31, 2003 and 2002, respectively, which are
included in the table above.
The Company defines its below investment grade assets as those securities
rated Ba1 by Moody's Investor Services (or its equivalent) or below by
external rating agencies, or the equivalent by internal analysts when a
public rating does not exist. Such assets include publicly traded below
investment grade bonds and certain other privately issued bonds and notes
that are classified as below investment grade. Below investment grade
assets included in the preceding table include $157 million and $109
million in Electric Utilities, $31 million and $35 million in Media, and
$34 million and $53 million in Telecommunications at December 31, 2003 and
2002, respectively. Below investment grade assets in other categories were
insignificant. Total below investment grade assets were $506 million and
$414 million at December 31, 2003 and 2002, respectively.
Included in mortgage loans were the following group concentrations:
($ IN THOUSANDS)
---------------------------------------------------------------------
At December 31, 2003 2002
---------------------------------------------------------------------
STATE
California $34,304 $42,169
New York 30,766 22,636
---------------------------------------------------------------------
PROPERTY TYPE
Agricultural $63,672 $79,075
Office 61,812 44,094
---------------------------------------------------------------------
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, credit limits
and other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit. The Company's underwriting standards with respect to
new mortgage loans generally require loan to value ratios of 75% or less at
the time of mortgage origination.
34
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
RESTRUCTURED INVESTMENTS
Mortgage loan and debt securities which were restructured at below market
terms at December 31, 2003 and 2002 were insignificant. The new terms of
restructured investments typically defer a portion of contract interest
payments to varying future periods. Gross interest income on restructured
assets that would have been recorded in accordance with the original terms
of such assets was insignificant. Interest on these assets, included in net
investment income, was insignificant.
NET INVESTMENT INCOME
---------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) 2003 2002 2001
---------------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $316,790 $276,818 $217,813
Other invested assets 33,118 27,886 22,542
Mortgage loans 10,931 10,578 11,327
Other 935 1,402 2,227
---------------------------------------------------------------------------
Total gross investment income 361,774 316,684 253,909
---------------------------------------------------------------------------
Investment expenses 5,311 4,738 2,855
---------------------------------------------------------------------------
Net investment income $356,463 $311,946 $251,054
---------------------------------------------------------------------------
35
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the periods were as follows:
---------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) 2003 2002 2001
---------------------------------------------------------------------------
REALIZED
Fixed maturities $(14,361) $(11,185) $33,061
Other invested assets 8,152 (19,423) (4,980)
Mortgage loans (886) (61) (707)
Other (107) 85 (1,230)
---------------------------------------------------------------------------
Total realized investment
gains (losses) $(7,202) $(30,584) $26,144
---------------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are included as
accumulated other changes in equity from nonowner sources in shareholder's
equity were as follows:
---------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) 2003 2002 2001
---------------------------------------------------------------------------
UNREALIZED
Fixed maturities $188,949 $91,013 $14,761
Other invested assets (2,805) 22,449 (16,182)
---------------------------------------------------------------------------
Total unrealized investment
gains (losses) 186,144 113,462 (1,421)
Related taxes 65,151 39,712 (497)
---------------------------------------------------------------------------
Change in unrealized investment
gains (losses) 120,993 73,750 (924)
Balance beginning of year 86,448 12,698 13,622
---------------------------------------------------------------------------
Balance end of year $207,441 $86,448 $12,698
---------------------------------------------------------------------------
3. REINSURANCE
The Company uses reinsurance in order to limit losses, minimize exposure to
large risks, provide additional capacity for future growth and to effect
business-sharing arrangements. Reinsurance is accomplished through various
plans of reinsurance, primarily yearly renewable term (YRT) coinsurance and
modified coinsurance. The Company remains primarily liable as the direct
insurer on all risks reinsured.
Since 1997 the majority of UL business has been reinsured under an 80%/20%
YRT quota share reinsurance program and term life business has been
reinsured under a 90%/10% YRT quota share reinsurance program. Beginning in
September, 2002, newly issued term life business has been reinsured under a
90%/10% coinsurance quota share reinsurance program. Maximum retention of
$2.5 million is generally reached on policies in excess of $12.5 million
for UL and $25.0 million for term insurance. For other plans of insurance,
it is the policy of the Company to obtain reinsurance for amounts above
certain retention limits on individual life policies, which limits vary
with age and underwriting classification. Generally, the maximum retention
on an ordinary life risk is $2.5 million.
Total life insurance in-force ceded under reinsurance contracts was $35.0
billion and $29.3 billion at December 31, 2003 and 2002, including $4.5
million and $6.0 million, respectively to TIC. Total life
36
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
insurance premiums ceded were $24.9 million, $14.9 million and $11.9
million in 2003, 2002 and 2001, respectively. Ceded premiums paid to TIC
were insignificant for these same periods.
Prior to April 1, 2001, the Company also reinsured substantially all of the
guaranteed minimum death benefit (GMDB) on its variable annuity product.
Total variable annuity account balances with GMDB were $9.9 billion,
including $5.4 billion or 55% which was reinsured, and $7.1 billion, of
which $4.9 billion or 69% is reinsured at December 31, 2003 and 2002,
respectively. GMDB is payable upon the death of a contractholder. When the
benefit payable is greater than the account value of the variable annuity,
the difference is called the net amount at risk (NAR). NAR was $887 million
and $2.2 billion at December 31, 2003 and 2002, respectively. NAR included
$816 million, or 92%, and $1.9 billion, or 86%, which was reinsured at
December 31, 2003 and 2002, respectively.
4. INTANGIBLE ASSETS
The Company has two intangible, amortizable assets, DAC and the value of
insurance in force. The following is a summary of capitalized DAC by
product type:
Traditional Deferred
($ IN MILLIONS) Life Annuity UL Total
---------------------------------------------------------------------------
Beginning balance
January 1, 2002 $47.7 $511.5 $255.2 $814.4
Commissions and expenses deferred 16.5 169.4 130.8 316.7
Amortization expense (8.9) (72.6) (90.8) (9.3)
Underlying lapse and interest
rate assumptions -- 29.8 -- 29.8
Amortization related to FAS 91
reassessment -- (6.0) -- (6.0)
---------------------------------------------------------------------------
Balance December 31, 2002 55.3 632.1 376.7 1,064.1
Commissions and expenses deferred 14.3 172.1 164.9 351.3
Amortization expense (10.2) (107.6) (18.5) (136.3)
---------------------------------------------------------------------------
Balance December 31, 2003 $59.4 $696.6 $523.1 $1,279.1
---------------------------------------------------------------------------
The value of insurance in force totaled $11.7 million and $12.5 million at
December 31, 2003 and 2002, respectively, and was reported in other assets.
Amortization expense of value of insurance in force was insignificant for
2003, 2002 and 2001.
5. DEPOSIT FUNDS AND RESERVES
At December 31, 2003 and 2002, the Company had $5.6 billion and $5.0
billion of life and annuity deposit funds and reserves, respectively. Of
those totals, $1.6 billion were not subject to discretionary withdrawal
based on contract terms for 2003 and 2002. The remaining amounts were life
and annuity products that were subject to discretionary withdrawal by the
contractholders.
37
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Included in the amounts that are subject to discretionary withdrawal were
$2.6 billion and $2.4 billion of liabilities that are surrenderable with
market value adjustments. Also included are an additional $1.3 billion and
$.9 billion of life insurance and individual annuity liabilities which are
subject to discretionary withdrawals with an average surrender charge of
4.7% and 4.2%, respectively. The remaining $.1 billion in 2003, and $.1
billion in 2002, is surrenderable without charge. The life insurance risks
would have to be underwritten again if transferred to another carrier,
which is considered a significant deterrent for long-term policyholders.
Insurance liabilities that are surrendered or withdrawn from the Company
are reduced by outstanding policy loans and related accrued interest prior
to payout.
6. FEDERAL INCOME TAXES
EFFECTIVE TAX RATE
($ IN THOUSANDS)
---------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
---------------------------------------------------------------------------
Income before federal income taxes $154,048 $159,024 $176,249
Statutory tax rate 35% 35% 35%
---------------------------------------------------------------------------
Expected federal income taxes 53,917 55,658 61,687
Tax effect of:
Non-taxable investment income (11,626) -- (36)
Tax reserve release (7,852) -- --
Other, net 149 4 (562)
---------------------------------------------------------------------------
Federal income taxes $34,588 $55,654 $61,089
===========================================================================
Effective tax rate 22% 35% 35%
---------------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $72,983 $(30,830) $(19,007)
Foreign 440 (313) --
---------------------------------------------------------------------------
Total 73,423 (31,143) (19,007)
---------------------------------------------------------------------------
Deferred:
United States (38,835) 86,797 80,096
Foreign -- -- --
---------------------------------------------------------------------------
Total (38,835) 86,797 80,096
---------------------------------------------------------------------------
Federal income taxes $34,588 $55,654 $61,089
===========================================================================
38
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 2003 and 2002 were
comprised of the tax effects of temporary differences related to the
following assets and liabilities:
($ IN THOUSANDS) 2003 2002
---------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $251,017 $151,454
Other 6,496 2,286
---------------------------------------------------------------------------
Total 257,513 153,740
---------------------------------------------------------------------------
Deferred Tax Liabilities:
Investments, net (117,613) (48,363)
Deferred acquisition costs and value
of insurance in force (363,670) (303,652)
Other (1,051) (1,075)
---------------------------------------------------------------------------
Total (482,334) (353,090)
---------------------------------------------------------------------------
Net Deferred Tax Liability $(224,821) $(199,350)
---------------------------------------------------------------------------
TIC and its subsidiaries, including the Company, file a consolidated
federal income tax return with Citigroup. Federal income taxes are
allocated to each member of the consolidated group, according to a Tax
Sharing Agreement (the Agreement), on a separate return basis adjusted for
credits and other amounts required by the Agreement. TLAC had a $9.1
million recoverable from TIC at December 31, 2003 and a $53.6 million
payable to TIC at December 31, 2002 pursuant to the Agreement.
At December 31, 2003 and 2002, the Company had no ordinary or capital loss
carryforwards.
The policyholders' surplus account, which arose under prior tax law, is
generally that portion of the gain from operations that has not been
subjected to tax, plus certain deductions. The balance of this account is
approximately $2.1 million. Income taxes are not provided for on this
amount because under current U.S. tax rules such taxes will become payable
only to the extent such amounts are distributed as a dividend or exceed
limits prescribed by federal law. Distributions are not contemplated from
this account. At current rates the maximum amount of such tax would be
approximately $700 thousand.
7. SHAREHOLDER'S EQUITY
SHAREHOLDER'S EQUITY AND DIVIDEND AVAILABILITY
The Company's statutory net income (loss) was $37.3 million, $(133.9)
million and $(73.4) million for the years ended December 31, 2003, 2002 and
2001, respectively. Statutory capital and surplus was $494 million and $397
million at December 31, 2003 and 2002, respectively.
Effective January 1, 2001, the Company began preparing its statutory basis
financial statements in accordance with the National Association of
Insurance Commissioners' ACCOUNTING PRACTICES AND PROCEDURES MANUAL -
VERSION EFFECTIVE JANUARY 1, 2001, subject to any deviations prescribed or
39
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
permitted by its domicilary insurance commissioner (see Permitted Statutory
Accounting Practices in Note 1). The impact of this change on statutory
capital and surplus was not significant.
The Company is currently subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to its parent
without prior approval of insurance regulatory authorities. In accordance
with Connecticut statutes, after reducing the Company's unassigned funds
(surplus) by 25% of the change in net unrealized capital gains, the Company
may not pay dividends during 2004 without prior approval of the State of
Connecticut Insurance Department.
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX
Changes in each component of Accumulated Other Changes in Equity from
Nonowner Sources were as follows:
NET ACCUMULATED
UNREALIZED DERIVATIVE OTHER CHANGES
GAIN/LOSS ON INSTRUMENTS & IN EQUITY FROM
INVESTMENT HEDGING NONOWNER
($ IN THOUSANDS) SECURITIES ACTIVITIES SOURCES
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 $13,622 $-- $13,622
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of tax of $33 -- 62 62
Unrealized gains on investment securities,
net of tax of $10,673 19,821 -- 19,821
Less: Reclassification adjustment for gains
included in net income, net of tax of $(11,170) (20,745) -- (20,745)
Add: Derivative instrument hedging activity gains, net of
tax of $1,789 -- 3,324 3,324
- -----------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE (924) 3,386 2,462
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 12,698 3,386 16,084
Unrealized gains on investment securities, net of
tax of $35,352 65,653 -- 65,653
Add: Reclassification adjustment for losses included in net
income, net of tax of $4,360 8,097 -- 8,097
Add: Derivative instrument hedging activity gains, net of
tax of $2,750 -- 5,107 5,107
- -----------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 73,750 5,107 78,857
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 86,448 8,493 94,941
Unrealized gains on investment securities,
net of tax of $60,482 112,322 -- 112,322
Add: Reclassification adjustment for losses included in
net income, net of tax of $4,669 8,671 -- 8,671
Less: Derivative instrument hedging activity loss, net of
tax benefits of $(845) -- (1,568) (1,568)
- -----------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 120,993 (1,568) 119,425
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 $207,441 $6,925 $214,366
- -----------------------------------------------------------------------------------------------------------------------
40
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
8. BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company participates in a qualified, noncontributory defined benefit
pension plan, a non-qualified pension plan and other postretirement
benefits to retired employees through plans sponsored by Citigroup. The
Company's share of net expense for these plans was not significant for
2003, 2002 and 2001.
401(K) SAVINGS PLAN
Substantially all of the Company's employees are eligible to participate in
a 401(k) savings plan sponsored by Citigroup. See Note 11. The Company's
expenses in connection with the 401(k) savings plan were not significant in
2003, 2002 and 2001.
9. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures, interest rate swaps, options and forward contracts, as a means of
hedging exposure to foreign currency, equity price changes and/or interest
rate risk on anticipated transactions or existing assets and liabilities.
The Company does not hold or issue derivative instruments for trading
purposes.
The Company uses exchange traded financial futures contracts to manage its
exposure to changes in interest rates that arise from the sale of certain
insurance and investment products, or the need to reinvest proceeds from
the sale or maturity of investments. To hedge against adverse changes in
interest rates, the Company enters long or short positions in financial
futures contracts, which offset asset price changes resulting from changes
in market interest rates until an investment is purchased, or a product is
sold. Futures contracts are commitments to buy or sell at a future date a
financial instrument, at a contracted price, and may be settled in cash or
through delivery.
The Company uses equity option contracts to manage its exposure to changes
in equity market prices that arise from the sale of certain insurance
products. To hedge against adverse changes in the equity market prices, the
Company enters long positions in equity option contracts with major
financial institutions. These contracts allow the Company, for a fee, the
right to receive a payment if the Standard and Poor's 500 Index falls below
agreed upon strike prices.
The Company enters into interest rate swaps in connection with other
financial instruments to provide greater risk diversification and better
match assets and liabilities. Under interest rate swaps, the Company agrees
with other parties to exchange, at specified intervals, the difference
between fixed rate and floating rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. A single net payment is usually made by one counterparty
at each due date.
Forward contracts are used on an ongoing basis to hedge the Company's
exposure to foreign currency exchange rates that result from the net
investment in the Company's direct foreign currency investments. To hedge
against adverse changes in exchange rates, the Company enters into
contracts
41
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
to exchange foreign currency for U.S. Dollars with major financial
institutions. These contracts cannot be settled prior to maturity. At the
maturity date the Company must purchase the foreign currency necessary to
settle the contracts.
Several of the Company's hedging strategies do not qualify or are not
designated as hedges for accounting purposes. This can occur when the
hedged item is carried at fair value with changes in fair value recorded in
earnings, the derivative contracts are used in a macro hedging strategy,
the hedge is not expected to be highly effective, or structuring the hedge
to qualify for hedge accounting is too costly or time consuming.
The Company monitors creditworthiness of counterparties to these financial
instruments by using criteria of acceptable risk that are consistent with
on-balance-sheet financial instruments. The controls include credit
approvals, limits and other monitoring procedures. Additionally, the
Company enters into collateral agreements with its derivative
counterparties. As of December 31, 2003 the Company held collateral under
these contracts amounting to approximately $69.7million.
The following table summarizes certain information related to the Company's
hedging activities for the years ended December 31, 2003 and 2002:
Year Ended Year Ended
December 31, December 31,
($ IN THOUSANDS) 2003 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
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
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
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
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3. Articles of Incorporation and By-Laws
a.) Charter of The Travelers Life and Annuity Company (the
"Company"), as amended on April 10, 1990, incorporated
herein by reference to Exhibit 6(a) to the Registration
Statement on Form N-4, File No. 33-58131, filed on March 17,
1995.
b.) By-laws of the Company as amended October 20, 1994,
incorporated herein by reference to Exhibit 6(b) to the
Registration Statement on Form N-4, File No. 33-58131, filed
on March 17, 1995.
14.01 Citigroup Code of Ethics for Financial Professionals,
incorporated by reference to Exhibit 14.01 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
31.01+ Certification of chief financial officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.02+ Certification of chief executive officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.01+ Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------
+Filed herewith
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 22nd day of March,
2004.
THE TRAVELERS LIFE AND ANNUITY COMPANY
(Registrant)
By: /s/Glenn D. Lammey
--------------------------------------------
Glenn D. Lammey
Executive Vice President,
Chief Financial Officer and Chief Accounting Officer
(Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on the 22nd day of March, 2004.
SIGNATURE CAPACITY
/s/ George C. Kokulis Director, Chief Executive Officer
- ------------------------- (Principal Executive Officer)
(George C. Kokulis)
/s/ Glenn D. Lammey Director, Chief Financial Officer
- ------------------------- and Chief Accounting Officer
(Glenn D. Lammey) (Principal Financial Officer and
Principal Accounting Officer)
/s/ Kathleen L. Preston Director
- -------------------------
(Kathleen L. Preston)
/s/ Marla Berman Lewitus Director
- -------------------------
(Marla Berman Lewitus)
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities pursuant to
Section 12 of the Act: NONE
No Annual Report to Security Holders covering the registrant's last fiscal year
or proxy material with respect to any meeting of security holders has been sent,
or will be sent, to security holders.
51
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
ASSUMED FROM OF AMOUNT
CEDED TO OTHER 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
THIS PAGE INTENTIONALLY LEFT BLANK.
THIS PAGE INTENTIONALLY LEFT BLANK.
THE TRAVELERS INSURANCE COMPANY
THE TRAVELERS LIFE AND ANNUITY COMPANY
REGISTERED FIXED ACCOUNT OPTION
FOR USE WITH ANNUITY CONTRACTS
L-24443 12/2004