Filed Pursuant to
Rule 424(b)(3)
Registration No:
333-83072
333-83076
TTM
TRAVELERS TARGET MATURITY
TTM, Travelers Target Maturity, is a deferred annuity Contract ("Contract") that
provides a guaranteed fixed rate of return for your investment if you do not
surrender your Contract before the Guarantee Period ends. Generally, if you do
surrender your Contract before the Guarantee Period ends, your Cash Value will
be subject to a market value adjustment and surrender charges.
This prospectus explains:
o the Contract (single purchase payment)
o The Travelers Insurance Company and Separate Account MGA
o The Travelers Life and Annuity Company and Separate Account MGA II
o the Guarantee Periods and Interest Rates
o Surrenders
o Surrender Charges
o Market Value Adjustment
o Death Benefit
o Annuity Payments
o other aspects of the Contract
This Contract is issued by The Travelers Insurance Company or The Travelers Life
and Annuity Company. The Travelers Life and Annuity Company does not solicit or
issue insurance products in the state of New York. Refer to your Contract for
the name of your issuing company. Both companies are located at One 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 A COPY OF THE TRAVELERS INSURANCE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 2004 AND THE
TRAVELERS LIFE AND ANNUITY COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD
ENDED DECEMBER 31, 2004.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MUTUAL FUNDS, ANNUITIES AND INSURANCE PRODUCTS ARE NOT DEPOSITS OF ANY BANK, AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
PROSPECTUS DATED MAY 2, 2005
TABLE OF CONTENTS
Special Terms.................................. 3 Investments by the Company..................... 13
Prospectus Summary............................. 4 Amendment of the Contracts..................... 14
The Insurance Companies........................ 5 Assignment of the Contracts.................... 14
The Contracts.................................. 5 Distribution of the Contracts.................. 14
Application and Purchase Payment............. 5 Federal Tax Considerations..................... 14
Right to Cancel.............................. 6 General...................................... 14
Guarantee Periods.............................. 7 Section 403 (b) Plans and Arrangements....... 15
Establishment of Guaranteed Interest Rates..... 8 Qualified Pension and Profit-Sharing Plans... 15
Surrenders..................................... 8 Individual Retirement Annuities.............. 16
General...................................... 8 Roth IRAs.................................... 16
Surrender Charge............................. 8 Section 457 Plans............................ 17
Special Surrenders........................... 9 Nonqualified Annuities....................... 17
Market Value Adjustment...................... 9 The Employee Retirement Income Security
Waiver of Surrender Charge................... 9 Act of 1974................................ 18
Guarantee Period Exchange Option............. 10 Federal Income Tax Withholding............... 18
Premium Taxes................................ 10 Tax Advice................................... 19
Death Benefit.................................. 10 Puerto Rico Tax Considerations............... 19
Annuity Period................................. 12 Non-Resident Aliens.......................... 19
Election of Annuity Commencement Date Available Information.......................... 20
and Form of Annuity........................ 12 Incorporation of Certain Documents by
Change of Annuity Commencement Date or Reference.................................... 20
Annuity Option............................. 12 Legal Opinion.................................. 21
Annuity Options.............................. 12 Experts........................................ 21
Annuity Payment.............................. 13 Appendix A..................................... A-1
Death of Annuitant after Annuity Appendix B..................................... B-1
Commencement Date.......................... 13 Financial Statements
SPECIAL TERMS
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IN THIS PROSPECTUS THE FOLLOWING TERMS HAVE THE INDICATED MEANINGS:
ACCOUNT VALUE -- The Purchase Payment plus all interest earned, minus all
surrenders, surrender charges and applicable premium tax previously deducted.
ANNUITANT -- The person upon whose life the Contract is issued.
ANNUITY COMMENCEMENT DATE -- The date on which annuity payments are to start.
The date may be designated in the Contract or elected by the Owner.
BENEFICIARY -- The person entitled to receive benefits under the Contract in
case of the death of the Annuitant or the Owner, or joint Owner, as applicable.
CASH SURRENDER VALUE -- The Cash Value less surrender charges and any applicable
premium tax.
CASH VALUE -- The Account Value at the end of a Guarantee Period or the Market
Adjusted Value before the end of a Guarantee Period.
COMPANY (WE, US, OUR) -- The Travelers Insurance Company or the Travelers Life
and Annuity Company, depending on the state where your Contract is issued.
CONTINGENT ANNUITANT -- The person named prior to the Contract Date by the Owner
who, upon the Annuitant's death (prior to the Annuity Commencement Date) becomes
the Annuitant. All rights and benefits provided by the Contract then continue to
be in effect. Applicable to nonqualified Contracts only.
CONTRACT -- For a group Contract, the certificate evidencing a participating
interest in the group annuity Contract. Any reference in this Prospectus to
Contract includes the underlying group annuity Contract. See Appendix A. For an
individual Contract, the individual annuity Contract.
CONTRACT DATE -- The effective date of participation under the group annuity
Contract as designated in the certificate, or the date of issue of an individual
annuity Contract.
CONTRACT YEAR -- A continuous twelve-month period beginning on the Contract Date
and each anniversary thereof.
FREE WITHDRAWAL AMOUNT -- The interest credited in the previous Contract Year
that is not subject to a surrender charge or a market value adjustment.
GUARANTEE PERIOD -- The period for which either an initial or subsequent
Guaranteed Interest Rate is credited.
GUARANTEED INTEREST RATE -- The annual effective interest rate credited during
the Guarantee Period.
HOME OFFICE -- The principal executive offices of The Travelers Insurance
Company or The Travelers Life and Annuity Company located at One Cityplace,
Hartford, Connecticut 06103-3415 (Attention: Annuity Services).
MARKET VALUE ADJUSTMENT -- The Market Value Adjustment reflects the
relationship, at the time of surrender, between the then-current Guaranteed
Interest Rate for a Guarantee Period equal to the duration left in your
Guarantee Period, and the Guaranteed Interest Rate that applies to your
Contract.
MATURITY VALUE -- The accumulated value of a Purchase Payment at the Guaranteed
Interest Rate at the end of the Guarantee Period selected, minus all surrenders,
surrender charges and premium taxes previously deducted.
OWNER (YOU, YOURS) -- For an individual Contract, the person or entity to whom
the individual Contract is issued. Joint Owners, who share in ownership rights
and any benefits or payments, may be named in nonqualified Contracts. For a
group contract, the person or entity to whom the certificate under a group
annuity Contract is issued.
PURCHASE PAYMENT -- The premium payment applied to the Contract less premium
taxes if applicable.
3
PROSPECTUS SUMMARY
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Travelers Target Maturity is a single purchase payment modified guaranteed
annuity contract available to eligible individuals. Modified Guaranteed
Annuities offer a guaranteed fixed rate of return on your principal investment
if you do not surrender your Contract before the Guarantee Period ends. If you
do surrender your Contract before the end of the Guarantee Period, generally
your Cash Value is subject to a Market Value Adjustment and Surrender Charge.
The Contract is offered by either The Travelers Insurance Company or The
Travelers Life and Annuity Company ("the Company," "We" or "Us"). Both companies
are indirect wholly-owned subsidiaries of Citigroup. The Travelers Life and
Annuity Company does not solicit or issue insurance products in the state of New
York. Refer to your Contract for the name of your issuing company. The Contract
is available only in those states where it has been approved for sale.
You may select an initial Guarantee Period from those available from the
Company. Currently, we offer Guarantee Periods up to ten years. Interest on the
Purchase Payment is credited on a daily basis and so compounded in the
Guaranteed Interest Rate. (See "Guarantee Periods" and "Establishment of
Guaranteed Interest Rates".)
At the end of each Guarantee Period, a subsequent Guarantee Period of one year
will automatically begin unless you elect another duration within thirty days
before the Guarantee Period ends.
You may surrender your Contract, but the Cash Value may be subject to a
Surrender Charge and/or a Market Value Adjustment. A full or partial surrender
made prior to the end of a Guarantee Period will be subject to a Market Value
Adjustment. The surrender charge may be deducted from any surrender made before
the end of the seventh Contract Year. The surrender charge is computed as a
percentage of the Cash Value being surrendered.
CONTRACT YEAR CHARGE AS A PERCENTAGE
IN WHICH SURRENDER IS MADE OF CASH VALUE
--------------------------- ----------------------
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
There is no surrender charge for full or partial surrenders: (1) at the end of
an initial Guarantee Period of at least three years, or (2) at the end of any
other Initial Guarantee Period if the surrender occurs on or after the fifth
Contract Year. We may waive surrender charges in certain instances. (See
"Surrenders -- Waiver of Surrender Charge".)
There is no Market Value Adjustment if you surrender at the end of a guarantee
period. Any such surrender request must be in writing and received by us within
30 days before the Guarantee Period ends. You may request any interest that has
been credited during the prior Contract Year. No surrender charge or Market
Value Adjustment will be imposed on such interest payments; however, all
applicable premium taxes will be deducted. Any such surrender may also be
subject to federal and state taxes. (See "Surrenders" and "Federal Tax
Considerations".)
The Market Value Adjustment reflects the relationship between the current
Guaranteed Interest Rate for the time left in the Guarantee Period at surrender
and the Guaranteed Interest Rate that applies to your Contract. The Market Value
Adjustment amount primarily depends on the interest rates the Company receives
on its investments when the current Guaranteed Interest Rates are established.
The Market Value Adjustment is sensitive, therefore, to changes in interest
rates. It is possible that the amount you receive upon surrender may be less
than your original Purchase Payment if interest rates increase. It is also
possible that if interest rates decrease, the amount you receive upon surrender
may be more than your original Purchase Payment plus accrued interest.
4
On the Annuity Commencement Date specified by you, the Company will make either
a lump sum payment or start to pay a series of payments based on the Annuity
Options you select. (See "Annuity Period".)
The Contract may provide for a death benefit that is the Account Value on the
date we receive written notification of death. If the Annuitant dies before the
Annuity Commencement Date with no designated Contingent Annuitant surviving, or
if the Owner dies before the Annuity Commencement Date with the Annuitant
surviving, we will pay the death benefit to the Beneficiary. We calculate the
death benefit as of the date the Home Office receives written notification of
due proof of death. (See "Death Benefit".)
We will deduct any applicable premium taxes from the Cash Value either upon
death, surrender, annuitization, or at the time the Purchase Payment is made to
the Contract. (See "Surrenders Premium Taxes".)
THE INSURANCE COMPANIES
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Refer to your contract for the name of your issuing company.
The Travelers Insurance Company is a stock insurance company chartered in 1863
in the state of Connecticut and has been continuously engaged in the insurance
business since that time. The Company is licensed to conduct life insurance
business in all states of the United States, the District of Columbia, Puerto
Rico, Guam, the U.S. and British Virgin Islands and the Bahamas. The Company is
an indirect wholly-owned subsidiary of Citigroup Inc. The Company's home office
is located at One Cityplace, Hartford, Connecticut 06103-3415.
The Travelers Life and Annuity Company is a stock insurance company chartered in
1973 in Connecticut and continuously engaged in the insurance business since
that time. It is licensed to conduct life insurance business in all states of
the United States (except New York), the District of Columbia and Puerto Rico.
The Company is an indirect wholly-owned subsidiary of Citigroup Inc. The
Company's Home Office is located at One Cityplace, Hartford, Connecticut
06103-3415.
On January 31, 2005, CITIGROUP INC. announced that it has agreed to sell its
life insurance and annuity businesses to METLIFE, INC. The proposed sale would
include the following insurance companies that issue the annuity contract
described in your prospectus:
o The Travelers Insurance Company
o The Travelers Life and Annuity Company
The transaction is subject to certain domestic and international regulatory
approvals, as well as other customary conditions to closing. The transaction is
expected to close this summer. Under the terms of the transaction, The Travelers
Insurance Company will distribute its ownership of Primerica Life Insurance
Company and certain other assets, including shares of Citigroup preferred stock,
to Citigroup Inc., or its subsidiaries prior to the closing. The Travelers
Insurance Company has filed a current report on Form 8-K on February 2, 2005
with additional information about the transaction, including pro forma financial
information. The filing can be found at the SEC's Internet website at
http://www.sec.gov.
The transaction will not affect the terms or conditions of your annuity
contract, and The Travelers Insurance Company or The Travelers Life and Annuity
Company will remain fully responsible for their respective contractual
obligations to annuity contract owners.
THE CONTRACTS
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APPLICATION AND PURCHASE PAYMENT
For the Company to issue a Contract to you, you must:
o complete an application or an order to purchase
5
o include your minimum Purchase Payment of at least $5,000 and
o submit both to our Home Office for approval.
The Company may:
o accept Purchase Payments up to $1 million without prior approval
o contact you or your agent if the application or order form is not
properly completed
o return your entire application or order form and Purchase Payment if
not properly completed.
RIGHT TO CANCEL
Generally, you may return your Contract to us at our Home Office within 10 days
(7 days for IRAs) of delivery of your Contract. Depending on your state, we will
return your Purchase Payment or Cash Value. Please refer to your Contract for
any additional information.
6
GUARANTEE PERIODS
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You will select the duration of the Guarantee Period and corresponding declared
Guaranteed Interest Rate. Your Purchase Payment will earn interest at the
Guaranteed Interest Rate during the entire Guarantee Period. All interest earned
will be credited daily; this compounding effect is reflected in the Guaranteed
Interest Rate.
EXAMPLE OF COMPOUNDING AT THE GUARANTEED INTEREST RATE
Beginning Account Value: $50,000
Guarantee Period: 5 years
Guaranteed Interest Rate: 5.50% Annual Effective Rate
END OF CONTRACT YEAR
------------------------------------------------------------------------------
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
-------------- -------------- -------------- -------------- ---------------
Beginning Account Value...................... $ 50,000.00
X (1 + Guaranteed Interest Rate)............. 1.055
--------------
$ 52,750.00
==============
Account Value at end of Contract Year 1...... $ 52,750.00
X (1 + Guaranteed Interest Rate)............. 1.055
--------------
$ 55,651.25
==============
Account Value at end of Contract Year 2...... $ 55,651.25
X (1 + Guaranteed Interest Rate)............. 1.055
--------------
$ 58,712.07
==============
Account Value at end of Contract Year 3...... $ 58,712.07
X (1 + Guaranteed Interest Rate)............. 1.055
--------------
$ 61,941.23
==============
Account Value at end of Contract Year 4...... $ 61,941.23
X (1 + Guaranteed Interest Rate)............. 1.055
---------------
$ 65,348.00
===============
Account Value at end of Guarantee Period $ 65,348.00
(i.e. Maturity Value)........................ ===============
Total Interest Credited in Guarantee Period -- $65,348.00 - $50,000.00 =
$15,348.00
Account Value at end of Guarantee Period -- $50,000.00 + $15,348.00 =
$65,348.00
THE ABOVE EXAMPLE ASSUMES NO SURRENDERS, DEDUCTIONS FOR PREMIUM TAXES, OR
PRE-AUTHORIZED PAYMENT OF INTEREST DURING THE ENTIRE FIVE-YEAR PERIOD. A MARKET
VALUE ADJUSTMENT OR SURRENDER CHARGE MAY APPLY TO ANY SUCH INTERIM SURRENDER
(SEE "SURRENDERS"). THE HYPOTHETICAL GUARANTEED INTEREST RATES ARE ILLUSTRATIVE
ONLY AND ARE NOT INTENDED TO PREDICT FUTURE GUARANTEED INTEREST RATES TO BE
DECLARED UNDER THE CONTRACT. ACTUAL GUARANTEED INTEREST RATES DECLARED FOR ANY
GIVEN TIME MAY BE MORE OR LESS THAN THOSE SHOWN.
We will notify you about subsequent Guarantee Periods near the end of your
current Guarantee Period. At the end of a Guarantee Period:
o you may elect a subsequent Guarantee Period by telephone or in writing
o your Account Value will be transferred to the new Guarantee Period at
the Guaranteed Interest Rate offered at that time
o if you do not make any election, we will automatically transfer the
Account Value into a 1-year Guarantee Period, which you may transfer
out of into a new Guarantee Period with no transfer, surrender or
Market Value Adjustment charge
7
ESTABLISHMENT OF GUARANTEED INTEREST RATES
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When you purchase your Contract, you will know the Guaranteed Interest Rate for
the Guarantee Period you choose. We will send you a confirmation showing the
amount of your Purchase Payment and the applicable Guaranteed Interest Rate.
After the end of each calendar year, we will send you a statement that will
show:
o your Account Value as of the end of the preceding year
o all transactions regarding your Contract during the year
o your Account Value at the end of the current year
o the Guaranteed Interest Rate being credited to your Contract.
The Company has no specific formula for determining Guaranteed Interest Rates in
the future. The Guaranteed Interest Rates will be declared from time to time as
market conditions dictate. (See "Investments by the Company".) In addition, the
Company may also consider various other factors in determining Guaranteed
Interest Rates for a given period, including regulatory and tax requirements,
sales commissions, administrative expenses, general economic trends and
competitive factors.
THE COMPANY WILL MAKE THE FINAL DETERMINATION AS TO GUARANTEED INTEREST RATES TO
BE DECLARED. WE CANNOT PREDICT NOR CAN WE GUARANTEE FUTURE GUARANTEED INTEREST
RATES.
SURRENDERS
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GENERAL
You may make a full or partial surrender at any time, subject to the surrender
charges described below. In the case of all surrenders, the Cash Value and
Maturity Value will be reduced.
Upon request, we will inform you of the amount payable upon a full or partial
surrender. Any full, partial or special surrender may be subject to tax. (See
"Federal Tax Considerations".)
We may defer payment of any surrender up to six months from the date we receive
your notice of surrender or the period permitted by state insurance law, if
less. If we defer payment for more than 30 days, we will pay interest of at
least 3.5% per annum on the amount deferred.
Participants in Section 403 (b) tax-deferred annuity plans may not make
surrenders from certain amounts before the earliest of age 59 1/2, separation
from service, death, disability or hardship. (See "Federal Tax Considerations --
Section 403 (b) Plans and Arrangements".)
SURRENDER CHARGE
There are no front-end sales charges. A surrender charge may be assessed on
surrenders made before the end of the seventh Contract Year. The surrender
charge is computed as a percentage of the Cash Value being surrendered.
CONTRACT YEAR CHARGE AS A PERCENTAGE
IN WHICH SURRENDER IS MADE OF CASH VALUE
--------------------------- ----------------------
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
8
SPECIAL SURRENDERS
No surrender charge or Market Value Adjustment will apply for full or partial
surrenders taken: (1) at the end of an Initial Guarantee Period of at least
three years in duration; or (2) at the end of any other Initial Guarantee Period
if the surrender occurs on or after the fifth Contract Year. However, Guarantee
Periods initiated through the Guaranteed Period Exchange Option will be subject
to the surrender charges based on the original Contract Date. (See "Guarantee
Period Exchange Option".)
We will not assess a surrender charge if your Account Value is applied to elect
an annuity option on the Annuity Commencement Date (except if the Fifth Option
is elected within the First Contract Year). A Market Value Adjustment will be
applied if the Annuity Commencement Date is not at the end of a Guarantee
Period. To elect an annuity option, you must notify us at least 30 days before
your Annuity Commencement Date.
In addition, for all full or partial surrenders, no surrender charge or Market
Value Adjustment will apply to any interest credited during the previous
Contract Year. Any such surrender may, however, be subject to federal or state
taxes.
If you participate in our Minimum Distribution Program, any payments that
satisfy the maximum requirements for the Minimum Distribution Program will not
be subject to the Market Value Adjustment or surrender charge. Systematic
withdrawals outside our Minimum Distribution Program are subject to a surrender
charge and a Market Value Adjustment to the extent that the payments exceed the
interest earned during the prior Contract Year.
Any payments may be subject to federal or state taxes.
MARKET VALUE ADJUSTMENT
The amount payable on a full or partial surrender made before the end of any
Guarantee Period may be adjusted up or down by the Market Value Adjustment.
The Market Value Adjustment is the relationship between the then-current
Guaranteed Interest Rate for a Guarantee Period equal to the time left in your
Guarantee Period, and the Guaranteed Interest Rate that applies to your
Contract.
Generally, if your Guaranteed Interest Rate is lower than the applicable current
Guaranteed Interest Rate, then the Market Value Adjustment will result in a
lower payment upon surrender. Conversely, if your Guaranteed Interest Rate is
higher than the applicable current Guaranteed Interest Rate, the Market Value
Adjustment will result in a higher payment upon surrender.
The Market Value Adjustment amount primarily depends on the level of interest
rates on the Company's investments when the current Guaranteed Interest Rates
are established. The Market Adjusted Value is sensitive, therefore, to changes
in current interest rates. It is possible that the amount you receive upon
surrender would be less than the original Purchase Payment if interest rates
increase. It is also possible that if interest rates decrease, the amount you
receive upon surrender may be more than the original Purchase Payment plus
accrued interest.
The formula for calculating the Market Value Adjustment is shown in Appendix B,
which also contains an additional illustration of the application of the Market
Value Adjustment.
WAIVER OF SURRENDER CHARGE
The surrender charge may be waived if:
(a) distributions are applied to any one of the annuity options (except
if the Fifth Option is elected within the first Contract Year) or
(b) the Owner or Annuitant dies and payment of a death benefit is made
to the Beneficiary.
9
GUARANTEE PERIOD EXCHANGE OPTION
Once each Contract Year after the first year, you may elect to transfer from
your current Guarantee Period into a new Guarantee Period of a different
duration and at the then-current Guaranteed Interest Rate. A Market Value
Adjustment will be applied to your current Account Value at the time of
transfer. There will be no surrender charge for this exchange. However,
surrender charges will continue to be based on time elapsed from the original
Contract Date. We reserve the right to charge a fee of up to $50 for such
transfers, but do not impose a transfer charge as of the date of this
prospectus.
PREMIUM TAXES
Certain state and local governments impose premium taxes. These taxes currently
range from 0% to 5.0%, depending upon jurisdiction. The Company is responsible
for paying these taxes and will determine the method used to recover premium tax
expenses incurred. The Company will deduct any applicable premium taxes from the
Cash Value either upon death, surrender, annuitization, or at the time the
Purchase Payment is made to the Contract, but no earlier than when the Company
has a tax liability under state law.
RESTRICTIONS ON FINANCIAL TRANSACTIONS
Federal laws designed to counter terrorism and prevent money laundering might,
in certain circumstances, require us to block a contract owner's ability to make
certain transactions and thereby refuse to accept any request for transfers,
withdrawals, surrenders, or death benefits, until the instructions are received
from the appropriate regulator. We may also be required to provide additional
information about you and your contract to government regulators.
DEATH BENEFIT
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For nonqualified Contracts, IRAs and individual Section 403 (b) Contracts, the
Death Benefit is the Account Value on the date we receive written notification
of due proof of death. There is no death benefit payable under group contracts
issued to tax qualified plans under Sections 403 (b) (ERISA only), 457 or 401
(k).
PAYMENT OF PROCEEDS
The process of paying death benefit proceeds before the maturity date under
various situations for nonqualified contracts is summarized in the charts below.
The charts do not encompass every situation and are merely intended as a general
guide. More detailed information is provided in your Contract. Generally, the
person (s) receiving the benefit may request that the proceeds be paid in a lump
sum, or be applied to one of the settlement options available under the
Contract.
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BEFORE THE MATURITY DATE, THE COMPANY WILL MANDATORY PAYOUT
UPON THE DEATH OF THE PAY THE PROCEEDS TO: UNLESS. . . RULES APPLY*
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OWNER (WHO IS NOT THE ANNUITANT) The Beneficiary (ies), Unless the Beneficiary is the Yes
(WITH NO JOINT OWNER) or if none, to the Contract Owner's spouse and the
Contract Owner's estate. spouse elects to continue the
contract as the new owner rather
than receive the distribution.
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OWNER (WHO IS THE ANNUITANT) The Beneficiary (ies), Unless the Beneficiary is the Yes
(WITH NO JOINT OWNER) or if none, to the Contract Owner's spouse and the
Contract Owner's estate. spouse elects to continue the
contract as the new owner rather
than receive the distribution.
- ------------------------------------------------------------------------------------------------------------------------------------
10
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BEFORE THE MATURITY DATE, THE COMPANY WILL MANDATORY PAYOUT
UPON THE DEATH OF THE PAY THE PROCEEDS TO: UNLESS. . . RULES APPLY*
- ------------------------------------------------------------------------------------------------------------------------------------
JOINT OWNER (WHO IS NOT THE The surviving joint Unless the surviving joint owner is Yes
ANNUITANT) owner. the spouse and elects to continue
the Contract.
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JOINT OWNER (WHO IS THE ANNUITANT) The surviving joint Unless the surviving joint owner is Yes
owner. the Contract Owner's spouse and the
spouse elects to continue the Contract.
Or, unless there is a Contingent
Annuitant the Contingent Annuitant
becomes the Annuitant and the proceeds
will be paid to the surviving joint
owner. If the surviving joint owner
is the spouse, the spouse may elect
to continue the Contract.
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ANNUITANT (WHO IS NOT THE The Beneficiary (ies), Unless, the Beneficiary is the Contract Yes
CONTRACT OWNER) or if none, to the Owner's spouse and the spouse elects
Contract Owner. to continue the Contract as the new
owner rather than receive the
distribution.
Or, unless there is a Contingent
Annuitant. Then, the Contingent
Annuitant becomes the Annuitant and the
Contract continues in effect (generally
using the original Maturity Date). The
proceeds will then be paid upon the
death of the Contingent Annuitant or
owner.
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ANNUITANT (WHO IS THE CONTRACT See death of "owner who Yes
OWNER) is the Annuitant" above.
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ANNUITANT (WHERE OWNER IS A The Beneficiary (ies) Yes (Death of
NONNATURAL PERSON/TRUST) (e.g. the trust). Annuitant is treated
as death of the
owner in these
circumstances.)
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CONTINGENT ANNUITANT (ASSUMING No death proceeds are N/A
ANNUITANT IS STILL ALIVE) payable; Contract
continues.
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BENEFICIARY No death proceeds are N/A
payable; Contract
continues.
- ------------------------------------------------------------------------------------------------------------------------------------
CONTINGENT BENEFICIARY No death proceeds are N/A
payable; Contract
continues.
- ------------------------------------------------------------------------------------------------------------------------------------
- --------------
* Certain payout rules of the Internal Revenue Code (IRC) are triggered
upon the death of any Owner. Non-spousal Beneficiaries (as well as
spousal beneficiaries who choose not to assume the contract) must begin
taking distributions based on the Beneficiary's life expectancy within
one year of death or take a complete distribution of contract proceeds
within 5 years of death.
11
DEATH PROCEEDS AFTER THE MATURITY DATE
If any owner or the Annuitant dies on or after the maturity date, the Company
will pay the Beneficiary a death benefit consisting of any benefit remaining
under the annuity or income option then in effect.
ANNUITY PERIOD
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ELECTION OF ANNUITY COMMENCEMENT DATE AND FORM OF ANNUITY
You can select an Annuity Commencement Date at the time you apply for a
Contract. If no date is elected, for nonqualified Contracts, the automatic
default age is 90. For qualified Contracts, the automatic default age is 70 1/2.
Within 30 days before your Annuity Commencement Date, you may elect to have all
or a portion of your Cash Surrender Value paid in a lump sum on your Annuity
Commencement Date. Or, at least 30 days before the Annuity Commencement Date,
you may elect to have your Cash Value or a portion thereof (less applicable
premium taxes, if any) distributed under any of the Annuity Options described
below. If Option 5 "Payments for a Designated Period" is elected in the first
contract year, the Cash Surrender Value will be applied.
If no option is elected for nonqualified Contracts, the Cash Value will be
applied on the Annuity Commencement Date under the Second Option to provide a
life annuity with 120 monthly payments certain. For qualified Contracts, the
Cash Value will be applied to Option 4, to provide a joint and last life
annuity. This Contract may not be surrendered once annuity payments begin,
except with respect to Option 6.
CHANGE OF ANNUITY COMMENCEMENT DATE OR ANNUITY OPTION
You may change the Annuity Commencement Date at any time as long as such change
is made in writing and is received by us at least 30 days prior to the scheduled
Annuity Commencement Date. Once an Annuity Option has begun, it may not be
changed.
ANNUITY OPTIONS
Any one of the following Annuity Options may be elected. Annuity payments may be
available on a monthly, quarterly, semiannual or annual basis. The minimum
amount that may be applied to Annuity Options is $2,000 unless we consent to a
smaller amount.
OPTION 1 -- LIFE ANNUITY -- NO REFUND: The Company will make annuity payments
during the lifetime of the Annuitant ending with the last payment before death.
This option offers the maximum periodic payment, since there is no assurance of
a minimum number of payments or provision for a death benefit for beneficiaries.
OPTION 2 -- LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS ASSURED: The
Company will make monthly annuity payments during the lifetime of the Annuitant,
with the agreement that if, at the death of that person, payments have been made
for less than 120, 180 or 240 months as elected, we will continue making
payments to the Beneficiary during the remainder of the period.
OPTION 3 -- CASH REFUND LIFE ANNUITY: The Company will make monthly annuity
payments during the lifetime of the Annuitant. Upon the death of the Annuitant,
the Beneficiary will receive a payment equal to the Cash Value applied to this
option on the Annuity Commencement Date minus the dollar amount of annuity
payments already paid.
OPTION 4 -- JOINT AND LAST SURVIVOR LIFE ANNUITY -- NO REFUND: The Company will
make regular annuity payments during the lifetime of the Annuitant and a second
person. When either person dies, we will continue making payments to the
survivor. No further payments will be made following the death of the survivor.
OPTION 5 -- PAYMENTS FOR A DESIGNATED PERIOD: We will make periodic payments
guaranteed for the number of years selected which may be from five to thirty
years.
OPTION 6 -- ANNUITY PROCEEDS SETTLEMENT OPTION: Proceeds from the Death Benefit
may be left with the Company for a period not to exceed five years from the date
of the Owner's or Annuitant's death prior to the Annuity Commencement Date. The
proceeds will remain in the same Guarantee Period and continue to earn the
12
same Guaranteed Interest Rate as at the time of death. If the Guarantee Period
ends before the end of the five-year period, the Beneficiary may elect a new
Guarantee Period with a duration not to exceed the time remaining in the period
of five years from the date of the Owner's or Annuitant's death. Full or partial
surrenders may be made at any time. In the event of surrenders, the remaining
Cash Value will equal the proceeds left with the Company, minus any surrender
charge and applicable premium tax, plus any interest earned. A Market Value
Adjustment will be applied to all surrenders except those occurring at the end
of a Guarantee Period.
The Tables in the Contract reflect guaranteed dollar amounts of monthly payments
for each $1,000 applied under the first five Annuity Options listed above. Under
Options 1, 2 or 3, the amount of each payment will depend upon the age (and, for
nonqualified Contracts, sex) of the Annuitant at the time the first payment is
due. Under Option 4, the amount of each payment will depend upon the payees'
ages at the time the first payment is due (and, for nonqualified Contracts, the
sex of both payees).
The Tables for Options 1, 2, 3 and 4 are based on the 1983 Individual Annuitant
Mortality Table A with ages set back one year and a net investment rate of 3%
per annum. The table for Option 5 is based on a net investment rate of 3% per
annum. If mortality appears more favorable and interest rates so justify, at our
discretion, we may apply other tables which will result in higher payments for
each $1,000 applied under one or more of the first five Annuity Options.
ANNUITY PAYMENT
The first payment under any Annuity Option will be made on the Annuity
Commencement Date. Subsequent payments will be made in accordance with the
manner of payment selected and are based on the first payment date.
The option elected must result in a payment at least equal to the minimum
payment amount according to Company rules then in effect. If at any time
payments are less than the minimum payment amount, the Company has the right to
change the frequency to an interval resulting in a payment at least equal to the
minimum. If any amount due is less than the minimum per year, the Company may
make other arrangements that are equitable to the Annuitant.
Once annuity payments have begun, no surrender of the annuity benefit (including
benefits under Option 5) can be made for the purpose of receiving a lump-sum
settlement.
DEATH OF ANNUITANT AFTER ANNUITY COMMENCEMENT DATE
If the Annuitant dies after the Annuity Commencement Date, any amount payable as
a death benefit will be distributed at least as rapidly as under the method of
distribution in effect.
INVESTMENTS BY THE COMPANY
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We must invest our assets according to applicable state laws regarding the
nature, quality and diversification of investments that may be made by life
insurance companies. In general, these laws permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments. Purchase Payments made to
Contracts issued by the Travelers Insurance Company are invested in Separate
Account MGA, and purchase payments made to contracts issued by the Travelers
Life and Annuity Company are invested in Separate Account MGA II. Both Separate
Account MGA and MGA II are non-unitized separate accounts and are not chargeable
with liabilities arising out of any other business that the Company may conduct.
Owners do not share in the investment performance of assets allocated to the
Separate Accounts. The obligations under the Contract are independent of the
investment performance of the Separate Accounts and are the obligations of the
Company.
In establishing Guaranteed Interest Rates, the Company will consider the yields
on fixed income securities that are part of the Company's current investment
strategy for the Contracts at the time that the Guaranteed Interest Rates are
established. (See "Establishment of Guaranteed Interest Rates".) The current
investment strategy for the Contracts is to invest in fixed income securities,
including public bonds, privately placed bonds, and mortgages, some of which may
be zero coupon securities. While this generally describes our investment
strategy, we are not obligated to follow any particular strategy except as may
be required by federal and state laws.
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AMENDMENT OF THE CONTRACTS
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We reserve the right to amend the Contracts to comply with applicable federal or
state laws or regulations. We will notify you in writing of any such amendments.
ASSIGNMENT OF THE CONTRACTS
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Our rights as evidenced by a Contract may be assigned as permitted by applicable
law. An assignment will not be binding upon us until we receive notice from you
in writing. We assume no responsibility for the validity or effect of any
assignment. You should consult your tax adviser regarding the tax consequences
of an assignment.
DISTRIBUTION OF THE CONTRACTS
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Travelers Distribution LLC ("TDLLC"), an affiliate of the Company, is the
principal underwriter of the Contracts. TDLLC is registered with the Securities
and Exchange Commission under the Act as a broker-dealer, and is a member of the
National Association of Securities Dealers, Inc. The Contract is offered through
both affiliated and non-affiliated broker dealers.
The principal underwriter enters into selling agreements with certain
broker-dealers registered under the Act. Under the selling agreements such
broker-dealers may offer Contracts to persons who have established an account
with the broker-dealer. In addition, the Company may offer certificates to
members of certain other eligible groups. The Company will pay a maximum
commission of 7% of the Purchase Payment for the sale of a Contract. Tower
Square Securities, Inc., an affiliate of the Company, receives greater
compensation for selling the contract than nonaffiliated broker-dealers.
From time to time, the Company may offer customers of certain broker-dealers
special Guaranteed Interest Rates and negotiated commissions. In addition, the
Company may offer Contracts to members of certain other eligible groups through
trusts or otherwise. Also, we may pay additional compensation or permit other
promotional incentives in cash, credit or other compensation for, among other
things, training, marketing or services provided.
FEDERAL TAX CONSIDERATIONS
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GENERAL
The Company is taxed as a life insurance company under Subchapter L of the Code.
Generally, amounts credited to a contract are not taxable until received by the
Contract Owner, participant or Beneficiary, either in the form of annuity
payments or other distributions. Tax consequences and limits are described
further below for each annuity program. The following general discussion of the
federal income tax consequences related to your investment in this Contract is
not intended to cover all situations, and is not meant to provide legal or tax
advice. Because of the complexity of the law and the fact that the tax results
will vary depending upon many factors, you should consult with your tax and/or
legal advisor regarding the tax implications of purchasing this Contract based
upon your individual situation.
Congress has recognized the value of saving for retirement by providing certain
tax benefits for annuities. The Internal Revenue Code ("Code") governs how
earnings on your investment in the Contract are ultimately taxed, depending upon
the type of Contract, Qualified or Non-qualified, and the manner in which the
money is distributed, as briefly described below. In analyzing the benefits of
tax deferral it is important to note that the Jobs and Growth Tax Relief
Reconciliation Act of 2003 reduced the marginal tax rates on long-term capital
gains and dividends to 5% and 15%. The reduced rates apply during 2003 through
2008, and thereafter will increase to prior levels. Earnings under annuity
Contracts, like interest payable as fixed investments (notes, bonds, etc.),
continue to be taxed as ordinary income (top rate of 35%).
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NOTE TO PARTICIPANTS IN QUALIFIED PLANS INCLUDING 401, 403 (B), 457 AS WELL AS
IRA OWNERS:
While annual plan contribution limits may be increased from time to time by
Congress and the IRS for federal income tax purposes, these limits must be
adopted by each state for the higher limits to be effective at a state income
tax level. In other words, permissible contribution limit for income tax
purposes may be different at the federal level from your state's income tax
laws. Please consult your employer or tax adviser regarding this issue.
SECTION 403 (B) PLANS AND ARRANGEMENTS
Purchase Payments for a tax-deferred annuity contract (including salary
reduction contributions) may be made by an employer for employees under annuity
plans adopted by public educational organizations and certain organizations
which are tax exempt under Section 501 (c) (3) of the Code. Within statutory
limits ($14,000 in 2005, $15,000 in 2006), such salary reduction contributions
are not currently includable in the gross income of the participants. Additional
"catch-up contributions" may be made by individuals age 50 or over. Increases in
the value of the Contract attributable to these Purchase Payments are similarly
not subject to current taxation. Instead, both the contributions to the
tax-sheltered annuity and the income in the Contract are taxable as ordinary
income when distributed.
An additional tax of 10% will apply to any taxable distribution received by the
participant before the age of 59 1/2, except when due to death, disability, or
as part of a series of payments for life or life expectancy, or made after the
age of 55 with separation from service. There are other statutory exceptions
that may apply in certain situations.
Amounts attributable to salary reductions made to a tax-sheltered annuity and
income thereon may not be withdrawn prior to attaining the age of 59 1/2,
separation from service, death, total and permanent disability, or in the case
of hardship as defined by federal tax law and regulations. Hardship withdrawals
are available only to the extent of the salary reduction contributions and not
from the income attributable to such contributions. These restrictions do not
apply to assets held generally as of December 31, 1988.
Distributions must begin by April 1st of the calendar year following the later
of the calendar year in which the participant attains the age of 70 1/2 or the
calendar year in which the Participant retires. Certain other mandatory
distribution rules apply at the death of the participant.
Certain distributions, including most partial or full redemptions or
"term-for-years" distributions of less than 10 years, are eligible for direct
rollover to another 403 (b) contract, certain qualified plans or to an
Individual Retirement Arrangement (IRA) without federal income tax or
withholding.
To the extent an eligible rollover distribution is not directly rolled over to
another 403 (b) contract, an IRA or eligible qualified contract, 20% of the
taxable amount must be withheld. In addition, current tax may be avoided on
eligible rollover distributions which were not directly transferred to a
qualified retirement program if the participant makes a rollover to a qualified
retirement plan or IRA within 60 days of the distribution.
Distributions in the form of annuity payments are taxable to the participant or
Beneficiary as ordinary income in the year of receipt, except that any
distribution that is considered the participant's "investment in the Contract"
is treated as a return of capital and is not taxable.
QUALIFIED PENSION AND PROFIT-SHARING PLANS
Like most other contributions made under a qualified pension or profit-sharing
trust described in Section 401 (a) of the Code and exempt from tax under Section
501 (a) of the Code, a Purchase Payment made by an employer (including salary
reduction contributions under Section 401(k) of the Code) is not currently
taxable to the participant and increases in the value of a contract are not
subject to taxation until received by a participant or Beneficiary. For 2005,
the applicable limits are $42,000 for total contributions and $14,000 for salary
reduction contributions made pursuant to Code Section 401(k). Additional
"catch-up contributions" may be made by individuals age 50 or over.
Distributions in the form of annuity payments are taxable to the participant or
Beneficiary as ordinary income in the year of receipt, except that any
distribution that is considered the participant's "investment in the contract"
is treated as a return of capital and is not taxable. Certain eligible rollover
distributions including most partial and full surrenders or term-for-years
distributions of less than 10 years are eligible for direct rollover to an
eligible retirement plan or to an IRA without federal income tax withholding.
15
If a distribution that is eligible for rollover is not directly rolled over to
another qualified retirement plan or IRA, 20% of the taxable amount must be
withheld. In addition, current tax may be avoided on eligible rollover
distributions that were not directly transferred to a qualified retirement
program if the participant makes a rollover contribution to a qualified
retirement plan or IRA within 60 days of the distribution.
Distributions must begin by April Ist of the calendar year following the later
of the calendar year in which you attain age 70 1/2 or the calendar year in
which you retire, except that if you are a 5% owner as defined in Code Section
416(i) (1) (B), distributions must begin by April Ist of the calendar year
following the calendar year in which you attain age 70 1/2. Certain other
mandatory distribution rules apply on the death of the participant.
An additional tax of 10% will apply to any taxable distribution received by the
participant before the age of 59 1/2, except by reason of death, disability or
as part of a series of payments for life or life expectancy, or at early
retirement at or after the age of 55. There are other statutory exceptions which
may apply in certain situations. Amounts attributable to salary reduction
contributions under Code Section 401(k) and income thereon may not be withdrawn
prior to severance from employment, death, total and permanent disability,
attainment of age 59 1/2, or in the case of hardship.
INDIVIDUAL RETIREMENT ANNUITIES
To the extent of earned income for the year and not exceeding the applicable
limit for the taxable year, an individual may make deductible contributions to
an individual retirement annuity (IRA). The applicable limit ($2,000 per year
prior to 2002) has been increased by the Economic Growth and Tax Relief
Reconciliation Act of 2001 ("EGTRRA"). The limit is $3,000 for calendar years
2002-2004, $4,000 for calendar years 2005-2007, and will be indexed for
inflation in years subsequent to 2008. (Note: The minimum Purchase Payment
allowed for this Contract is $5,000.) Additional "catch-up contributions" may be
made to an IRA by individuals age 50 or over. There are certain limits on the
deductible amount based on the adjusted gross income of the individual and
spouse based on their participation in a retirement plan. If an individual is
married and the spouse is not employed, the individual may establish IRAs for
the individual and spouse. Purchase Payments may then be made annually into IRAs
for both spouses in the maximum amount of 100% of earned income up to a combined
limit based on the individual limits outlined above.
Partial or full distributions are treated as ordinary income, except that
amounts contributed after 1986 on a non-deductible basis are not includable in
income when distributed. An additional tax of 10% will apply to any taxable
distribution from the IRA that is received by the participant before the age of
59 1/2 except by reason of death, disability or as part of a series of payments
for life or life expectancy. Distributions must commence by April 1st of the
calendar year after the close of the calendar year in which the individual
attains the age of 70 1/2. Certain other mandatory distribution rules apply on
the death of the individual. The individual must maintain personal and tax
return records of any non-deductible contributions and distributions.
Section 408 (k) of the Code provides for the purchase of a Simplified Employee
Pension (SEP) plan. A SEP is funded through an IRA with an annual employer
contribution limit of $40,000 for each participant.
ROTH IRAS
Effective January 1, 1998, Section 408A of the Code permits certain individuals
to contribute to a Roth IRA. Eligibility to make contributions is based upon
income, and the applicable limits vary based on marital status and/or whether
the contribution is a rollover contribution from another IRA or an annual
contribution. Contributions to a Roth IRA, which are subject to certain
limitations, (similar to the annual limits for traditional IRAs), are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A conversion of "traditional" IRA to a Roth IRA may be
subject to tax and other special rules apply. You should consult a tax adviser
before combining any converted amounts with other Roth IRA contributions,
including any other conversion amounts from other tax years.
Qualified distributions from a Roth IRA are tax-free. A qualified distribution
requires that the Roth IRA has been held for at least 5 years, and the
distribution is made after age 59 1/2, on death or disability of the owner, or
for a limited amount ($10,000) for a qualified first time home purchase for the
owner or certain relatives. Income tax and a 10% penalty tax may apply to
distributions made (1) before age 59 1/2 (subject to certain exceptions) or (2)
during five taxable years starting with the year in which the first contribution
is made to the Roth IRA.
16
SECTION 457 PLANS
Section 457 of the Code allows employees and independent contractors of state
and local governments and tax-exempt organizations to defer a portion of their
salaries or compensation to retirement years without paying current income tax
on either the deferrals or the earnings on the deferrals. Such deferrals are
subject to limits similar to those applicable to 403(b) and 401(k) plans.
The Owner of contracts issued under Section 457 plans by non-governmental
employers is the employer or a contractor of the participant and amounts may not
be made available to participants (or beneficiaries) until separation from
service, retirement or death or an unforeseeable emergency as determined by
Treasury Regulations. The proceeds of annuity contracts purchased by Section 457
plans are subject to the claims of general creditors of the employer or
contractor. A different rule applies with respect to Section 457 plans that are
established by governmental employers. The contract must be for the exclusive
benefit of the plan participants (and their beneficiaries), and the governmental
employer (and their creditors) must have no claim on the contract.
Distributions must begin by April 1st of the calendar year following the later
of the calendar year in which the participant attains the age of 70 1/2 or the
calendar year in which the participant retires. Certain other mandatory
distribution rules apply upon the death of the participant.
All distributions from plans that meet the requirements of Section 457 of the
Code are taxable as ordinary income in the year paid or made available to the
participant or Beneficiary.
NONQUALIFIED ANNUITIES
Individuals may purchase tax-deferred annuities without any limits. The Purchase
Payment receives no tax benefit, deduction or deferral, but taxes on the
increases in the value of the Contract are generally deferred until
distribution. Generally, if an annuity is owned other than by an individual, the
owner will be taxed each year on the increase in the value of the Contract. An
exception applies for Purchase Payments made before March 1, 1986. In addition,
for Contracts issued after April 22, 1987, all deferred increases in value will
be includable annually in the income of an Owner when that Owner transfers the
Contract without adequate considerations.
The federal tax law requires nonqualified annuity contracts issued on or after
January 19, 1985 to meet minimum mandatory distribution requirements upon the
death of the Contract Owner. Failure to meet these requirements will cause the
succeeding Contract Owner or Beneficiary to lose the tax benefits associated
with annuity contracts, i.e., primarily the tax deferral prior to distribution.
The distribution required depends upon whether an Annuity Option is elected or
whether the succeeding Owner is the surviving spouse. Contracts will be
administered by the Company in accordance with these rules.
If two or more nonqualified annuity contracts are purchased from the same
insurer within the same calendar year, such annuity contracts will be aggregated
for federal income tax purposes. As a result, distributions from any of them
will be taxed based upon the amount of income in all of the same calendar year
series of annuities. This will generally have the effect of causing taxes to be
paid sooner on the deferred gain in the contracts.
Those receiving partial distributions made before annuitization of a contract
will generally be taxed on an income-first basis to the extent of income in the
Contract. Certain pre-August 14, 1982 deposits into a nonqualified annuity
contract that have been placed in the Contract by means of a tax-deferred
exchange under Section 1035 of the Code may be withdrawn first without income
tax liability. This information on deposits must be provided to the Company by
the other insurance company at the time of the exchange. There is income in the
Contract generally to the extent the Cash Value exceeds the investment in the
Contract. The investment in the Contract is equal to the amount of premiums paid
less any amount received previously that was excludable from gross income. Any
direct or indirect borrowing against the value of the Contract or pledging of
the Contract as security for a loan will be treated as a cash withdrawal under
the tax law.
With certain exceptions, the law will impose an additional tax if a Contract
Owner makes a withdrawal of any amount under the Contract that is allocable to
an investment made after August 13, 1982. The amount of the additional tax will
be 10% of the amount includable in income by the Contract Owner because of the
withdrawal. The additional tax will not be imposed if the amount is received on
or after the Contract Owner reaches the age of 59 1/2, or if the amount is one
of a series of substantially equal periodic payments made for life or life
expectancy of the taxpayer. The additional tax will not be imposed if the
withdrawal or partial surrender follows the death or disability of the Contract
Owner.
17
Code Section 1035 provides that, if certain conditions are met, no gain or loss
is recognized when an annuity contract is received in exchange for a life,
endowment, or annuity contract. Since different annuity contract have different
expenses, fees, and benefits, a tax-free exchange could result in your
investment becoming subject to higher or lower fees and expenses.
THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
Under the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended,
certain special provisions may apply to the Contract if the Owner of a Section
403 (b) plan Contract or the owner of a contract issued to certain qualified
plans requests that the Contract be issued to conform to ERISA or if the Company
has notice that the Contract was issued pursuant to a plan subject to ERISA.
ERISA requires that certain Annuity Options, withdrawals or other payments and
any application for a loan secured by the Contract may not be made until the
Participant has filed a Qualified Election with the plan administrator. Under
certain plans, ERISA also requires that a designation of a Beneficiary other
than the participant's spouse be deemed invalid unless the participant has filed
a Qualified Election.
A Qualified Election must include either the written consent of the
Participant's spouse, notarized or witnessed by an authorized plan
representative, or the participant's certification that there is no spouse or
that the spouse cannot be located.
The Company intends to administer all contracts to which ERISA applies in a
manner consistent with the direction of the plan administrator regarding the
provisions of the plan, in accordance with applicable law. Because these
requirements differ according to the plan, a person contemplating the purchase
of an annuity contract should consider the provisions of the plan.
FEDERAL INCOME TAX WITHHOLDING
The portion of a distribution that is taxable income to the recipient will be
subject to federal income tax withholding, generally pursuant to Section 3405 of
the Code. The application of this provision is summarized below.
1. ELIGIBLE ROLLOVER DISTRIBUTION FROM SECTION 403(B) PLANS OR
ARRANGEMENTS, FROM QUALIFIED PENSION AND PROFIT-SHARING PLANS, OR
FROM 457 PLANS SPONSORED BY GOVERNMENTAL ENTITIES
There is a mandatory 20% tax withholding for plan distributions
that are eligible for rollover to an IRA or to another retirement
plan but that are not directly rolled over. A distribution made
directly to a participant or Beneficiary may avoid this result if:
(a) a periodic settlement distribution is elected based upon a
life or life expectancy calculation, or
(b) a complete term-for-years settlement distribution is elected
for a period of ten years or more, payable at least annually,
or
(c) a minimum required distribution as defined under the tax law
is taken after the attainment of the age of 70 1/2 or as
otherwise required by law.
A distribution including a rollover that is not a direct rollover
will require the 20% withholding, and the 10% additional tax
penalty on premature withdrawals may apply to any amount not added
back in the rollover. The 20% withholding may be recovered when the
participant or Beneficiary files a personal income tax return for
the year if a rollover was completed within 60 days of receipt of
the funds, except to the extent that the participant or spousal
Beneficiary is otherwise underwithheld or short on estimated taxes
for that year.
2. OTHER NON-PERIODIC DISTRIBUTIONS (FULL OR PARTIAL REDEMPTIONS)
To the extent not subject to the mandatory 20% withholding as
described in (1) above, the portion of a nonperiodic distribution
which constitutes taxable income will be subject to federal income
tax withholding, to the extent such aggregate distributions exceed
$200 for the year, unless the recipient elects not to have taxes
withheld. If an election to opt out of withholding is not provided,
10% of the taxable portion of the distribution will be withheld as
federal income tax; provided that the recipient may elect any other
percentage. Election forms will be provided at the time
distributions are requested. This form of withholding applies to
all annuity programs.
18
3. PERIODIC DISTRIBUTIONS (DISTRIBUTIONS PAYABLE OVER A PERIOD GREATER
THAN ONE YEAR)
The portion of a periodic distribution that constitutes taxable
income will be subject to federal income tax withholding under the
wage withholding tables as if the recipient were married claiming
three exemptions. A recipient may elect not to have income taxes
withheld or have income taxes withheld at a different rate by
providing a completed election form. Election forms will be
provided at the time distributions are requested. This form of
withholding applies to all annuity programs.
Recipients who elect not to have withholding made are liable for payment of
federal income tax on the taxable portion of the distribution. All recipients
may also be subject to penalties under the estimated tax payment rules if
withholding and estimated tax payments are not sufficient.
Recipients who do not provide a social security number or other taxpayer
identification number will not be permitted to elect out of withholding.
Additionally, United States citizens residing outside of the country, or U.S.
legal residents temporarily residing outside the country, are subject to
different withholding rules and cannot elect out of withholding.
TAX ADVICE
Because of the complexity of the law and the fact that the tax results will vary
according to the factual status of the individual involved, a person
contemplating purchase of an annuity contract and/or an Owner, participant or
Beneficiary who may make elections under a contract should consult with a
qualified tax or legal adviser prior to such purchase or the making of an
election. It should be understood that the foregoing description of the federal
income tax consequences under these contracts is not exhaustive and that special
rules are provided with respect to situations not discussed here. It should be
understood that if a tax benefited plan loses its exempt status, employees could
lose some of the tax benefits described. For further information, a qualified
tax adviser should be consulted.
PUERTO RICO TAX CONSIDERATIONS
The Puerto Rico Internal Revenue Code of 1994 (the "1994 Code") taxes
distributions from non-qualified annuity contracts differently than in the U.S.
Distributions that are not in the form of an annuity (including partial
surrenders and period certain payments) are treated under the 1994 Code first as
a return of investment. Therefore, no taxable income is recognized for Puerto
Rico tax purposes until the cumulative amount paid exceeds your tax basis. The
amount of income on annuity distributions (payable over your lifetime) is also
calculated differently under the 1994 Code. Since Puerto Rico residents are also
subject to U.S. income tax on all income other than income sourced to Puerto
Rico, and the Internal Revenue Service issued guidance in 2004 which indicated
that the income from an annuity contract issued by a U.S. life insurer would be
considered U.S. source income, the timing of recognition of income from an
annuity contract could vary between the two jurisdictions. Although the 1994
Code provides a credit against the Puerto Rico income tax for U.S. income taxes
paid, an individual may not get full credit because of the timing differences.
You should consult with a personal tax adviser regarding the tax consequences of
purchasing an annuity contract and/or any proposed distribution, particularly a
partial distribution or election to annuitize.
NON-RESIDENT ALIENS
Distributions to non-resident aliens ("NRAs") are subject to special and complex
tax and withholding rules under the Code with respect to U.S. source income,
some of which are based upon the particular facts and circumstances of the
Contract Owner, the beneficiary and the transaction itself. As stated above, the
IRS has taken the position that income from the Contract received by NRAs is
considered U.S. source income. In addition, Annuity Payments to NRAs in many
countries are exempt from U.S. tax (or subject to lower rates) based upon a tax
treaty, provided that the Contract Owner complies with the applicable
requirements. NRAs should seek guidance from a tax adviser regarding their
personal situation.
19
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, each Company has filed with the Commission a
registration statement (the "Registration Statement") relating to the Contracts
offered by this prospectus. This prospectus has been filed as a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement and the exhibits, and reference is hereby made to
such Registration Statement and exhibits for further information relating to the
Company and the Contracts. The Registration Statement and the exhibits may be
inspected and copied as described above. Although the Company furnishes
certificate and contract holders with the annual reports on Form 10-K for the
year ended December 31, 2004 the Company does not plan to furnish subsequent
financial reports.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
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Each Company's latest annual report on Form 10-K has been filed with the
Commission. They are incorporated by reference into this Prospectus and copies
must accompany this Prospectus.
The Forms 10-K for the period ended December 31, 2004 contain additional
information about the Company, including audited financial statements for the
Company's latest fiscal year. Each Company filed its Form 10-K on March 30,
2005. The Travelers Insurance Company filed its Form 10-K via Edgar File No.
33-03094. The Travelers Life and Annuity Company filed its Form 10-K via Edgar
File No. 33-58677.
If requested, the Company will furnish, without charge, a copy of any and all of
the documents incorporated by reference, other than exhibits to those documents
(unless such exhibits are specifically incorporated by reference in those
documents). You may direct your requests to The Travelers Insurance Company, One
Cityplace, Hartford, Connecticut 06103-3415, Attention: Annuity Services. The
telephone number is (800) 842-9368. You may also obtain copies of any documents,
incorporated by reference into this prospectus by accessing the Commission's
website (http: //www.sec.gov).
20
LEGAL OPINION
- --------------------------------------------------------------------------------
Legal matters in connection with federal laws and regulations affecting the
issue and sale of the Contracts described in this prospectus and the
organization of the Company, its authority to issue such Contracts under
Connecticut law and the validity of the forms of the Contracts under Connecticut
law have been passed on by the Deputy General Counsel of the Company.
EXPERTS
- --------------------------------------------------------------------------------
THE TRAVELERS INSURANCE COMPANY
The consolidated financial statements and schedules of The Travelers Insurance
Company and subsidiaries as of December 31, 2004 and 2003, and for each of the
years in the three-year period ended December 31, 2004, 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, 2004, consolidated financial statements and
schedules refer to changes in the Company's methods of accounting for certain
nontraditional long-duration contracts and for separate accounts in 2004,
variable interest entities in 2003, and for goodwill and intangible assets in
2002.
THE TRAVELERS LIFE AND ANNUITY COMPANY
The financial statements and schedules of The Travelers Life and Annuity Company
as of December 31, 2004 and 2003, and for each of the years in the three-year
period ended December 31, 2004, 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, 2004, financial statements and schedules refer to changes in the Company's
methods of accounting for certain nontraditional long-duration contracts and for
separate accounts in 2004 and goodwill and intangible assets in 2002.
21
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APPENDIX A
- --------------------------------------------------------------------------------
Plans eligible to purchase the Contract are pension and profit sharing plans
qualified under Section 401 (a) of the Internal Revenue Code, Section 403 (b)
ERISA plans, and eligible state deferred compensation plans under Section 457 of
the Code ("Qualified Plans").
To apply for a group annuity contract, the trustee or other applicant must
complete an application or purchase order for the Group Annuity Contract and
make a Purchase Payment. A group annuity contract will then be issued to the
applicant. While no Certificates are issued, each Purchase Payment and the
Account established thereby, are confirmed to the Contract Owner. Each account
will have its own optional Guarantee Period and Guaranteed Interest Rate.
Surrenders under the Group Annuity Contract may be made at the election of the
Contract Owner, from the Account established under the Contract. Account
surrenders are subject to the same limitations, adjustments and charges as
surrenders made under a certificate (see "Surrenders"). Surrender Values may be
taken in cash or applied to purchase annuities for the Contract Owners'
Qualified Plan participants.
Because there are no individual participant accounts, the qualified group
annuity contract issued in connection with a Qualified Plan does not provide for
death benefits. Annuities purchased for Qualified Plan participants may provide
for a payment upon the death of the Annuitant depending on the option chosen
(see "Annuity Options"). Additionally, since there are no Annuitants prior to
the actual purchase of an Annuity by the Contract Owner, the provisions
regarding the Annuity Commencement Date are not applicable.
A-1
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APPENDIX B
- --------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENT
The application of a Market Value Adjustment may adjust up or down your account
value. The following describes the amount the Market Value Adjustment applies
to:
Maturity Value = [(CURRENT ACCOUNT VALUE--FI) x (1 + iG) (t)/(365)]
1
Market Adjusted Value = [(MATURITY VALUE) x ------------------]
(1 + iC) (t)/(365)
o where: "FI" is the available free interest credited for the Previous
Certificate Year, "iG" is the Guaranteed Credited rate as stated on the
contract specification page, "iC" is the Guaranteed Interest Rate for a
Guarantee period of "t" days, where "t" is the number of days remaining
in the Guarantee Period adjusted for leap years.
The total amount available to customers, prior to any charges or premium taxes,
is: Market Adjusted Value + Free Interest.
The current Guaranteed Interest Rate is declared periodically by the Company and
is based on the rate (straight line interpolation between whole years) which the
Company is then paying on premiums paid under this class of Contracts with the
same maturity date as the Purchase Payment to which the formula is being
applied.
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $50,000.00
Guarantee Period: 5 years
Guaranteed Interest Rate: 5.50% Effective Annual Rate
The following examples illustrate how the Market Value Adjustment may affect the
values of your Contract. In these examples, a Purchase Payment of $50,000 was
made to the Contract. After one year of the guarantee period, the Account Value
(i.e., the Purchase Payment plus accumulated interest) would be $52,750.
The Market Adjusted Value is calculated based on your then current Account Value
less any available free interest, and is based on a rate the Company is
crediting at the time on new Purchase Payments of the same term-to-maturity as
the time remaining in your Guarantee Period. One year after the Purchase Payment
was made, you would have four years remaining in the five-year Guarantee Period.
EXAMPLE OF A NEGATIVE MARKET VALUE ADJUSTMENT
A negative Market Value Adjustment results when interest rates have increased
since the date the Purchase Payment was made. Assume interest rates have
increased one year after the Purchase Payment and the Company is crediting 7.00%
for a four-year Guarantee Period.
The Maturity Value would be:
$61,941.23 = ($52,750.00 - $2,750) x (1 + .055)(4)
The Market Adjusted Value would be:
1
$47,254.67 = [($61,941.23 x ------------
(1 + .07)(4)
B-1
Total amount available, prior to charges and premium taxes:
$50,004.67 = $47,254.67 + $2,750.00
EXAMPLE OF A POSITIVE MARKET VALUE ADJUSTMENT
A positive Market Value Adjustment results when interest rates have decreased
since the date the Purchase Payment was made. Assume interest rates have
decreased one year after the Purchase Payment and the Company is crediting 3.50%
for a four-year Guarantee Period.
The Maturity Value would be:
$61,941.23 = ($52,750.00 - $2,750) x (1 + .055)(4)
The Market Adjusted Value would be:
1
$53,978.21 = [($61,941.23 x -------------
(1 + .035)(4)
Total amount available, prior to charges and premium taxes:
$56,728.21 = $53,978.21 + $2,750.00
These examples illustrate what may happen when interest rates increase or
decrease from the beginning of a Guarantee Period. A particular Market Value
Adjustment may have a greater or lesser impact than that shown in these
examples, depending on how much interest rates have changed since the beginning
of a Guarantee Period and the amount of time remaining to maturity. In addition,
a surrender charge may be assessed on surrenders made before the Purchase
Payment has been under the Contract for five years.
B-2
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes _X_ No ___
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2).
Yes ___ No _X_
As of the date hereof, there were outstanding 40,000,000 shares of common stock,
par value $2.50 per share, of the registrant, all of which were owned by
Citigroup Insurance Holding Corporation, an indirect wholly owned subsidiary of
Citigroup Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER PART I PAGE
1. Business ......................................................... 2
A. General ...................................................... 2
B. Business by Segment
Travelers Life & Annuity ................................. 2
Primerica ................................................ 4
C. Insurance Regulations ........................................ 4
2. Properties ....................................................... 6
3. Legal Proceedings ................................................ 6
4. Submission of Matters to a Vote of Security Holders .............. 8
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................................. 8
6. Selected Financial Data .......................................... 8
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 9
7A. Quantitative and Qualitative Disclosures About Market Risk ....... 16
8. Financial Statements and Supplementary Data ...................... 19
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................... 67
9A. Controls and Procedures .......................................... 67
9B. Other Information ................................................ 67
PART III
10. Directors and Executive Officers of the Registrant ............... 67
11. Executive Compensation ........................................... 67
12. Security Ownership of Certain Beneficial Owners and Management ... 67
13. Certain Relationships and Related Transactions ................... 67
14. Principal Accountant Fees and
Services ......................................................... 67
PART IV
15. Exhibits and Financial Statement Schedules ....................... 69
Exhibit Index .................................................... 70
Signatures ....................................................... 71
Index to Financial Statements and Financial Statement Schedules .. 72
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
(TLA) and Primerica. The primary insurance entities of the Company are TIC and
its subsidiaries The Travelers Life and Annuity Company (TLAC), included in the
TLA 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.
On January 31, 2005, Citigroup announced that it had agreed to sell its Life
Insurance and Annuity businesses, including the Company, to MetLife, Inc. The
transaction is subject to certain domestic and international regulatory
approvals, as well as other customary conditions to closing. The Company's
Primerica segment and certain other assets will remain with Citigroup. The
transaction is expected to close this summer.
See Note 17 of Notes to Consolidated Financial Statements. The Company filed
Form 8-K regarding this proposed transaction on February 2, 2005.
BUSINESS BY SEGMENT
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 Company has a license from St. Paul Travelers 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. See Note 14 in the Notes to Consolidated Financial Statements. 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, structured
settlements and funding agreements.
2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Individual fixed and variable deferred 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.
Retail 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, Inc. (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 is the
leading seller of retail annuities among the Company's affiliates and its share
of total individual annuity premiums and deposits was 27% in 2004. Other
affiliated retail annuities premiums and deposits in 2004 were: PFS - 17%, SB -
16% and Citibank - 9%. The non-affiliated channels accounted for 31% 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 independent financial
professionals and account for 77% of total 2004 life sales. SB and Citibank
accounted for 8% and 5%, respectively, of total individual life sales for 2004.
Institutional 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, Canada, 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 the Primerica segment. Their
primary product is individual term life insurance marketed through a sales force
composed of approximately 106,000 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. TLAC had four
ratios fall outside of the usual range for December 31, 2004 statutory financial
statements filed on March 1, 2005. TLAC had one ratio and three ratios fall
outside the usual range for December 31, 2003 and 2002, respectively. TLAC was
not subject to any regulatory action by any state insurance department or the
NAIC with respect to these IRIS ratios for the 2003 and 2002 statutory financial
statements.
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, 2004, 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 $908 million is available by the end of the year 2005 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 $263 million to TIC in 2005 without prior
approval of the Commonwealth of Massachusetts Insurance Department.
5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The Company's 2004 dividends were paid in the following amounts: $467.5 million
on March 30; $152.5 million on June 30; and $152.5 million on September 30. Due
to the timing of the payments, these dividends were considered extraordinary.
In addition to the aforementioned quarterly dividends, the Company also made a
dividend consisting of all the issued and outstanding shares of The Travelers
Life and Annuity Reinsurance Company (TLARC) on December 15, 2004. TLARC was
valued at $250,000 and was considered to be an ordinary dividend. See Notes 4
and 13 for further discussion of TLARC.
In December 2004, the Company requested and received prior approval from the
State of Connecticut Insurance Department to pay an extraordinary dividend on
January 3, 2005. 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 $302.5
million payable on January 3, 2005 exceeded the ordinary dividend limitation by
approximately $167 million, based on the 2005 dividend limit of $908 million.
The State of Connecticut Insurance Department approved the request on December
19, 2004. TIC paid the dividend to its parent on January 3, 2005.
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.
Other leasehold interests of the Company include approximately 939,000 square
feet of office space in 24 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 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 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 nationwide class action. The class action claims against TLA are
6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
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.
In 2003 and 2004, 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.
During 2004 the SEC requested additional information about the Company's
variable product operations on market timing, late trading and revenue sharing,
and the SEC, the National Association of Securities Dealers and the New York
Insurance Department have made inquiries into these issues and other matters
associated with the sale and distribution of insurance products. In addition,
like many insurance companies and agencies, in 2004 and 2005 the Company
received inquiries from certain state Departments of Insurance regarding
producer compensation and bidding practices. The Company is cooperating fully
with all of these requests and is not able to predict their outcomes.
7
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, 2004. 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 $773 million and $545 million in 2004 and 2003, 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.
8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON 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.
Additional information about the Company is available on the Citigroup website
at HTTP://WWW.TRAVELERSLIFE.COM by selecting the "Financial Information" page
and selecting "SEC Filings."
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
Deferred acquisition costs (DAC) represent costs that are deferred and amortized
over the estimated life of the related insurance policies. DAC principally
includes 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, and payout annuities is
amortized employing a level effective yield methodology per SFAS 91 as indicated
by AICPA Practice Bulletin 8, generally over 10-15 years. 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 universal life and COLI is amortized in relation to estimated gross
profits from surrender charges, investment, mortality, and expense margins per
SFAS 97, generally over 16-25 years. 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.
9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
DAC relating to traditional life, including term insurance, and health insurance
is amortized in relation to anticipated premiums per SFAS 60, generally over
5-20 years. 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.
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 and are prepared in
accordance with industry standards and accounting principles generally accepted
in the United States of America (GAAP). 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 1.7% to 8.7%,
with a weighted average rate of 6.5% 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 5.3%.
INVESTMENTS IN FIXED MATURITIES
Fixed maturities, which comprise 78% and 75% of total investments at December
31, 2004 and 2003, 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 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 other-than-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
Premium income is reported for individual payout annuities, group close-out
annuities, whole life and term insurance. The annuities premiums are recognized
as revenue when collected. The life 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.
10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
CONSOLIDATED OVERVIEW
FOR THE YEARS ENDED DECEMBER 31, 2004 2003
- -------------------------------- ------ ------
($ IN MILLIONS)
Revenues $6,495 $6,139
Insurance benefits and interest credited 3,276 3,350
Operating expenses 1,136 960
------ ------
Income before taxes 2,083 1,829
Income taxes 602 471
------ ------
Net income $1,481 $1,358
====== ======
Net income in 2004 increased 9% from 2003, primarily attributable to increased
revenues due to earnings from business volume growth and improved retained
investment margins. These increases were partially offset by higher operating
expenses and higher DAC amortization and lower investment yields. See the
detailed description of each business segment for additional information.
TRAVELERS LIFE & ANNUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 2003
- ------------------------------- ------ ------
($ IN MILLIONS)
Revenues $4,725 $4,479
Insurance benefits and interest credited 2,716 2,816
Operating expenses 658 505
------ ------
Income before taxes 1,351 1,158
Income taxes 361 240
------ ------
Net income $ 990 $ 918
====== ======
Net income of $990 million in 2004, which increased 8% from $918 million in
2003, was primarily attributable to earnings from higher fee revenues and net
investment income (NII) from increased business volumes. These increases were
partially offset by higher operating expenses, higher DAC amortization and lower
investment yields, as well as a $30 million Dividends Received Deduction (DRD)
tax benefit related to prior periods in 2004, versus a $50 million DRD tax
benefit relating to prior periods in 2003.
TLA revenues increased to $4.7 billion in 2004, 5% higher than 2003. This
increased revenue was driven by NII and fee revenue, partially offset by a
decline in premiums.
TLA NII increased 10% to $3,012 million in 2004 from $2,743 million in 2003. The
increase was driven by a larger invested asset base from higher business volumes
and favorable equity and real estate returns.
11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The following table shows net written premiums and deposits by product line for
each of the years ended December 31, 2004 and 2003. The majority of the annuity
business and a substantial portion of the life business written by TLA are
accounted for as investment contracts, with the result that the deposits
collected are reported as liabilities and are not included in revenues. Deposits
represent a statistic used for measuring business volumes, which management of
the Company uses to manage the life insurance and annuities operations, and may
not be comparable to similarly captioned measurements used by other life
insurance companies.
2004 2003
($ IN MILLIONS) Premiums Deposits Premiums Deposits
-------- -------- -------- --------
Retail annuities
Fixed $ -- $ 582 $ -- $ 535
Variable -- 4,977 -- 3,983
Individual payout 69 36 26 28
----- -------- ------- --------
Total retail annuities 69 5,595 26 4,546
Institutional annuities 707 7,284 908 6,494
Individual life insurance:
Direct periodic premiums & deposits 136 865 140 686
Single premium deposits -- 745 -- 405
Reinsurance (51) (112) (40) (99)
----- -------- ------- --------
Total individual life insurance 85 1,498 100 992
Other 50 -- 48 --
----- -------- ------- --------
Total $ 911 $ 14,377 $ 1,082 $ 12,032
===== ======== ======= ========
Retail annuity deposits increased 23% in 2004 to $5.6 billion from $4.5 billion
in 2003, reflecting strong variable annuity sales due to improved equity market
conditions in 2004 and sales of the guaranteed minimum withdrawal benefit
feature of the variable annuity product. Retail annuity account balances and
benefit reserves were $37.2 billion at December 31, 2004, up from $32.9 billion
at December 31, 2003. This increase reflects equity market growth in variable
annuity investments of $2.3 billion in 2004 and $2.1 billion of net sales from
good in-force retention.
Institutional annuities deposits (excluding the Company's employee pension plan
deposits) in 2004 increased 12% to $7.3 billion from 2003, reflecting higher
fixed and variable rate guaranteed investment contracts (GIC) sales. 2003
included a total of $1.0 billion fixed rate GIC sales to The Federal Home Loan
Bank of Boston. Institutional annuities premiums decreased 22% to $707 million
in 2004, primarily related to a one-time group close-out sale of $290 million in
2003. Group annuity account balances and benefit reserves reached $27.9 billion
at December 31, 2004, an increase of $2.7 billion, or 11%, from $25.2 billion at
December 31, 2003, reflecting continued strong GIC sales.
Deposits for the life insurance business increased 51% to $1.5 billion from
2003. This increase was related to an 84% increase in single premium sales and
higher direct periodic deposits for individual life insurance in 2004, driven by
independent agent high-end estate planning, partially offset by a 54% decrease
in COLI sales. Life insurance in force was $100.8 billion at December 31, 2004
up from $89.5 billion at December 31, 2003.
During 2004, TLA expenses increased primarily due to higher DAC amortization and
volume-related insurance expenses.
12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The amortization of capitalized DAC is a significant component of TLA expenses.
TLA's recording of DAC amortization varies based upon product type. DAC for
deferred annuities, both fixed and variable, and payout annuities employs a
level yield methodology as described in SFAS 91. DAC for universal life (UL) and
COLI is amortized in relation to estimated gross profits as described in SFAS
97, with traditional life, including term insurance and other products amortized
in relation to anticipated premiums as per SFAS 60. The following is a summary
of capitalized DAC by type:
Deferred & Payout Traditional Life
($ IN MILLIONS) Annuities UL & COLI & Other Total
- ---------------------------------------------------------------------------------------------------------
Balance January 1, 2003 $ 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
Commissions and expenses deferred 448 342 20 810
Amortization expense (273) (51) (20) (344)
Underlying lapse and interest rate adjustment (17) -- -- (17)
Pattern of estimated gross profit adjustment -- (39) -- (39)
------------------------------------------------------
Balance December 31, 2004 $ 1,639 $ 1,018 $ 114 $ 2,771
- ---------------------------------------------------------------------------------------------------------
DAC capitalization increased $227 million or 39% in 2004 over 2003 driven by the
$121 million or 55% increase in UL and COLI, and the $108 million or 32%
increase in deferred and payout annuities, which is consistent with the increase
in premiums and deposits for those lines of business. The increase in
amortization expense in 2004 was primarily driven by business volume growth in
deferred annuities and UL, and also included a one-time adjustment for the
change in pattern in the estimated gross profits on the UL business and a
one-time increase in deferred annuities DAC amortization due to changes in
underlying lapse and expense adjustments.
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.
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. The retail annuities
business is interest rate and equity market sensitive. TLA's variable annuities
offer products with guaranteed features that are equity market sensitive. The
guaranteed minimum death benefit feature pays benefits when at the time of death
of a contractholder the account value is below the guaranteed amount. Another
guaranteed feature offered is a guaranteed minimum withdrawal benefit, which is
considered an embedded derivative. Exposure increases with the decline in equity
markets and exposure decreases with equity market growth. This creates earnings
volatility because the embedded derivative is marked to market through income.
TLA has entered into an alternative hedging strategy to reduce the earnings
volatility.
13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Citigroup, the Company's ultimate parent, has agreed to sell its Life Insurance
and Annuities business to MetLife, Inc. TIC and TLA are included in Citigroup's
Life Insurance and Annuities business. The transaction is expected to close this
summer. At that time TLA, after giving effect to certain dispositions to be
effected prior to the closing, will become part of MetLife, Inc. See Note 17 of
Notes to Consolidated Financial Statements.
Due to the proposed transaction, there may be a negative impact on institutional
annuity sales in 2005, in particular fixed rate GICs, as potential customers
assess the concentration risk associated with the combination of MetLife, Inc.
and TLA.
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, producer
compensation 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 16.
PRIMERICA
FOR THE YEARS ENDED DECEMBER 31, 2004 2003
- -------------------------------- ------ ------
($ IN MILLIONS)
Revenues $1,770 $1,660
Insurance benefits 560 534
Operating expenses 478 455
------ ------
Income before taxes 732 671
Income taxes 241 231
------ ------
Net income $ 491 $ 440
====== ======
Net income increased 12% to $491 million from $440 million in 2003. The increase
in net income reflects growth in life insurance in force from $503.6 billion at
December 31, 2003 to $545.4 billion at December 31, 2004 and higher NII from a
larger invested capital base. These were partially offset by volume-related
increases in DAC amortization. Other general expense increased slightly,
consistent with the increase of life insurance in-force. Mortality experience
was favorable in 2004, compared to 2003, 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.
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. DAC amortization
increased from $235 million in 2003 to $249 in 2004, due to growth in sales and
in-force business.
14
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The following is a summary of capitalized DAC:
($ IN MILLIONS)
------------------------------------------------
Balance January 1, 2003 $ 1,892
Deferred expenses and other 377
Amortization expense (235)
------------------------------------------------
Balance December 31, 2003 2,034
------------------------------------------------
Deferred expenses and other 393
Amortization expense (249)
------------------------------------------------
Balance December 31, 2004 $ 2,178
------------------------------------------------
EARNED PREMIUMS, NET OF REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2004 2003
- -------------------------------- ------ ------
($ IN MILLIONS)
Individual term life $1,243 $1,179
Other 72 66
------ ------
$1,315 $1,245
====== ======
The total face amount of term life insurance issued was $91.4 billion in 2004
compared to $82.2 billion in 2003. This increase in term life production
resulted from the increase in the productivity of licensed life representatives.
Life insurance in force at year-end 2004 reached $545.4 billion, up from $503.6
billion at year-end 2003, reflecting consistent in-force policy retention and
higher volume of sales.
PRIMERICA OUTLOOK
Over the last few years, training programs, primarily sales and product
training, have been developed and deployed 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 16.
Citigroup, the Company's ultimate parent, has agreed to sell its Life Insurance
and Annuities business to MetLife, Inc. TIC, Primerica's direct parent, is
included in Citigroup's Life Insurance and Annuities business. Primerica and its
subsidiaries, through a dividend, will remain part of Citigroup.
15
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 proposed sale to MetLife, Inc., and the transactions to be effected
before that sale, may have on the Company and its prospects, 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, 2004.
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,
2003. 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.
16
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, 2004 and 2003. The current duration of invested assets as of December 31,
2004 is 4.6 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 December 31, 2004 and 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 December 31,
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 $1.9 billion and $1.7 billion based on a 100 basis
point increase in interest rates as of December 31, 2004 and 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
December 31, 2004 and 2003 is not material.
MARKET RISK SENSITIVE INSTRUMENTS ENTERED INTO FOR TRADING PURPOSES
The Company maintains a trading portfolio consisting primarily of convertible
bonds and common stocks with carrying values of $1,360 million and $1,707
million as of December 31, 2004 and 2003, respectively, and $473 million and
$637 million of liabilities resulting from common stocks sold not yet purchased
(referred to as short sales) as of December 31, 2004 and 2003, respectively. The
primary market risk to the trading portfolio is equity risk. Assets are reported
as trading securities and liabilities are reported as trading securities sold
not yet purchased.
17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The Company's primary investment strategy is convertible bond arbitrage where
convertible bonds are paired with short sales of the common stocks of companies
issuing the convertible bonds. These positions are established and maintained so
that general changes in equity markets and interest rates should not materially
impact the value of the portfolio.
TABULAR PRESENTATION
The table below provides information about the trading portfolio's financial
instruments that are primarily exposed to equity price risk. This table presents
the fair values of these instruments as of December 31, 2004 and 2003. Fair
values are based upon quoted market prices.
($ IN MILLIONS) Fair value as of Fair value as of
- --------------- December 31, 2004 December 31, 2003
----------------- -----------------
ASSETS
Trading securities
Convertible bond arbitrage $1,110 $1,447
Other 250 260
------ ------
$1,360 $1,707
====== ======
LIABILITIES
Trading securities sold not yet purchased
Convertible bond arbitrage $ 460 $ 629
Other 13 8
------ ------
$ 473 $ 637
====== ======
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.
18
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm..................20
Consolidated Financial Statements:
Consolidated Statements of Income for
the years ended December 31, 2004, 2003 and 2002.....................21
Consolidated Balance Sheets - December 31, 2004 and 2003.............22
Consolidated Statements of Changes in Shareholder's Equity
for the years ended December 31, 2004, 2003 and 2002.................23
Consolidated Statements of Cash Flows for
the years ended December 31, 2004, 2003 and 2002.....................24
Notes to Consolidated Financial Statements........................25-66
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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,
2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting and reporting for certain nontraditional
long-duration contracts and for separate accounts in 2004, variable interest
entities in 2003, and for goodwill and intangible assets in 2002.
/s/KPMG LLP
Hartford, Connecticut
March 28, 2005
20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
------ ------ -------
REVENUES
Premiums $2,226 $2,327 $ 1,924
Net investment income 3,348 3,058 2,936
Realized investment gains (losses) 16 37 (322)
Fee income 781 606 560
Other revenues 124 111 136
- --------------------------------------------------------------------------------
Total Revenues 6,495 6,139 5,234
- --------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,971 2,102 1,711
Interest credited to contractholders 1,305 1,248 1,220
Amortization of deferred acquisition costs 649 501 393
General and administrative expenses 487 459 407
- --------------------------------------------------------------------------------
Total Benefits and Expenses 4,412 4,310 3,731
- --------------------------------------------------------------------------------
Income from operations before federal income taxes 2,083 1,829 1,503
- --------------------------------------------------------------------------------
Federal income taxes
Current 563 360 236
Deferred 39 111 185
- --------------------------------------------------------------------------------
Total Federal Income Taxes 602 471 421
- --------------------------------------------------------------------------------
Net Income $1,481 $1,358 $ 1,082
================================================================================
See Notes to Consolidated Financial Statements.
21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
AT DECEMBER 31, 2004 2003
- --------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value
(including $2,468 and $2,170 subject to securities
lending agreements) (cost $45,314; $40,119) $ 47,715 $42,323
Equity securities, at fair value (cost $322; $323) 367 362
Mortgage loans 2,124 1,886
Policy loans 1,121 1,135
Short-term securities 3,731 3,603
Trading securities, at fair value 1,360 1,707
Other invested assets 5,005 5,188
- --------------------------------------------------------------------------------
Total Investments 61,423 56,204
- --------------------------------------------------------------------------------
Cash 246 149
Investment income accrued 606 567
Premium balances receivable 177 165
Reinsurance recoverables 4,667 4,470
Deferred acquisition costs 4,949 4,395
Separate and variable accounts 31,327 26,972
Other assets 2,448 2,426
- --------------------------------------------------------------------------------
Total Assets $105,843 $95,348
- --------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $ 34,101 $30,252
Future policy benefits and claims 16,808 15,964
Separate and variable accounts 31,327 26,972
Deferred federal income taxes 2,220 2,030
Trading securities sold not yet purchased, at fair value 473 637
Other liabilities 6,609 6,136
- --------------------------------------------------------------------------------
Total Liabilities 91,538 81,991
- --------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares
authorized, issued and outstanding
100 100
Additional paid-in capital 5,449 5,446
Retained earnings 7,159 6,451
Accumulated other changes in equity from nonowner sources 1,597 1,360
- --------------------------------------------------------------------------------
Total Shareholder's Equity 14,305 13,357
- --------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $105,843 $95,348
================================================================================
See Notes to Consolidated Financial Statements.
22
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
COMMON STOCK 2004 2003 2002
- --------------------------------------------------------------------------------
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 $ 5,446 $ 5,443 $ 3,864
Stock option tax benefit (expense) 3 3 (17)
Capital contributed by parent -- -- 1,596
- --------------------------------------------------------------------------------
Balance, end of year $ 5,449 $ 5,446 $ 5,443
================================================================================
- --------------------------------------------------------------------------------
RETAINED EARNINGS
- --------------------------------------------------------------------------------
Balance, beginning of year $ 6,451 $ 5,638 $ 5,142
Net income 1,481 1,358 1,082
Dividends to parent (773) (545) (586)
- --------------------------------------------------------------------------------
Balance, end of year $ 7,159 $ 6,451 $ 5,638
================================================================================
- --------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- --------------------------------------------------------------------------------
Balance, beginning of year $ 1,360 $ 454 $ 74
Unrealized gains, net of tax 138 817 452
Foreign currency translation, net of tax 1 4 3
Derivative instrument hedging activity
gains (losses), net of tax 98 85 (75)
- --------------------------------------------------------------------------------
Balance, end of year $ 1,597 $ 1,360 $ 454
================================================================================
- --------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- --------------------------------------------------------------------------------
Net income $ 1,481 $ 1,358 $ 1,082
Other changes in equity from nonowner sources 237 906 380
- --------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 1,718 $ 2,264 $ 1,462
================================================================================
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY
- --------------------------------------------------------------------------------
Changes in total shareholder's equity $ 948 $ 1,722 $ 2,455
Balance, beginning of year 13,357 11,635 9,180
- --------------------------------------------------------------------------------
Balance, end of year $14,305 $13,357 $11,635
================================================================================
See Notes to Consolidated Financial Statements.
23
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 2,218 $ 2,335 $ 1,917
Net investment income received 3,228 2,787 2,741
Other revenues received 901 335 384
Benefits and claims paid (1,367) (1,270) (1,218)
Interest paid to contractholders (1,294) (1,226) (1,220)
Operating expenses paid (1,646) (1,375) (1,310)
Income taxes paid (262) (456) (197)
Trading account investments (purchases),
sales, net 226 (232) 76
Other (479) (84) (105)
- --------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,525 814 1,068
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 6,833 7,446 4,459
Mortgage loans 655 358 374
Proceeds from sales of investments
Fixed maturities 7,796 15,078 15,472
Equity securities 78 124 212
Mortgage loans 52 -- --
Real estate held for sale 55 5 26
Purchases of investments
Fixed maturities (19,164) (26,766) (23,623)
Equity securities (157) (144) (134)
Mortgage loans (944) (317) (355)
Policy loans, net 14 34 39
Short-term securities (purchases) sales, net (116) 814 (1,320)
Other investments (purchases) sales, net 50 108 (69)
Securities transactions in course of
settlement, net 699 (618) 529
- --------------------------------------------------------------------------------
Net Cash Used in Investing Activities (4,149) (3,878) (4,390)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 9,619 8,326 8,505
Contractholder fund withdrawals (6,125) (4,754) (4,729)
Capital contribution by parent -- -- 172
Dividends to parent company (773) (545) (586)
- --------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 2,721 3,027 3,362
- --------------------------------------------------------------------------------
Net increase (decrease) in cash 97 (37) 40
Cash at December 31, previous year 149 186 146
- --------------------------------------------------------------------------------
Cash at December 31, current year $ 246 $ 149 $ 186
================================================================================
See Notes to Consolidated Financial Statements.
24
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).
On January 31, 2005, Citigroup announced its intention to sell its Life
Insurance and Annuities business, which includes TIC, TLAC and certain other
businesses, to MetLife, Inc. Primerica Life and its subsidiaries will remain
part of Citigroup. See Note 17.
The financial statements and accompanying footnotes of the Company are prepared
in conformity with U.S. generally accepted accounting principles (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 2004
presentation.
ACCOUNTING CHANGES
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, 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.
25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 (GMDB)
features, 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 2004, the Company capitalized sales inducements of
approximately $50.6 million in accordance with SOP 03-1. These inducements
relate to bonuses on certain products offered by the Company. For 2004,
amortization of these capitalized amounts was insignificant.
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. FIN 46 and FIN 46-R change the method
of determining
26
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
whether certain entities should be included in the Company's consolidated
financial statements. 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.
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, 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 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.
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.
27
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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" (APB 25), 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 immaterial.
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, 2004 2003 2002
($ IN MILLIONS)
- --------------------------------------------------------------------------------
Compensation expense related to As reported $2 $2 $--
stock option plans, net of tax Pro forma 5 7 9
- --------------------------------------------------------------------------------
Net income As reported $1,481 $1,358 $1,082
Pro forma 1,478 1,353 1,073
- --------------------------------------------------------------------------------
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.
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.
28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The FASB will be issuing implementation guidance related to this topic. Once
issued, the Company will evaluate the impact of adopting EITF 03-1. The
disclosures required by EITF 03-1 are included in Note 3 to the Consolidated
Financial Statements.
STOCK-BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" (SFAS 123-R), which replaces the existing SFAS 123 and supersedes APB
25. SFAS 123-R requires companies to measure and record compensation expense for
stock options and other share-based payment based on the instruments' fair
value. SFAS 123-R is effective for interim and annual reporting periods
beginning after June 15, 2005. The Company will adopt SFAS 123-R on July 1, 2005
by using a modified prospective approach. For unvested stock-based awards
granted before January 1, 2003 (APB 25 awards), the Company will expense the
fair value of the awards as at the grant date over the remaining vesting period.
The impact of recognizing compensation expense for the unvested APB 25 awards
will be immaterial in the third and fourth quarters of 2005. In addition, the
amount of additional compensation expense that will be disclosed as the impact
in the first and second quarters of 2005, as if the standard had been adopted as
of January 1, 2005, but will not be recognized in earnings, will be immaterial.
The Company continues to evaluate other aspects of adopting SFAS 123-R.
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. 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 other-than-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 is 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 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.
29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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. Cash received on impaired
loans is reported as income. In estimating fair value, the Company uses interest
rates reflecting the higher returns required in the current real estate
financing market.
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.
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.
Cash includes certificates of deposits and other time deposits with original
maturities of less than 90 days.
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 limited partnership and limited liability company
interests in investment funds 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 real estate held
for sale, which 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. Also
included in other invested assets is an investment in Citigroup Preferred Stock,
which is recorded at cost. See Notes 13 and 17.
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, interest rate caps, 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 investment strategies designed to enhance
portfolio returns. (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.
30
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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. This documentation 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 must 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 be reported in 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.
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 effectiveness. If a hedge
relationship is found to be ineffective, it no longer qualifies for hedge
accounting 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 derivative remains 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 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.
31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FINANCIAL INSTRUMENTS WITH EMBEDDED DERIVATIVES
The Company bifurcates an embedded derivative from the host contract 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. 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.
The Company may enter into derivative contracts to hedge the exposures
represented by these embedded derivatives. These are economic hedges, however
they do not qualify for hedge accounting. These derivatives are carried at fair
value, with the changes in value reflected in realized gains and losses.
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. Realized gains and losses also result from fair value changes in
derivative contracts that do not qualify, or are not designated, as hedging
instruments, and the application of fair value hedges under SFAS 133.
Impairments are recognized as realized losses when investment losses in value
are deemed other-than-temporary. The Company conducts regular reviews to assess
whether other-than-temporary losses exist. 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
Deferred acquisition costs (DAC) represent costs that are deferred and amortized
over the estimated life of the related insurance policies. DAC principally
includes 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, generally over 10-15
32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
years. 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 universal life and COLI is amortized in relation to estimated gross
profits from surrender charges, investment, mortality, and expense margins per
SFAS 97, generally over 16-25 years. 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 relating to traditional life, including term insurance, and health insurance
is amortized in relation to anticipated premiums per SFAS 60, generally over
5-20 years. 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.
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.
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.
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.
VARIABLE ANNUITY CONTRACTS WITH GUARANTEED MINIMUM DEATH BENEFIT FEATURES. For
variable annuity contracts with GMDB features, 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
33
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are included in other assets. 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, as of January 1, 2002, 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 charged to the
contractholder. Interest rates credited to contractholder funds related to
universal life and COLI range from 3.5% to 5.4%, with a weighted average
interest rate of 4.7%.
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 less than 1.0% to 8.0% with a weighted average interest rate of 4.2%.
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 UL and 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.
34
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life products and are prepared in
accordance with industry standards and U.S. GAAP. 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 1.7% to 8.7% with
a weighted average of 6.5% 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 5.3%. 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, 2004 and 2003, the
Company had a liability of $22.6 million and $22.5 million, respectively, for
guaranty fund assessments and a related premium tax offset recoverable of $4.8
million and $4.6 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
Premium income is reported for individual payout annuities, group close-out
annuities, whole life and term insurance. The annuities premiums are recognized
as revenue when collected. The life 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 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.
35
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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. These
business segments are Travelers Life & Annuity (TLA) and Primerica Life
Insurance (Primerica).
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.
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,
36
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
primarily term insurance, to customers through a sales force of approximately
106,000 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.
($ IN MILLIONS)
REVENUES BY SEGMENT 2004 2003 2002
- ------------------- -------- ------- -------
TLA $ 4,725 $ 4,479 $ 3,653
Primerica 1,770 1,660 1,581
-------- ------- -------
Total Revenues $ 6,495 $ 6,139 $ 5,234
======== ======= =======
NET INCOME BY SEGMENT
TLA $ 990 $ 918 $ 673
Primerica 491 440 409
-------- ------- -------
Net Income $ 1,481 $ 1,358 $ 1,082
======== ======= =======
ASSETS BY SEGMENT
TLA $ 95,824 $85,881 $74,562
Primerica 10,019 9,467 8,433
-------- ------- -------
Total segments $105,843 $95,348 $82,995
======== ======= =======
The following tables contain key segment measurements.
BUSINESS SEGMENT INFORMATION:
- -------------------------------------------------------------------------
FOR THE YEAR
ENDED DECEMBER 31, 2004
($ IN MILLIONS) TLA PRIMERICA
- -------------------------------------------------------------------------
Premiums $911 $1,315
Net investment income 3,012 336
Interest credited to contractholders 1,305 -
Amortization of deferred acquisition costs 400 249
Expenditures for deferred acquisition costs 810 393
Federal income taxes 361 241
37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
BUSINESS SEGMENT INFORMATION:
- --------------------------------------------------------------------------------
FOR THE YEAR
ENDED DECEMBER 31, 2003
($ 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
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, 2004, 2003 and 2002, deposits
collected amounted to $14.4 billion, $12.0 billion and $11.9 billion,
respectively.
The Company's revenue was derived almost entirely from U.S. domestic business.
Revenue attributable to foreign countries was insignificant.
The Company had no transactions with a single customer representing 10% or more
of its revenue.
38
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities were as
follows:
- ---------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2004 AMORTIZED COST UNREALIZED UNREALIZED FAIR VALUE
($ IN MILLIONS) GAINS LOSSES
- ---------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $8,568 $311 $9 $8,870
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 2,143 106 -- 2,249
Obligations of states, municipalities and
political subdivisions 364 41 1 404
Debt securities issued by foreign
governments 847 81 1 927
All other corporate bonds 25,603 1,466 40 27,029
Other debt securities 7,613 421 14 8,020
Redeemable preferred stock 176 41 1 216
- ---------------------------------------------------------------------------------------------------------------
Total Available For Sale $45,314 $2,467 $66 $47,715
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2003 AMORTIZED COST UNREALIZED UNREALIZED FAIR VALUE
($ IN MILLIONS) GAINS LOSSES
- ---------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $8,061 $326 $18 $8,369
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 2,035 22 12 2,045
Obligations of states, municipalities and
political subdivisions 379 21 2 398
Debt securities issued by foreign
governments 690 51 1 740
All other corporate bonds 23,098 1,507 64 24,541
Other debt securities 5,701 377 22 6,056
Redeemable preferred stock 155 20 1 174
- ---------------------------------------------------------------------------------------------------------------
Total Available For Sale $40,119 $2,324 $120 $42,323
- ---------------------------------------------------------------------------------------------------------------
Proceeds from sales of fixed maturities classified as available for sale were
$7.8 billion, $15.1 billion and $15.5 billion in 2004, 2003 and 2002,
respectively. Gross gains of $246 million, $476 million and $741
39
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
million and gross losses of $263 million, $394 million and $309 million in 2004,
2003 and 2002, respectively, were realized on those sales. Additional losses of
$40 million, $110 million and $639 million in 2004, 2003 and 2002, respectively,
were realized due to other-than-temporary losses in value. Impairments in 2002
were concentrated in telecommunication and energy company investments.
The amortized cost and fair value of fixed maturities at December 31, 2004, by
contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
- ------------------------------------------------------------------------------
AMORTIZED
($ IN MILLIONS) COST FAIR VALUE
- ------------------------------------------------------------------------------
MATURITY:
Due in one year or less $2,634 $2,679
Due after 1 year through 5 years 13,015 13,514
Due after 5 years through 10 years 13,262 14,034
Due after 10 years 7,835 8,618
- ------------------------------------------------------------------------------
36,746 38,845
- ------------------------------------------------------------------------------
Mortgage-backed securities 8,568 8,870
- ------------------------------------------------------------------------------
Total Maturity $45,314 $47,715
- ------------------------------------------------------------------------------
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, 2004 and 2003, the Company held CMOs classified as available for
sale with a fair value of $6.0 billion and $5.2 billion, respectively.
Approximately 28% and 30%, respectively, of the Company's CMO holdings are fully
collateralized by GNMA, FNMA or FHLMC securities at December 31, 2004 and 2003.
In addition, the Company held $2.9 billion and $3.0 billion of GNMA, FNMA or
FHLMC mortgage-backed pass-through securities at December 31, 2004 and 2003,
respectively. All of these securities are rated AAA.
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, and reports that liability as part of
other liabilities in the consolidated balance sheet. At December 31, 2004 and
2003, the Company held cash collateral of $2.2 billion and $2.4 billion,
respectively. The Company also had $382.7 million of investments held as
collateral with a third party at December 31, 2004. The Company does not have
the right to sell or pledge this collateral and it is not recorded on the
consolidated balance sheet. No such collateral existed at December 31, 2003.
40
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company participates in dollar roll repurchase transactions as a way to
generate investment income. These transactions involve the sale of
mortgage-backed securities with the agreement to repurchase substantially the
same securities from the same counterparty. Cash is received from the sale,
which is invested in the Company's short-term money market pool. The cash is
returned at the end of the roll period when the mortgage-backed securities are
repurchased. The Company will generate additional investment income based upon
the difference between the sale and repurchase prices. These transactions are
recorded as secured borrowings. The mortgage-backed securities remain recorded
as assets. The cash proceeds are reflected in short-term investments and a
liability is established to reflect the Company's obligation to repurchase the
securities at the end of the roll period. The liability is classified as other
liabilities in the consolidated balance sheets and fluctuates based upon the
timing of the repayments. The balances were insignificant at December 31, 2004
and 2003.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as follows:
- ---------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES: GROSS UNREALIZED GROSS UNREALIZED FAIR
($ IN MILLIONS) COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004
Common stocks $153 $42 $1 $194
Non-redeemable preferred stocks 169 6 2 173
- ---------------------------------------------------------------------------------------------------------------
Total Equity Securities $322 $48 $3 $367
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003
Common stocks $109 $27 $2 $134
Non-redeemable preferred stocks 214 14 - 228
- ---------------------------------------------------------------------------------------------------------------
Total Equity Securities $323 $41 $2 $362
- ---------------------------------------------------------------------------------------------------------------
Proceeds from sales of equity securities were $78 million, $124 million and $212
million in 2004, 2003 and 2002, respectively. Gross gains of $29 million, $23
million and $8 million and gross losses of $10 million, $2 million and $4
million in 2004, 2003 and 2002, respectively, were realized on those sales.
Additional losses of $5 million, $11 million and $19 million in 2004, 2003 and
2002, respectively, were realized due to other-than-temporary losses in value.
OTHER-THAN-TEMPORARY LOSSES ON INVESTMENTS
Management has determined that the unrealized losses on the Company's
investments in fixed maturity and equity securities at December 31, 2004 are
temporary in nature. The Company conducts a periodic review to identify and
evaluate investments that have indications of possible 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 other-than-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;
41
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 that are available for sale and have been in an unrealized
loss position at December 31, 2004:
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 $955 $7 $82 $2 $1,037 $9
U.S. Treasury securities and obligations of U.S.
Government and government agencies and authorities 66 -- 11 -- 77 --
Obligations of states, municipalities and political
subdivisions 4 -- 11 1 15 1
Debt securities issued by foreign governments 24 1 2 -- 26 1
All other corporate bonds 3,494 32 269 8 3,763 40
Other debt securities 1,072 10 199 4 1,271 14
Redeemable preferred stock 15 -- 7 1 22 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities $5,630 $50 $581 $16 $6,211 $66
Equity securities $39 $2 $14 $1 $53 $3
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2004, the cost of approximately 825 investments in fixed
maturity and equity securities exceeded their fair value by $69 million. Of the
$69 million, $50 million represents fixed maturity investments that have been in
a gross unrealized loss position for less than a year and of these 93% are rated
investment grade. Fixed maturity investments that have been in a gross
unrealized loss position for a year or more total $16 million and 89% of these
investments are rated investment grade. The gross unrealized loss on equity
securities was $3 million at December 31, 2004.
42
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The table below shows the fair value of investments in fixed maturities and
equity securities in an unrealized loss position at December 31, 2003:
Gross Unrealized Losses
-----------------------
Less Than One Year One Year or Longer Total
----------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
($ 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
- ------------------------------------------------------------------------------------------------------------------------------------
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
investments are rated investment grade. The gross unrealized loss on equity
securities was $2 million at December 31, 2003.
43
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
AGING OF GROSS UNREALIZED LOSSES ON AVAILABLE FOR SALE
The aging of gross unrealized losses on fixed maturity investments is as
follows:
TOTAL FIXED MATURITIES
WITH UNREALIZED LOSS
TOTAL FIXED MATURITIES TOTALING 20% OR MORE
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004 AMORTIZED UNREALIZED AMORTIZED UNREALIZED
($ IN MILLIONS) COST LOSS COST LOSS
- -----------------------------------------------------------------------------------------------------------------------------
Six months or less $4,435 $31 $1 $--
Greater than six months to nine months 1,029 14 -- --
Greater than nine months to twelve months 215 5 -- --
Greater than twelve months 597 16 -- --
------ --- -- ---
Total $6,276 $66 $1 $--
====== === == ===
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES
WITH UNREALIZED LOSS
TOTAL FIXED MATURITIES TOTALING 20% OR MORE
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 AMORTIZED UNREALIZED AMORTIZED UNREALIZED
($ 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
====== ==== === ==
Fair values of investments in fixed maturities and equity securities 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
quoted market prices, third-party broker quotations or validated model prices
are not available amounted to $345.0 million and $1,058.4 million at December
31, 2004 and 2003, respectively.
44
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MORTGAGE LOANS
At December 31, 2004 and 2003, the Company's mortgage loan portfolios consisted
of the following:
- ------------------------------------------------------------------------------
($ IN MILLIONS) 2004 2003
- ------------------------------------------------------------------------------
Current Mortgage Loans $2,070 $1,841
Underperforming Mortgage Loans 54 45
- ------------------------------------------------------------------------------
Total Mortgage Loans $2,124 $1,886
- ------------------------------------------------------------------------------
Underperforming mortgage loans include delinquent mortgage loans over 90 days
past due, loans in the process of foreclosure and loans modified at interest
rates below market.
Aggregate annual maturities on mortgage loans at December 31, 2004 are shown
below. Actual maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations with or without prepayment
penalties.
- ----------------------------------------------------------------------
YEAR ENDING DECEMBER 31,
($ IN MILLIONS)
- ----------------------------------------------------------------------
2005 $ 122
2006 308
2007 249
2008 93
2009 252
Thereafter 1,100
- ----------------------------------------------------------------------
Total $2,124
======================================================================
TRADING SECURITIES
Trading securities of the Company are held primarily in Tribeca Citigroup
Investments Ltd. The assets and liabilities are valued at fair value as follows:
($ IN MILLIONS) Fair value as of Fair value as of
- --------------- December 31, 2004 December 31, 2003
----------------- -----------------
ASSETS
Trading securities
Convertible bond arbitrage $1,110 $1,447
Other 250 260
------ ------
$1,360 $1,707
====== ======
LIABILITIES
Trading securities sold not yet purchased
Convertible bond arbitrage $460 $629
Other 13 8
------ ------
$473 $637
====== ======
45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's trading portfolio investments and related liabilities are normally
held for periods less than six months. See Note 11.
OTHER INVESTED ASSETS
Other invested assets are composed of the following:
- ------------------------------------------------------------------------
($ IN MILLIONS) 2004 2003
- ------------------------------------------------------------------------
Investment in Citigroup Preferred Stock $3,212 $3,212
Private equity and arbitrage investments 1,235 1,315
Real estate joint ventures 230 327
Derivatives 192 182
Real estate - Investment 28 33
Real estate - Foreclosed 9 63
Other 99 56
- ------------------------------------------------------------------------
Total $5,005 $5,188
- ------------------------------------------------------------------------
CONCENTRATIONS
At December 31, 2004 and 2003, 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) 2004 2003
- ------------------------------------------------------------------------
Finance $6,917 $5,056
Banking 3,474 2,830
Electric Utilities 3,258 3,552
- ------------------------------------------------------------------------
The Company held investments in foreign banks in the amount of $1,321 million
and $1,018 million at December 31, 2004 and 2003, 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 $918 million and $1,118 million in Electric
Utilities at December 31, 2004 and 2003, respectively. Below investment grade
assets in Finance and Banking were insignificant at December 31, 2004 and 2003.
Total below investment grade assets were $5.4 billion and $5.2 billion at
December 31, 2004 and 2003, respectively.
46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Included in mortgage loans were the following group concentrations:
- ------------------------------------------------------------------------
($ IN MILLIONS) 2004 2003
- ------------------------------------------------------------------------
STATE
California $788 $732
PROPERTY TYPE
Agricultural $1,177 $1,025
- ------------------------------------------------------------------------
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 $105.3 million and $104.4 million at December 31, 2004 and
2003, respectively.
RESTRUCTURED INVESTMENTS
The Company had mortgage loans and debt securities that were restructured at
below market terms at December 31, 2004 and 2003. The balances of the
restructured investments were insignificant. The new terms typically defer a
portion of contract interest payments to varying future periods. Gross interest
income on restructured assets that would have been recorded in accordance with
the original terms of such loans was insignificant in 2004, 2003 and 2002.
Interest on these assets, included in net investment income, was also
insignificant in 2004, 2003 and 2002.
NET INVESTMENT INCOME
- -----------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
($ IN MILLIONS)
- -----------------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $2,615 $2,465 $2,359
Mortgage loans 184 158 167
Trading 41 222 9
Other invested assets 303 58 203
Citigroup Preferred Stock 203 203 178
Other, including policy loans 108 82 104
- -----------------------------------------------------------------------------
Total gross investment income 3,454 3,188 3,020
- -----------------------------------------------------------------------------
Investment expenses 106 130 84
- -----------------------------------------------------------------------------
Net Investment Income $3,348 $3,058 $2,936
- -----------------------------------------------------------------------------
47
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the periods were as follows:
- -----------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
($ IN MILLIONS)
- -----------------------------------------------------------------------------
REALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities (17) $(28) $(207)
Equity securities 19 10 (15)
Mortgage loans 1 (14) -
Real estate held for sale (4) 1 8
Other invested assets 5 49 (19)
Derivatives:
Guaranteed minimum withdrawal
benefit derivatives, net 30 -- --
Other derivatives (14) 19 (87)
Other (4) -- (2)
- -----------------------------------------------------------------------------
Total realized investment gains (losses) $16 $37 $(322)
- -----------------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are reported in
accumulated other changes in equity from nonowner sources were as follows:
- -----------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
($ IN MILLIONS)
- -----------------------------------------------------------------------------
UNREALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $197 $1,198 $664
Equity securities 6 35 3
Other 12 6 31
- -----------------------------------------------------------------------------
Total unrealized investment gains 215 1,239 698
- -----------------------------------------------------------------------------
Related taxes 77 421 243
- -----------------------------------------------------------------------------
Change in unrealized investment gains 138 818 455
Balance beginning of year 1,444 626 171
- -----------------------------------------------------------------------------
Balance end of year $1,582 $1,444 $626
- -----------------------------------------------------------------------------
VARIABLE INTEREST ENTITIES
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, 2004 DECEMBER 31, 2003
- --------------------------------------------------------------------------------
Investments $386 $ 400
Cash 9 11
Other 2 4
----- -----
Total assets of consolidated VIEs $397 $415
- --------------------------------------------------------------------------------
48
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
For TLA, since 1997 the majority of universal life business has been reinsured
under an 80% ceded/20% retained YRT quota share reinsurance program and term
life business has been reinsured under a 90%/10% YRT quota share reinsurance
program. Beginning June 1, 2002, COLI business has been reinsured under a
90%/10% 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. Subsequently, portions of this term coinsurance has
reverted to YRT for new business. Generally, the maximum retention on an
ordinary life risk is $2.5 million. 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. Total in-force business ceded under reinsurance contracts is
$397.4 billion and $356.3 billion at December 31, 2004 and 2003, respectively.
For Primerica Life, business sold prior to 1991 was reinsured under a
coinsurance arrangement with approximately 50% of the face amount being ceded.
For business sold from 1991 through June 1994, only amounts over the company
retention of $1.0 million were reinsured through an excess loss YRT treaty. In
June 1994, Primerica Life began reinsuring almost all business under a 1st
dollar quota share YRT treaty with 80% being ceded. Beginning with business sold
in January 1997, the amount ceded was increased from 80% to 90%.
Business sold in Canada is not included in the U.S. YRT quota share treaties. In
Canada, the business sold from April 2000 through December 2003, was reinsured
under a separate 1st dollar quota share YRT arrangement, with the ceding amount
ranging from 70% to 90%. Beginning with business sold in January 2004, Canada
began reinsuring only amounts above their company retention of $500,000.
Primerica has also entered into several reinsurance assumed treaties with
Reinsurance Group of America, Inc. The reinsurance assumed treaties generated a
$79 million pre-tax loss in 2001 and a $95 million pre-tax loss in 2002. The
pre-tax impact from these reinsurance assumed treaties has been minor for 2003
and 2004.
During 2004, The Travelers Life and Annuity Reinsurance Company (TLARC) was
formed as a pure captive insurer in order to permit the Company to cede 100% of
its statutory based risk associated with the death benefit guarantee rider on
certain universal life contracts. The reinsurance transaction related to
statutory-only reserves, and had no impact on GAAP premiums and benefits. TLARC
is a direct subsidiary of CIHC, the Company's parent. See Note 13.
49
TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 $224.2 million, $226.8 million and $231.8
million in 2004, 2003 and 2002, respectively, and earned premiums ceded were
$224.3 million, $226.7 million and $233.8 million in 2004, 2003 and 2002,
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 2004, 2003 and 2002 were
insignificant.
Prior to April 1, 2001, the Company also reinsured substantially all of the GMDB
on its variable annuity product. Total variable annuity account balances with
GMDB were $26.7 billion, of which $12.0 billion, or 45%, was reinsured, and
$23.5 billion, of which $12.9 billion, or 55%, was reinsured at December 31,
2004 and 2003, 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 $1.1
billion, of which $.9 billion, or 84%, is reinsured and $1.7 billion, of which
$1.4 billion, or 81%, is reinsured at December 31, 2004 and 2003, respectively.
TIC writes workers' compensation business. This business is reinsured through a
100% quota-share agreement with The Travelers Indemnity Company, an insurance
subsidiary of St. Paul Travelers. See Note 14.
A summary of reinsurance financial data reflected within the consolidated
statements of income and balance sheets is presented below ($ in millions):
FOR THE YEARS ENDING DECEMBER 31,
WRITTEN PREMIUMS 2004 2003 2002
- -----------------------------------------------------------------------------
Direct $2,908 $2,979 $2,610
Assumed 1 1 -
Ceded to:
The Travelers Indemnity Company (4) 2 (83)
Other companies (684) (638) (614)
- -----------------------------------------------------------------------------
Total Net Written Premiums $2,221 $2,344 $1,913
=============================================================================
EARNED PREMIUMS 2004 2003 2002
- -----------------------------------------------------------------------------
Direct $2,916 $3,001 $2,652
Assumed 1 1 -
Ceded to:
The Travelers Indemnity Company (1) (21) (109)
Other companies (690) (654) (619)
- -----------------------------------------------------------------------------
Total Net Earned Premiums $2,226 $2,327 $1,924
=============================================================================
The Travelers Indemnity Company was an affiliate for part of 2002.
50
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reinsurance recoverables at December 31, 2004 and 2003 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
REINSURANCE RECOVERABLES 2004 2003
- ------------------------------------------------------------------------------
Life and accident and health business $3,178 $2,885
Property-casualty business:
The Travelers Indemnity Company 1,489 1,585
- ------------------------------------------------------------------------------
Total Reinsurance Recoverables $4,667 $4,470
==============================================================================
Reinsurance recoverables for the life and accident and health business include
$1,876 million and $1,617 million at December 31, 2004 and 2003, respectively,
from General Electric Capital Assurance Company. Assets collateralizing these
receivables in the amount of $1,894 million and $1,632 million at December 31,
2004 and 2003, respectively, were held in trust for the purpose of paying
Company claims.
Reinsurance recoverables also include $409 million and $435 million at December
31, 2004 and 2003, respectively, from MetLife.
5. INTANGIBLE ASSETS
The Company's intangible assets are DAC, goodwill and the value of insurance in
force. DAC and the value of insurance in force are amortizable.
DAC
Deferred & Payout Traditional Life
($ IN MILLIONS) Annuities UL & COLI & Other Total
- -------------------------------------------------------------------------------------------------------------
Balance January 1, 2003 $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
Deferred expenses & other 448 342 413 1,203
Amortization expense (273) (51) (269) (593)
Underlying lapse and interest
rate adjustment (17) -- -- (17)
Pattern of estimated gross
profit adjustment -- (39) -- (39)
-----------------------------------------------------------------------------
Balance December 31, 2004 $1,639 $1,018 $2,292 $4,949
- -------------------------------------------------------------------------------------------------------------
VALUE OF INSURANCE IN FORCE
The value of insurance in force totaled $97 million and $112 million at December
31, 2004 and 2003, respectively, and is included in other assets. Amortization
expense on the value of insurance in force was $14 million, $18 million and $25
million for the year ended December 31, 2004, 2003 and 2002, respectively.
Amortization expense related to the value of insurance in force is estimated to
be $16 million in 2005, $15 million in 2006, $13 million in 2007, $9 million in
2008 and $7 million in 2009.
51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. DEPOSIT FUNDS AND RESERVES
At December 31, 2004 and December 31, 2003, the Company had $48.2 billion and
$43.5 billion of life and annuity deposit funds and reserves, respectively, as
follows:
($ IN MILLIONS) December 31, 2004 December 31, 2003
Subject to discretionary withdrawal:
With fair value adjustments $7,541 $6,974
Subject to surrender charges 4,852 6,057
Surrenderable without charge 8,105 5,756
------- -------
Total $20,498 $18,787
Not subject to discretionary withdrawal: $27,730 $24,693
------- -------
Total $48,228 $43,480
======= =======
Average surrender charges included in the subject to surrender charge category
above are 6.5% and 5.0%, respectively. In addition, during the payout phase,
these funds are credited at significantly reduced interest rates. There are $519
million and $550 million of life insurance reserves included in surrenderable
without charge at December 31, 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 $14.2 billion. These GICs have a weighted average interest rate of
4.23% and scheduled maturities are as follows:
($ IN MILLIONS) FIXED GIC VARIABLE GIC TOTAL
-------------------------------------------------
2005 $1,237 $4,006 $5,243
2006 1,862 -- 1,862
2007 1,561 -- 1,561
2008 1,343 -- 1,343
2009 1,393 -- 1,393
2010 and thereafter 2,835 -- 2,835
------- ------ -------
Total $10,231 $4,006 $14,237
======= ====== =======
52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. FEDERAL INCOME TAXES
EFFECTIVE TAX RATE
($ IN MILLIONS)
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
- --------------------------------------------------------------------------------
Income before federal income taxes $2,083 $1,829 $1,503
Statutory tax rate 35% 35% 35%
- --------------------------------------------------------------------------------
Expected federal income taxes 729 640 526
Tax effect of:
Non-taxable investment income (93) (62)
(91)
Tax reserve release (23) (43)
(79)
Other, net (11) 1 --
- --------------------------------------------------------------------------------
Federal income taxes $602 $471 $421
================================================================================
Effective tax rate 29% 26% 28%
- --------------------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $530 $330 $217
Foreign 33 30 19
- --------------------------------------------------------------------------------
Total 563 360 236
- --------------------------------------------------------------------------------
Deferred:
United States 40 108 182
Foreign (1) 3 3
- --------------------------------------------------------------------------------
Total 39 111 185
- --------------------------------------------------------------------------------
Federal income taxes $602 $471 $421
================================================================================
Additional tax benefits (expense) attributable to employee stock plans allocated
directly to shareholder's equity for the years ended December 31, 2004, 2003 and
2002 were $3 million, $3 million and $(17) million, respectively.
The net deferred tax liability at December 31, 2004 and 2003 was comprised of
the tax effects of temporary differences related to the following assets and
liabilities:
- ------------------------------------------------------------------------------
($ IN MILLIONS) 2004 2003
- ------------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $629 $574
Operating lease reserves 47 52
Employee benefits 195 201
Other 232 392
- ------------------------------------------------------------------------------
Total 1,103 1,219
- ------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value
of insurance in force (1,365) (1,225)
Investments, net (1,809) (1,795)
Other (149) (229)
- ------------------------------------------------------------------------------
Total (3,323) (3,249)
- ------------------------------------------------------------------------------
Net Deferred Tax Liability $(2,220) $(2,030)
- ------------------------------------------------------------------------------
53
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 $325 million and $52 million payable to Citigroup at December 31, 2004
and 2003, respectively, related to the Agreement.
At December 31, 2004 and 2003, 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. At current rates the maximum amount of such tax would be
approximately $326 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. The 2004 Tax Act provides that this account can be reduced directly
by distributions made by the life insurance subsidiaries in 2005 and 2006. The
Company intends to make sufficient distributions to eliminate this account
within the timeframe permitted under the Act.
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 $842 million, $1,104 million and $256 million
for the years ended December 31, 2004, 2003 and 2002, respectively. The
Company's statutory capital and surplus was $7.9 billion and $7.6 billion at
December 31, 2004 and 2003, respectively.
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 $908 million is
available by the end of the year 2005 for such dividends without prior approval
of the State of Connecticut Insurance Department, depending upon the amount and
timing of the payments. TIC has requested approval to effect certain of the
distributions described in Note 17 as an extraordinary dividend. See Note 17. In
accordance with the Connecticut statute, TLAC may not pay dividends during 2005
without prior approval of the State of Connecticut Insurance Department.
Primerica may pay up to $263 million to TIC in 2005 without prior approval of
the Commonwealth of Massachusetts Insurance Department. The Company paid
dividends of $773 million, $545 million and $586 million in 2004, 2003 and 2002,
respectively.
The Company's 2004 dividends were paid in the following amounts: $467.5 million
on March 30; $152.5 million on June 30; and $152.5 million on September 30. Due
to the timing of the payments, these dividends were considered extraordinary.
In addition to the aforementioned quarterly dividends, the Company also made a
dividend consisting of all the issued and outstanding shares of TLARC on
December 15, 2004. TLARC was valued at $250,000 and was considered to be an
ordinary dividend. See Notes 4 and 13 for further discussion of TLARC.
In December 2004, the Company requested and received prior approval from the
State of Connecticut Insurance Department to pay an extraordinary dividend on
January 3, 2005. Under Connecticut law, the ordinary dividend limitation amount
is based upon the cumulative total of all dividend payments made within
54
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
the preceding twelve months. The Company's proposed dividend payment of $302.5
million payable on January 3, 2005 exceeded the ordinary dividend limitation by
approximately $167 million, based on the 2005 dividend limit of $908 million.
The State of Connecticut Insurance Department approved the request on December
19, 2004. TIC paid the dividend to its parent on January 3, 2005.
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX
Changes in each component of Accumulated Other Changes in Equity from Nonowner
Sources were as follows:
NET UNREALIZED FOREIGN CURRENCY DERIVATIVE ACCUMULATED OTHER
GAIN/LOSS TRANSLATION INSTRUMENTS AND CHANGES IN EQUITY
ON INVESTMENT ADJUSTMENTS HEDGING ACTIVITIES FROM NONOWNER
($ IN MILLIONS) SECURITIES SOURCES
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2002 $186 $(3) $(109) $74
Unrealized gains on investment securities,
net of tax of $167 308 -- -- 308
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) -- -- (75) (75)
- ----------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 452 3 (75) 380
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 638 -- (184) 454
Unrealized gains on investment securities,
net of tax of $414 805 -- -- 805
Add: Reclassification adjustment for losses
included in net income, net of tax of $(6) 12 -- -- 12
Foreign currency translation adjustment, net
of tax of $3 -- 4 -- 4
Add: Derivative instrument hedging activity
gains, net of tax of $46 -- -- 85 85
- ----------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 817 4 85 906
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 1,455 4 (99) 1,360
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized gains on investment securities,
net of tax of $58 139 -- -- 139
Less: Reclassification adjustment for gains
included in net income, net of tax of $1 (1) -- -- (1)
Foreign currency translation adjustment, net
Of tax of $0 -- 1 -- 1
Add: Derivative instrument hedging activity
gains, net of tax of $53 -- -- 98 98
- ----------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 138 1 98 237
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 $1,593 $5 $ (1) $1,597
- ----------------------------------------------------------------------------------------------------------------------------
55
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 2004, 2003 and 2002.
The Company also participates in a non-qualified, noncontributory defined
benefit pension plan sponsored by Citigroup. During 2002, the Company assumed
Travelers Property Casualty Corporation's (TPC) share of the non-qualified
pension plan related to inactive employees of the former Travelers Insurance
entities as part of the TPC spin-off. See Note 14. The Company's share of net
expense for this plan was insignificant for 2004, 2003 and 2002.
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 both 2004 and 2003 and $18 million in 2002.
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 2004, 2003 and 2002. See
Note 13.
10. LEASES
Most leasing functions for the Company are administered by a Citigroup
subsidiary. Net rent expense for the Company was $22 million, $21 million, and
$24 million in 2004, 2003 and 2002, respectively.
- ------------------------------ ------------------------- -----------------------
YEAR ENDING DECEMBER 31, MINIMUM OPERATING MINIMUM CAPITAL
($ IN MILLIONS) RENTAL PAYMENTS RENTAL PAYMENTS
- ------------------------------ ------------------------- -----------------------
2005 $ 51 $ 5
2006 58 5
2007 58 6
2008 56 6
2009 48 6
Thereafter 31 12
- ------------------------------ ------------------------- -----------------------
Total Rental Payments $302 $40
============================== ========================= =======================
Future sublease rental income of approximately $54 million will partially offset
these commitments. Also, the Company will be reimbursed for 50%, totaling $120
million through 2011, of the rental expense for a particular lease by an
affiliate.
56
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, interest rate caps, 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 designed to enhance
portfolio returns.
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. In addition, the Company enters into interest
rate futures contracts in connection with macro hedges intended to reduce
interest rate risk by adjusting portfolio duration. 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 the cash
flows from assets and related liabilities. In addition, the Company enters into
interest rate swaps in connection with macro hedges intended to reduce interest
rate risk by adjusting portfolio duration. 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.
57
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company enters into interest rate caps in connection with other financial
instruments to provide greater risk diversification and better match assets and
liabilities. In addition, the Company enters into interest rate caps in
connection with macro hedges intended to reduce interest rate risk by adjusting
portfolio duration. Under interest rate caps, the Company pays a premium and is
entitled to receive cash payments equal to the excess of the market interest
rates over the strike prices multiplied by the notional principal amount.
Interest rate cap 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 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, 2004, the Company held collateral under these contracts amounting to
approximately $813.0 million.
The table below provides a summary of the notional and fair value of derivatives
by type:
($ IN MILLIONS) DECEMBER 31, 2004 DECEMBER 31, 2003
Fair Value Fair Value
---------- ----------
Notional Notional
DERIVATIVE TYPE Amount Assets Liabilities Amount Assets Liabilities
------------------------------------------------------------------------
Interest rate, equity and currency swaps $8,926.0 $910.4 $158.7 $7,422.3 $685.7 $178.9
Financial futures 1,421.0 -- -- 790.2 -- --
Interest rate and equity options 1,354.8 189.1 -- 754.4 182.1 --
Currency forwards 510.1 -- 8.9 352.4 0.3 7.3
Credit derivatives 427.4 4.1 3.4 209.5 5.2 0.6
Interest rate caps 117.5 3.1 -- -- -- --
------------------------------------------------------------------------
TOTAL $12,756.8 $1,106.7 $171.0 $9,528.8 $873.3 $186.8
------------------------------------------------------------------------
58
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table summarizes certain information related to the Company's
hedging activities for the years ended December 31, 2004 and 2003:
Year Ended Year Ended
In millions of dollars December 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Hedge ineffectiveness recognized
related to fair value hedges $(33.2) $(23.2)
Hedge ineffectiveness recognized
related to cash flow hedges 6.1 (3.4)
Net loss recorded in accumulated
other changes in equity from
nonowner sources related to
net investment hedges (0.6) (33.6)
Net loss from economic
hedges recognized in earnings (20.1) (1.6)
During the years ended December 31, 2004 and 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, 2004 is $(76.1) million.
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 $375.5 million and
$253.5 million at December 31, 2004 and 2003, respectively. The Company had
unfunded commitments of $1,075.8 million and $527.8 million to these
partnerships at December 31, 2004 and 2003, 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, 2004 and 2003, investments in fixed maturities had a carrying
value and a fair value of $47.7 billion and $42.3 billion, respectively. See
Notes 1 and 3.
At December 31, 2004, mortgage loans had a carrying value of $2.1 billion and a
fair value of $2.2 billion and at year-end 2003 had a carrying value of $1.9
billion and a fair value of $2.0 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,
2004 and 2003, 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
59
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 $150 million were received in both 2004
and 2003 and $125 million was received in 2002. 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, 2004
and 2003. 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 2004, 2003 and 2002. 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, 2004, contractholder funds with defined maturities had a
carrying value of $15.2 billion and a fair value of $15.6 billion, compared with
a carrying value and a fair value of $13.5 billion and $13.7 billion at December
31, 2003. 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 $14.4 billion and a fair value of $14.1
billion at December 31, 2004, compared with a carrying value of $13.1 billion
and a fair value of $12.8 billion at December 31, 2003. These contracts
generally are valued at surrender value.
The carrying values of $567 million and $698 million of financial instruments
classified as other assets approximated their fair values at December 31, 2004
and 2003, respectively. The carrying value of $3.0 billion and $2.5 billion of
financial instruments classified as other liabilities at December 31, 2004 and
2003 also approximated their fair values at both December 31, 2004 and 2003.
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. This separate account was fully consolidated in 2004 per the adoption of
SOP 03-1. See Note 1.
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 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 plaintiff in
September 2002 the Connecticut Supreme Court reversed the dismissal of several
of the plaintiff's
60
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
claims. On May 26, 2004, the Connecticut Superior Court certified a nation wide
class action. The class action claims against TLA are 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.
In 2003 and 2004, 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.
During 2004 the SEC requested additional information about the Company's
variable product operations on market timing, late trading and revenue sharing,
and the SEC, the National Association of Securities Dealers and the New York
Insurance Department have made inquiries into these issues and other matters
associated with the sale and distribution of insurance products. In addition,
like many insurance companies and agencies, in 2004 and 2005 the Company
received inquiries from certain state Departments of Insurance regarding
producer compensation and bidding practices. The Company is cooperating fully
with all of these requests and is not able to predict their outcomes.
In addition, 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 and regulatory proceedings would not be likely to have a material adverse
effect on the Company's consolidated financial condition or liquidity, but, if
involving monetary liability, may be material to the Company's operating results
for any particular period.
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, 2004 is $1.1 billion, included in
contractholder funds. The Company holds $60.3 million of common stock of the
Bank, included in equity securities.
61
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, 2004 is $466 million. The Company does not hold any collateral
related to this guarantee.
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, 2004. The Company paid Citigroup and its subsidiaries
$41.0 million, $55.3 million and $56.9 million in 2004, 2003 and 2002,
respectively, for these services. The amounts due to affiliates related to these
services, included in other liabilities at December 31, 2004 and 2003, were
insignificant.
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. See Note 14. These reimbursements totaled $27.4 million, $34.3 million
and $15.5 million in 2004, 2003 and 2002, respectively.
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, 2004 and 2003, the pool
totaled approximately $4.1 billion and $3.8 billion, respectively. The Company's
share of the pool amounted to $3.3 billion at both December 31, 2004 and 2003,
and is included in short-term securities in the consolidated balance sheets.
At December 31, 2004 and 2003, the Company had outstanding loaned securities to
an affiliate, Citigroup Global Markets, Inc. (CGMI), of $361.5 million and
$238.5 million, respectively.
Included in other invested assets is a $3.2 billion investment in Citigroup
Preferred Stock at December 31, 2004 and 2003, carried at cost. Dividends
received on these investments were $203 million in both 2004 and 2003 and $178
million in 2002. See Notes 11 and 17.
The Company had investments in an affiliated joint venture, Tishman Speyer, in
the amount of $92.9 million and $166.3 million at December 31, 2004 and 2003,
respectively. Income of $54.2 million, $18.6 million and $99.7 million was
earned on these investments in 2004, 2003 and 2002, respectively.
The Company also had an investment in Greenwich Street Capital Partners I, an
affiliated private equity investment, in the amount of $45.3 million and $48.3
million at December 31, 2004 and 2003, respectively. Income of $4.5 million,
$33.9 million and $0 were earned on this investment in 2004, 2003 and 2002,
respectively.
In the ordinary course of business, the Company purchases and sells securities
through affiliated broker-dealers, including SB. These transactions are
conducted on an arm's-length basis. Amounts due to SB were $363.7 million and
$134.4 million at December 31, 2004 and 2003, respectively.
The Company markets deferred annuity products and life insurance through its
affiliate, Smith Barney (SB), a division of CGMI. Annuity deposits related to
these products were $877 million, $835 million, and $1.0 billion in 2004, 2003
and 2002, respectively. Life
62
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
premiums were $137.5 million, $114.9 million and $109.7 million in 2004, 2003
and 2002, respectively. Commissions and fees paid to SB were $71.9 million,
$70.3 million and $77.0 million in 2004, 2003 and 2002, respectively.
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 $1.5 billion, $1.4 billion and $1.6 billion in 2004, 2003 and
2002, respectively. Commissions and fees paid to CitiStreet were $45.9 million,
$52.9 million and $54.0 million in 2004, 2003 and 2002, respectively.
The Company markets individual annuity products through an affiliate Citibank,
N.A. (together with its subsidiaries, Citibank). Deposits received from Citibank
were $525 million, $357 million and $321 million in 2004, 2003 and 2002,
respectively. Commissions and fees paid to Citibank were $44.3 million, $29.8
million and $24.0 million in 2004, 2003 and 2002, respectively.
Primerica Financial Services, Inc. (PFS), an affiliate, is a distributor of
products for TLA. PFS or its affiliates sold $983 million, $714 million and $787
million of individual annuities in 2004, 2003 and 2002, respectively.
Commissions and fees paid to PFS were $75.4 million, $58.1 million and $60.4
million in 2004, 2003 and 2002, 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. The fees paid by
Primerica Life were $15 million in 2004 and $12.5 million in each of 2003 and
2002.
During 2004 TLARC was established as a pure captive to reinsure 100% of the
statutory based risk associated with universal life contracts. Statutory
premiums paid by the Company to TLARC totaled $1,071 million in 2004. Ceding
commissions and experience refunds paid by TLARC to the Company totaled $1,054
million in 2004. The net amount paid was $17 million and reported as a reduction
of other income. See Note 4.
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 2004, 2003 and 2002.
63
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 2004, 2003 and
2002.
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 2004, 2003 and 2002.
14. TRAVELERS PROPERTY CASUALTY SPIN-OFF
On April 1, 2004 TPC merged with a subsidiary of The St. Paul Companies to form
St. Paul Travelers.
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. In 2002,
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.
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
======
64
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 paid TPC $4.9 million and $33.6 million in 2003 and 2002,
respectively, for these services. In 2004, The Company did not receive these
services.
The Company has a license from St. Paul Travelers to use the names "Travelers
Life & Annuity," "The Travelers Insurance Company," "The Travelers Life and
Annuity Company" and related names in connection with the Company's business.
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
($ IN MILLIONS)
- --------------------------------------------------------------------------------
Net Income $1,481 $1,358 $1,082
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized (gains) losses (16) (37) 322
Deferred federal income taxes (9) 58 185
Amortization of deferred policy
acquisition costs 649 501 393
Additions to deferred policy
acquisition costs (1,203) (960)
(879)
Investment income 106 (503)
(119)
Premium balances 8
(8) (7)
Insurance reserves and accrued expenses
604 832
493
Other (79) (443)
(402)
- --------------------------------------------------------------------------------
Net cash provided by operations $1,525 $814 $1,068
- --------------------------------------------------------------------------------
16. NON-CASH INVESTING AND FINANCING ACTIVITIES
In 2004, significant non-cash investing and financing activities include the
minority interest reversal of joint ventures held by TPC in the amount of $(58)
million. In 2003, these activities include the acquisition of real estate
through foreclosures of mortgage loans amounting to $53 million and the
inclusion of the TPC minority interest in joint ventures in the amount of $63
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.
65
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
17. SUBSEQUENT EVENT
On January 31, 2005, Citigroup announced that it had agreed to sell TIC,
including TLAC and certain other domestic and international insurance businesses
(the Life Insurance and Annuity Businesses) to MetLife, Inc. (MetLife) pursuant
to an Acquisition Agreement (the Agreement). The transaction is subject to
certain regulatory approvals, as well as other customary conditions to closing.
Citigroup currently anticipates that the intended sale would be completed during
this summer.
The Company's Primerica segment and certain other assets will remain with
Citigroup. Accordingly, prior to the closing, TIC will distribute to its parent
company by way of dividend (i) all of the outstanding shares of common stock of
the Company's 100% owned subsidiary, Primerica Life Insurance Company (Primerica
Life), (ii) all shares of Citigroup's Series YYY and Series YY preferred stock
held by the Company and (iii) certain other assets, including certain assets and
liabilities related to the Company's share of the non-qualified pension plan,
and post retirement benefits related to inactive employees of the former
Travelers Insurance entities, assumed during Citigroup's 2002 spin-off of the
Travelers Property Casualty operations (collectively, the Dispositions). The
Dispositions require certain regulatory approvals.
Subject to closing adjustments described in the Agreement, the contemplated sale
price would be $11.5 billion.
66
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, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not Applicable
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
The following is a description of the fees earned by KPMG for services rendered
to the Company for the years ended December 31, 2004 and 2003:
67
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 registered public accounting firm.
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, and accounting advice on
completed transactions. The aggregate fees earned by KPMG for audit services
rendered to the Company and its subsidiaries for the years ended December 31,
2004 and December 31, 2003 totaled approximately $2.3 million and $1.3 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 attestation 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, 2004 and December 31, 2003 were $42 thousand and $37
thousand, respectively.
TAX FEES: Tax fees include corporate tax compliance, counsel and advisory
services as well as expatriate tax services. The aggregate fees earned by KPMG
for tax related services rendered to the Company and its subsidiaries for the
years ended December 31, 2004 and December 31, 2003 totaled approximately
$46,000 and $0, respectively.
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, 2004 and December 31, 2003.
The Company did not engage KPMG for any additional non-audit services other than
those permitted under its policy, unless such services were individually
approved by the Citigroup audit and risk management committee.
Approval of Independent Registered Public Accounting Firm Services and Fees
Citigroup's audit and risk management committee has reviewed and approved all
fees charged by Citigroup's independent registered public accounting firm, 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 registered public
accounting firm 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. The
policy also includes limitations on the hiring of KPMG partners and other
professionals to ensure that the Company satisfies the SEC's auditor
independence rules.
During 2004, the following changes were made in Citigroup's policy for approval
of audit fees and services. Pre-approval of the audit and risk management
committee is required for all internal control engagements and, effective
December 31, 2004, Citigroup further restricted the scope of tax services that
may be provided by KPMG and determined that it will no longer use KPMG for tax
advisory services, including consulting and tax planning, except as related to
tax compliance services.
Under the Citigroup policy approved by the audit and risk management committee,
the committee must pre-approve all services provided by Citigroup's independent
registered public accounting firm 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,
68
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 the Company is
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.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Documents filed:
(1) Financial Statements. See index on page 19 of this report.
(2) Financial Statement Schedules. See index on page 72 of this report.
(3) Exhibits. See Exhibit Index on page 70.
69
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
2. Acquisition Agreement, dated as of January 31, 2005, by and between
Citigroup Inc. and MetLife, Inc., incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K of Citigroup Inc.
dated January 31, 2005 and filed February 4, 2005 (File No. 1-9924).
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
70
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 30th 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 30th day of March, 2004.
SIGNATURE CAPACITY
/s/ GEORGE C. KOKULIS Director and Chief Executive Officer
- ------------------------
(George C. Kokulis) (Principal Executive Officer)
/s/ GLENN D. LAMMEY Director, Chief Financial Officer and
- ------------------------ Chief Accounting Officer
(Glenn D. Lammey) (Principal Financial Officer and
Principal Accounting Officer)
/s/ KATHLEEN L. PRESTON Director
- ------------------------
(Kathleen L. Preston)
/s/ MARLA BERMAN LEWITUS Director
- ------------------------
(Marla Berman Lewitus)
/s/ EDWARD W. CASSIDY Director
- ------------------------
(Edward W. Cassidy)
/s/ WILLIAM P. KRIVOSHIK Director
- ------------------------
(William P. Krivoshik)
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.
71
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
The Travelers Insurance Company and Subsidiaries
Report of Independent Registered Public Accounting Firm *
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 *
Report of Independent Registered Public Accounting Firm 73
Schedule I - Summary of Investments - Other than Investments
in Related Parties 2004 74
Schedule III - Supplementary Insurance Information 2002-2004 75
Schedule IV - Reinsurance 2002-2004 76
All other schedules are inapplicable for this filing
* See index on page 19
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholder
The Travelers Insurance Company:
Under date of March 28, 2005, we reported on the consolidated balance sheets of
The Travelers Insurance Company and subsidiaries as of December 31, 2004 and
2003, 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, 2004, 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 and reporting for certain nontraditional
long-duration contracts and for separate accounts in 2004, variable interest
entities in 2003, and for goodwill and intangible assets in 2002.
/s/KPMG LLP
Hartford, Connecticut
March 28, 2005
73
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2004
($ IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------------
TYPE OF INVESTMENT AMOUNT SHOWN IN
COST VALUE BALANCE SHEET(1)
- --------------------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and authorities $6,582 $6,840 $6,840
States, municipalities and political subdivisions 364 404 404
Foreign governments 847 927 927
Public utilities 2,516 2,710 2,710
Convertible bonds and bonds with warrants attached 228 245 245
All other corporate bonds 34,601 36,373 36,373
- --------------------------------------------------------------------------------------------------------------------------
Total Bonds 45,138 47,499 47,499
Redeemable preferred stocks 176 216 216
- --------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 45,314 47,715 47,715
- --------------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Banks, trust and insurance companies 13 17 17
Industrial, miscellaneous and all other 140 177 177
- --------------------------------------------------------------------------------------------------------------------------
Total Common Stocks 153 194 194
Nonredeemable preferred stocks 169 173 173
- --------------------------------------------------------------------------------------------------------------------------
Total Equity Securities 322 367 367
- --------------------------------------------------------------------------------------------------------------------------
Mortgage Loans 2,124 2,124
Real Estate Held For Sale 37 37
Policy Loans 1,121 1,121
Short-Term Securities 3,731 3,731
Trading Securities 1,360 1,360
Other Investments (2)(3)(4) 1,341 1,341
- --------------------------------------------------------------------------------------------------------------------------
Total Investments $55,350 $57,796
==========================================================================================================================
(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 $415 million fair value of investment in affiliated
partnership interests.
(4) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
74
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
($ IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
FUTURE
POLICY OTHER
BENEFITS, POLICY AMORTIZATION
DEFERRED LOSSES, CLAIMS NET BENEFITS, OF DEFERRED
POLICY CLAIMS AND INVEST- CLAIMS POLICY OTHER
ACQUISITION AND LOSS BENEFITS PREMIUM MENT AND ACQUISITION OPERATING PREMIUMS
COSTS EXPENSES(1) PAYABLE REVENUE INCOME LOSSES(2) COSTS EXPENSES WRITTEN
- ------------------------------------------------------------------------------------------------------------------------------------
2004
----
Travelers Life & Annuity $2,771 $46,452 $581 $911 $3,012 $2,716 $400 $259 $911
Primerica 2,178 3,696 180 1,315 336 560 249 228 1,310
- ------------------------------------------------------------------------------------------------------------------------------------
Total $4,949 $50,148 $761 $2,226 $3,348 $3,276 $649 $487 $2,221
====================================================================================================================================
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 $1,913
====================================================================================================================================
(1) Includes contractholder funds.
(2) Includes interest credited to contractholders.
75
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
($ IN MILLIONS)
- -------------------------------------- -------------- ---------------- ---------------- ------------ ----------------
PERCENTAGE OF
CEDED TO OTHER ASSUMED FROM AMOUNT ASSUMED
GROSS AMOUNT COMPANIES OTHER COMPANIES NET AMOUNT TO NET
- -------------------------------------- -------------- ---------------- ---------------- ------------ ----------------
2004
- ------
Life Insurance In Force $646,184 $397,411 $ 3,470 $252,243 1.4%
Premiums:
Life insurance $ 2,609 $ 460 $ 1 $ 2,150 --
Accident and health insurance 305 229 -- 76 --
Property casualty 1 1 -- -- --
-------- -------- -------- -------- ------
Total Premiums $ 2,915 $ 690 $ 1 $ 2,226 --
======== ======== ======== ======== ======
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 --
======== ======== ======== ======== ======
76
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, 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 33-58677
----------------------
THE TRAVELERS LIFE AND ANNUITY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-0904249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE CITYPLACE, HARTFORD, CONNECTICUT 06103-3415
(Address of principal executive offices) (Zip Code)
(860) 308-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes _X_ No ___
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2).
Yes ___ No _X_
As of the date hereof, there were outstanding 30,000 shares of common stock, par
value $100 per share, of the registrant, all of which were owned by The
Travelers Insurance Company, an indirect wholly owned subsidiary of Citigroup
Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
THE TRAVELERS LIFE AND ANNUITY COMPANY
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER PART I PAGE
1. Business .............................................................. 2
2. Properties ............................................................ 4
3. Legal Proceedings ..................................................... 5
4. Submission of Matters to a Vote of Security Holders ................... 6
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters ................................................... 6
6. Selected Financial Data ............................................... 6
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 7
7A. Quantitative and Qualitative Disclosures About Market Risk ............ 12
8. Financial Statements and Supplementary Data ........................... 15
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .............................................. 52
9A. Controls and Procedures ............................................... 52
9B. Other Information ..................................................... 52
PART III
10. Directors and Executive Officers of the Registrant .................... 52
11. Executive Compensation ................................................ 52
12. Security Ownership of Certain Beneficial Owners and Management ........ 52
13. Certain Relationships and Related Transactions ........................ 52
14. Principal Accountant Fees and Services ................................ 53
PART IV
15. Exhibits and Financial Statement Schedules ............................ 54
Exhibit Index ......................................................... 55
Signatures ............................................................ 56
Index to Financial Statements and Financial Statement Schedules ....... 57
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), 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 and TIC provide additional business and financial
information concerning those companies and their consolidated subsidiaries.
On January 31, 2005, Citigroup announced that it had agreed to sell its Life
Insurance and Annuity businesses, including TIC and the Company, to MetLife,
Inc. The transaction is subject to certain domestic and international regulatory
approvals, as well as other customary conditions to closing. TIC's Primerica
segment and certain other assets will remain with Citigroup. The transaction is
expected to close this summer. See Note 14 of Notes to Financial Statements. TIC
filed a Form 8-K regarding this proposed transaction on February 2, 2005.
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 retail annuities and individual life insurance to individuals
and small businesses under the Travelers Life & Annuity (TLA) name. On April 1,
2004 Travelers Property Casualty Corporation (TPC), a former affiliate of the
Company, merged with a subsidiary of The St. Paul Companies to form St. Paul
Travelers. TIC has a license from St. Paul Travelers to use the names "Travelers
Life & Annuity", "The Travelers Insurance Company" and "The Travelers Life and
Annuity Company."
The retail annuity products offered are fixed and variable deferred annuities.
Retail annuity products are distributed through affiliated and non-affiliated
channels. The primary affiliated distribution channels are Smith Barney (SB), a
division of Citigroup Global Markets Inc., and Primerica Financial Services,
Inc. (PFS). Retail annuity sales by SB accounted for 25% of total retail annuity
sales in 2004 and 32% in both 2003 and 2002. Sales by PFS accounted for 31%, 29%
and 26% in 2004, 2003 and 2002, respectively. In addition, the Company
distributes its products through CitiStreet Retirement Services, a division of
CitiStreet LLC, (CitiStreet) and Citibank, N.A. (Citibank), also affiliates of
the Company.
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 independent financial
professionals and account for 83.5% of total 2004 life sales. SB and Citibank
accounted for 8.4% and 6.0%, respectively, of total individual life sales for
2004.
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 in force.
Reserves related to this block of business remain recorded in the Company's
balance sheets.
2
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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 fully
consolidated and 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.
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. The Company had
four ratios fall outside the usual range for December 31, 2004 statutory
financial statements filed on March 1, 2005. The Company had one ratio and three
ratios fall outside the usual range for December 31, 2003 and 2002,
respectively. The Company was not subject to any regulatory action by any state
insurance department or the NAIC with respect to these IRIS ratios for the 2003
and 2002 statutory financial statements.
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).
3
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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% 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, 2004, 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, the Company may not pay dividends
during 2005 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. 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 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 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 nationwide class action. The class action claims against TLA are
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.
In 2003 and 2004, 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.
During 2004 the SEC requested additional information about the Company's
variable product operations on market timing, late trading and revenue sharing,
and the SEC, the National Association of Securities Dealers and the New York
Insurance Department have made inquiries into these issues and other matters
associated with the sale and distribution of insurance products. In addition,
like many insurance companies and agencies, in 2004 and 2005 the Company
received inquiries from certain state Departments of Insurance regarding
producer compensation and bidding practices. The Company is cooperating fully
with all of these requests and is not able to predict their outcomes.
5
THE TRAVELERS LIFE AND ANNUITY COMPANY
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 STOCKHOLDER MATTERS.
The Company has 100,000 authorized shares of common stock, of which 30,000 are
issued and outstanding as of December 31, 2004. 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 2004 or 2003. 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.
6
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
PART II (CONTINUED)
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.
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."
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.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs (DAC) represent costs that are deferred and amortized
over the estimated life of the related insurance policies. DAC principally
includes 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, generally over 10-15 years. 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 universal life (UL) is amortized in relation to estimated gross profits
from surrender charges, investment, mortality, and expense margins per SFAS 97,
generally over 16-25 years. 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.
7
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
DAC relating to traditional life, including term insurance, is amortized in
relation to anticipated premiums per SFAS 60, generally over 5-20 years.
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.
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 and are prepared in
accordance with industry standards and accounting principles generally accepted
in the United States of America (GAAP). 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 1.5% to 9.2% 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 6.3%.
INVESTMENTS IN FIXED MATURITIES
Fixed maturities, which comprise 85% and 88% of total investments at December
31, 2004 and 2003, 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. 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 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 other-than-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
Premium income is reported for individual payout annuities, group close-out
annuities, whole life and term insurance. The annuities premiums are recognized
as revenue when collected. The life 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
8
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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, 2004 2003
- ------------------------------- ---- ----
Revenues $822 $646
Benefits and interest credited 326 307
Operating expenses 289 185
---- ----
Income before taxes 207 154
Income taxes 49 35
---- ----
Net income $158 $119
==== ====
Net income of $158 million in 2004, increased 33% from $119 million in 2003 from
higher fee income and net investment income (NII) related to increased business
volumes. These increases were partially offset by a 56% increase in operating
expenses, which resulted from the increased business volumes related to deposits
and market appreciation, and which included greater amortization of DAC. Lower
tax benefits from the separate account dividends received deduction (DRD), also
partially offset the increased revenues. Net income included net after-tax
realized investment gains (losses) of $11.2 million and $(4.7) million for the
years ended December 31, 2004 and 2003, respectively. A tax benefit related to
adjustments to the DRD of prior periods in 2004 and 2003 of $9.6 million and
$13.1 million, respectively, contributed to a 24% effective tax rate for 2004
and a 23% effective tax rate for 2003.
Revenues increased 27% in 2004 over prior year. This increase was driven by NII
and fee income. NII was $389 million in 2004 compared to $356 million in 2003.
This increase was primarily due to a larger invested asset base created from a
$400 million capital contribution from TIC and higher business volumes. Fee
income increased $134 million, or 57%, in the current year compared to 2003,
primarily from $188 million of management fees from variable annuities and $182
million from universal life fees.
Operating expenses in 2004 were up $104 million, or 56%, over the prior year due
to an increase in the amortization of DAC, which was $226 million in 2004 versus
$136 million in 2003, and an increase in other expenses related to business
volume.
The amortization of capitalized DAC is a significant component of the Company's
expenses. The Company's recording of DAC amortization varies based upon product
type. DAC for retail annuities, both fixed and variable employs a level yield
methodology as described in SFAS 91. DAC for UL is amortized in relation to
estimated gross profits as described in SFAS 97, with traditional life,
including term insurance and other products, amortized in relation to
anticipated premiums as per SFAS 60.
9
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
The following is a summary of capitalized DAC by type:
Traditional Deferred
($ in millions) Life Annuity UL Total
- ------------------------------------------------------------------------------------------------------------------
Beginning balance January 1, 2003 $55 $632 $377 $1,064
Commissions and expenses deferred 14 172 165 351
Amortization expense (10) (107) (19) (136)
- ------------------------------------------------------------------------------------------------------------------
Balance December 31, 2003 59 697 523 1,279
Commissions and expenses deferred 11 182 276 469
Amortization expense (10) (147) (43) (200)
Underlying lapse and interest rate assumptions -- (2) -- (2)
Pattern of estimated gross profit adjustment -- -- (24) (24)
- ------------------------------------------------------------------------------------------------------------------
Balance December 31, 2004 $60 $730 $732 $1,522
- ------------------------------------------------------------------------------------------------------------------
DAC capitalization increased $118 million, or 34%, in 2004 versus 2003. The 2004
growth was driven by a 67% increase in UL capitalization which is consistent
with the increase in premiums and deposits for the individual life line of
business. The increase in amortization expense in 2004 was primarily driven by
business volume growth in variable deferred annuities and UL. Included in UL's
2004 amortization expense was a one-time $24 million retrospective adjustment
for the change in pattern of the estimated gross profits.
The following table shows net written premiums and deposits by product line for
the years ended December 31, 2004 and 2003. The majority of the annuity business
and a substantial portion of the life business written by the Company are
accounted for as investment contracts, with the result that the deposits
collected are reported as liabilities and are not included in revenues. Deposits
represent a statistic used for measuring business volumes, which management of
the Company uses to manage the life insurance and annuities operations, and may
not be comparable to similarly captioned measurements used by other life
insurance companies.
10
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
PREMIUMS AND DEPOSITS ($ IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 2004 2003
- -------------------------------- ------ ------
PREMIUMS
Individual Life $ 34 $ 37
Other Annuity 6 4
------ ------
Total Premiums $ 40 $ 41
------ ------
DEPOSITS
------
Retail Annuity - Fixed $ 392 $ 606
Retail Annuity - Variable 1,637 1,581
------ ------
Total Retail Annuity 2,029 2,187
Individual Life 950 599
Other Annuity 4 4
------ ------
Total Deposits $2,983 $2,790
------ ------
Retail annuity deposits collected for the year ended December 31, 2004 decreased
$158 million, or 7%, from the prior year. This decrease was driven by lower
fixed annuity sales and a third quarter 2004 shift in offering certain retail
annuity products by TIC, which were previously offered by the Company. Variable
annuity deposits collected for the twelve months ended December 31, 2004 were up
$56 million from the twelve months ended December 31, 2003 due mainly to
improved equity market conditions in 2004 versus 2003; and sales related to the
guaranteed minimum withdrawal benefit feature to the variable annuity product.
These variable annuity deposit increases were partially decreased by the shift
of variable products into TIC. This should continue in future periods. This is a
forward looking statement within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on the following page.
Retail annuity account balances and benefit reserves were $14.9 billion and
$13.0 billion at December 31, 2004 and 2003, respectively. This increase is
reflective of $1.0 billion market appreciation and $1.2 billion of net sales of
variable annuity investments over the past year.
Individual life deposits increased $351 million, or 59%, for the twelve months
ended December 31, 2004 versus 2003 as a result of increased universal life
production including significant single premium sales in the second quarter of
2004. Life insurance in force was $54.9 billion at December 31, 2004, up from
$43.7 billion at December 31, 2003.
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.
The Company is included in the TLA segment of TIC and its outlook should be
considered within that context. The Company 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. The Company 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.
11
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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. The retail annuities
business is interest rate and equity market sensitive. TLA's variable annuities
offer products with guaranteed features that are equity market sensitive. The
guaranteed minimum death benefit feature pays benefits when at the time of death
of a contractholder the account value is below the guaranteed amount. Another
guaranteed feature offered is a guaranteed minimum withdrawal benefit, which is
considered an embedded derivative. Exposure increases with the decline in equity
markets and exposure decreases with equity market growth. This creates earnings
volatility because the embedded derivative is marked to market through income.
TLA has entered into an alternative hedging strategy to reduce the earnings
volatility.
Citigroup, the Company's ultimate parent has agreed to sell its Life Insurance
and Annuities business to MetLife, Inc. The Company is included in Citigroup's
Life Insurance and Annuities business. The transaction is expected to close this
summer. At that time, the Company will become part of MetLife, Inc.
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, producer
compensation 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 a discussion of recently issued
accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "may increase," "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, the impact
that the proposed sale to MetLife, Inc., may have on the Company and its
prospects, 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 11.
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
12
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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, 2004.
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,
2003. 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 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, 2004 and 2003. The sensitivity analysis model used by the Company produces a
loss in fair value of interest rate sensitive invested assets of approximately
$335 million and $299 million based on a 100 basis point increase in interest
rates as of December 31, 2004 and 2003, respectively.
13
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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 $274 million and $254 million based
on a 100 basis point increase in interest rates as of December 31, 2004 and
2003, 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, 2004 and 2003 is not
material.
14
THE TRAVELERS LIFE AND ANNUITY COMPANY
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm.................16
Financial Statements:
Statements of Income for the years ended
December 31, 2004, 2003 and 2002....................................17
Balance Sheets as of December 31, 2004 and 2003.....................18
Statements of Changes in Shareholder's Equity for the years
ended December 31, 2004, 2003 and 2002..............................19
Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002....................................20
Notes to Financial Statements.......................................21
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
methods of accounting and reporting for certain nontraditional long-duration
contracts and for separate accounts in 2004 and for goodwill and intangible
assets in 2002.
/s/ KPMG LLP
Hartford, Connecticut
March 28, 2005
16
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF INCOME
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
---- ---- ----
REVENUES
Premiums $40 $41 $43
Net investment income 389 356 312
Net realized investment gains (losses) 17 (7) (31)
Fee income 371 237 190
Other revenues 5 19 19
- -----------------------------------------------------------------------------
Total Revenues 822 646 533
- -----------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 85 90 94
Interest credited to contractholders 241 217 181
Amortization of deferred acquisition costs 226 136 67
General and administrative expenses 63 49 32
- -----------------------------------------------------------------------------
Total Benefits and Expenses 615 492 374
- -----------------------------------------------------------------------------
Income before federal income taxes 207 154 159
- -----------------------------------------------------------------------------
Federal income taxes
Current 96 74 (31)
Deferred (47) (39) 87
- -----------------------------------------------------------------------------
Total Federal Income Taxes 49 35 56
- -----------------------------------------------------------------------------
Net Income $158 $119 $103
=============================================================================
See Notes to Financial Statements.
17
THE TRAVELERS LIFE AND ANNUITY COMPANY
BALANCE SHEETS
($IN MILLIONS)
AT DECEMBER 31, 2004 2003
- ------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value
(including $133 and $131 subject to securities
lending agreements) (cost $5,929 and $5,034) $6,261 $5,357
Equity securities, at fair value (cost $16 and $8) 19 8
Mortgage loans 212 136
Short-term securities 420 195
Other invested assets 417 393
- ------------------------------------------------------------------------------
Total Investments 7,329 6,089
- ------------------------------------------------------------------------------
Separate and variable accounts 11,631 9,690
Deferred acquisition costs 1,522 1,279
Premiums and fees receivable 75 67
Other assets 268 313
- ------------------------------------------------------------------------------
Total Assets $20,825 $17,438
- ------------------------------------------------------------------------------
LIABILITIES
Future policy benefits and claims $1,079 $1,098
Contractholder funds 5,227 4,512
Separate and variable accounts 11,631 9,690
Deferred federal income taxes 180 225
Other liabilities 747 515
- ------------------------------------------------------------------------------
Total Liabilities 18,864 16,039
- ------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $100; 100,000 shares
authorized, 30,000 issued and outstanding 3 3
Additional paid-in capital 817 417
Retained earnings 922 764
Accumulated other changes in equity from
nonowner sources 219 215
- ------------------------------------------------------------------------------
Total Shareholder's Equity 1,961 1,399
- ------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $20,825 $17,438
==============================================================================
See Notes to Financial Statements.
18
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
($ IN MILLIONS)
FOR THE YEAR ENDED
DECEMBER 31,
- -----------------------------------------------------------------------------
COMMON STOCK 2004 2003 2002
- -----------------------------------------------------------------------------
Balance, beginning of year $3 $3 $3
Changes in common stock - - -
- -----------------------------------------------------------------------------
Balance, end of year $3 $3 $3
=============================================================================
- -----------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
- -----------------------------------------------------------------------------
Balance, beginning of year $417 $417 $417
Capital contributed by parent 400 - -
- -----------------------------------------------------------------------------
Balance, end of year $817 $417 $417
=============================================================================
- -----------------------------------------------------------------------------
RETAINED EARNINGS
- -----------------------------------------------------------------------------
Balance, beginning of year $764 $645 $542
Net income 158 119 103
- -----------------------------------------------------------------------------
Balance, end of year $922 $764 $645
=============================================================================
- -----------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- -----------------------------------------------------------------------------
Balance, beginning of year $215 $95 $16
Unrealized gains, net of tax 9 123 72
Derivative instrument hedging activity
gains (losses), net of tax (5) (3) 7
- -----------------------------------------------------------------------------
Balance, end of year $219 $215 $95
=============================================================================
- -----------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- -----------------------------------------------------------------------------
Net income $158 $119 $103
Other changes in equity from nonowner sources 4 120 79
- -----------------------------------------------------------------------------
Total changes in equity from nonowner sources $162 $239 $182
=============================================================================
- -----------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY
- -----------------------------------------------------------------------------
Balance, beginning of year $1,399 $1,160 $978
Changes in total shareholder's equity 562 239 182
- -----------------------------------------------------------------------------
Balance, end of year $1,961 $1,399 $1,160
=============================================================================
See Notes to Financial Statements.
19
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 2004 2003 2002
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $39 $44 $44
Net investment income received 383 320 277
Fee and other income received 399 265 239
Benefits and claims paid (134) (106) (104)
Interest paid to contractholders (241) (217) (181)
Operating expenses paid (470) (437) (344)
Income taxes (paid) received 179 (135) 89
Other (46) 41 (21)
- ------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 109 (225) (1)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 489 520 255
Mortgage loans 53 23 36
Proceeds from sales of investments
Fixed maturities 802 1,658 1,690
Equity securities 19 8 36
Mortgage loans 6 -- --
Real estate held for sale 2 1 --
Purchases of investments
Fixed maturities (2,179) (2,824) (3,018)
Equity securities (30) (4) (36)
Mortgage loans (136) (28) (45)
Policy loans, net (5) 1 (11)
Short-term securities (purchases) sales, net (225) 280 (269)
Other investment purchases, net (43) (46) (21)
Securities transactions in course of settlement, net 23 (4) 118
- ------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,224) (415) (1,265)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 1,023 914 1,486
Contractholder fund withdrawals (308) (288) (224)
Contribution from parent company 400 -- --
- ------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,115 626 1,262
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash -- (14) (4)
Cash at beginning of year 1 15 19
- ------------------------------------------------------------------------------------------------
Cash at December 31, $1 $1 $15
================================================================================================
See Notes to Financial Statements.
20
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), 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.
On January 31, 2005, Citigroup announced its intention to sell its Life
Insurance and Annuities business, which includes TIC, the Company and
certain other businesses, to MetLife. TIC's Primerica Life Segment will
remain part of Citigroup. See Note 14.
The financial statements and accompanying footnotes of the Company are
prepared in conformity with U.S. generally accepted accounting principles
(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.
Certain prior year amounts have been reclassified to conform to the 2004
presentation.
ACCOUNTING CHANGES
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, 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.
21
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The following summarizes the more significant aspects of the Company's
adoption of SOP 03-1:
VARIABLE ANNUITY CONTRACTS WITH GUARANTEED MINIMUM DEATH BENEFIT FEATURES.
For variable annuity contracts with guaranteed minimum death benefit (GMDB),
features 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 total variable annuity product, and
accordingly continued to classify these products as investment contracts.
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 less than $1 million.
SALES INDUCEMENTS TO CONTRACT HOLDERS. SOP 03-1 provides that,
prospectively, 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 2004, the Company
capitalized sales inducements of approximately $24.9 million in accordance
with SOP 03-1. These inducements relate to bonuses on certain products
offered by the Company. For the twelve months ended December 31, 2004,
amortization of these capitalized amounts was insignificant.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
On January 1, 2004, the Company adopted the 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. FIN 46 and
FIN 46-R change the method of determining whether certain entities should be
included in the Company's financial statements. The Company has evaluated
the impact of applying FIN 46-R to existing variable interest entities in
which it has variable interests. The effect of adopting FIN 46-R on the
Company's balance sheet is immaterial.
An entity is subject to FIN 46 and FIN 46-R and is called a 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.
22
NOTES TO 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 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, 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. 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. 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.
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" (SFAS 133). 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.
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
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", (APB 25) the alternative method of accounting, an offsetting
increase to shareholder's equity under SFAS 123 is recorded equal to the
23
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
amount of compensation expense charged. During the 2004 first quarter, the
Company changed its valuation from the Black-Scholes model to the Binomial
Method. The impact of this change was insignificant. Compensation expense
and proforma compensation expense had the Company applied SFAS 123 prior to
2003 was insignificant for the year ended December 31, 2004 and 2003.
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.
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 implementation guidance related to this topic. Once
issued, the Company will evaluate the impact of adopting EITF 03-1. The
disclosures required by EITF 03-1 are included in Note 2 to the Financial
Statements.
STOCK-BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" (SFAS 123-R), which replaces the existing SFAS 123 and supersedes
APB 25. SFAS 123-R requires companies to measure and record compensation
expense for stock options and other share-based payment based on the
instruments' fair value. SFAS 123-R is effective for interim and annual
reporting periods beginning after June 15, 2005. The Company will adopt SFAS
123-R on July 1, 2005 by using a modified prospective approach. For unvested
stock-based awards granted before January 1, 2003 (APB 25 awards), the
Company will expense the fair value of the awards as at the grant date over
the remaining vesting period. The impact of recognizing compensation expense
for the unvested APB 25 awards will be immaterial in the third and fourth
quarters of 2005. In addition, the amount of additional compensation expense
that will be disclosed as the impact in the first and second quarters of
2005, as if the standard had been adopted as of January 1, 2005, but will
not be recognized in earnings, will be immaterial. The Company continues to
evaluate other aspects of adopting SFAS 123-R.
24
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 26 expected cash
flows using market rates commensurate with the credit quality and maturity
of the investment are used to determine fair value. 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 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 other-than-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
is 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 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. Cash
received on impaired loans is reported as income. 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, which are marked to market
with the change recognized in net investment income during the current
period. Also included are limited partnership and limited liability company
interests in investment funds 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 surrender values
of the related insurance policies. The carrying value of policy loans, which
have no defined maturities, is considered to be fair value.
25
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 interest rate
and equity futures contracts, swaps, interest rate caps, options and forward
contracts as a means of hedging exposure to interest rate changes, equity
price changes 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. This documentation 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 must 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 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 be reported in 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 effectiveness of these hedging relationships is evaluated on a
retrospective and prospective basis using quantitative measures of
effectiveness. If a hedge relationship is found to be ineffective, it no
longer qualifies for hedge accounting 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 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 derivative recorded in
shareholder's equity are immediately reflected in realized investment gains
and losses.
26
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 from the host contract 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 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. 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.
The Company may enter into derivative contracts to hedge the exposures
represented by these embedded derivatives. These are economic hedges,
however they do not qualify for hedge accounting. These derivatives are
carried at fair value, with the changes in value reflected in realized gains
and losses.
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. Realized gains and losses also result from fair value changes in
derivative contracts that do not qualify, or are not designated, as hedging
instruments, and from the application of fair value hedge accounting under
SFAS 133. Impairments are recognized as realized losses when investment
losses in value are deemed other-than-temporary. The Company conducts
regular reviews to assess whether other-than-temporary losses exist. 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 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.
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.
27
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
VARIABLE ANNUITY CONTRACTS WITH GUARANTEED MINIMUM DEATH BENEFIT FEATURES.
For variable annuity contracts with GMDB features, 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 total variable annuity product, and
accordingly continued to classify these products as investment contracts.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs (DAC) represent costs that are deferred and
amortized over the estimated life of the related insurance policies. DAC
principally includes 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, generally over 10-15 years. 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 UL is amortized in relation to estimated gross profits from
surrender charges, investment, mortality, and expense margins per SFAS 97,
generally over 16-25 years. 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 relating to traditional life, including term insurance, is amortized in
relation to anticipated premiums per SFAS 60, generally over 5-20 years.
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.
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.
CASH AND CASH EQUIVALENTS
Cash, which is reported in other assets, includes certificates of deposits
and other time deposits with original maturities of less than 90 days.
28
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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
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 and are prepared
in accordance with industry standards and U.S. GAAP. 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 1.5% to 9.2% 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 6.3%.
CONTRACTHOLDER FUNDS
Contractholder funds represent deposits from the issuance of UL pension
investment and certain retail 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 UL range from 4.5% to 5.4%, with a weighted average interest rate
of 5.0%.
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 less
than 1.0% to 8.0% with a weighted average interest rate of 5.2%.
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 UL and 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.
29
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 less than $1 million.
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, 2004
and 2003, the Company's liability for guaranty fund assessments was not
significant.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company, domiciled in the State of Connecticut, prepares statutory
financial statements in accordance with the accounting practices prescribed
or permitted by the State of Connecticut Insurance Department. Prescribed
statutory accounting practices are those practices that are incorporated
directly or by reference in state laws, regulations, and general
administrative rules applicable to all insurance enterprises domiciled in a
particular state. Permitted statutory accounting practices include practices
not prescribed by the domiciliary state, but allowed by the domiciliary
state regulatory authority. The Company does not have any permitted
statutory accounting practices.
PREMIUMS
Premium income is reported for individual payout annuities, group close-out
annuities, whole life and term insurance. The annuities premiums are
recognized as revenue when collected. The life 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.
30
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, pension investment and certain retail 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.
31
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, 2004 AMORTIZED COST UNREALIZED UNREALIZED FAIR
($ IN MILLIONS) GAINS LOSSES VALUE
---------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities -- CMOs and
pass-through securities $906 $24 $1 $929
U.S. Treasury securities and obligations
of U.S. Government and government agencies
and authorities 154 9 -- 163
Obligations of states and political
subdivisions 57 8 -- 65
Debt securities issued by foreign
governments 63 6 -- 69
All other corporate bonds 3,565 219 4 3,780
All other debt securities 1,180 71 2 1,249
Redeemable preferred stock 4 2 -- 6
---------------------------------------------------------------------------------------------------------------
Total Available For Sale $5,929 $339 $7 $6,261
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2003 AMORTIZED COST UNREALIZED UNREALIZED FAIR
($ IN MILLIONS) GAINS LOSSES VALUE
---------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities -- CMOs and
pass-through securities $645 $18 $2 $661
U.S. Treasury securities and obligations
of U.S. Government and government agencies
and authorities 192 5 1 196
Obligations of states and political
subdivisions 53 6 -- 59
Debt securities issued by foreign
governments 58 3 -- 61
All other corporate bonds 3,179 241 5 3,415
All other debt securities 903 59 3 959
Redeemable preferred stock 4 2 -- 6
---------------------------------------------------------------------------------------------------------------
Total Available For Sale $5,034 $334 $11 $5,357
---------------------------------------------------------------------------------------------------------------
32
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Proceeds from sales of fixed maturities classified as available for sale
were $801.9 million, $1.7 billion and $1.7 billion in 2004, 2003 and 2002,
respectively. Gross gains of $25.0 million, $48.2 million and $85.6 million
and gross losses of $24.4 million, $52.4 million and $29.9 million in 2004,
2003 and 2002, respectively, were realized on those sales. Additional losses
of $6.9 million, $10.2 million and $66.9 million were realized due to
other-than-temporary losses in value in 2004, 2003 and 2002, respectively.
The significant impairment activity in 2002 was concentrated in
telecommunication and energy company investments.
The amortized cost and fair value of fixed maturities available for sale at
December 31, 2004, by contractual maturity, are shown below. Actual
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
--------------------------------------------------------------------------
AMORTIZED FAIR
($ IN MILLIONS) COST VALUE
--------------------------------------------------------------------------
MATURITY:
Due in one year or less $264 $270
Due after 1 year through 5 years 1,675 1,757
Due after 5 years through 10 years 2,365 2,514
Due after 10 years 719 791
--------------------------------------------------------------------------
5,023 5,332
--------------------------------------------------------------------------
Mortgage-backed securities 906 929
--------------------------------------------------------------------------
Total Maturity $5,929 $6,261
--------------------------------------------------------------------------
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, 2004 and 2003, the Company held CMOs classified as available
for sale with a fair value of $532.6 million and $332.4 million,
respectively. Approximately 34% of the Company's CMO holdings were fully
collateralized by GNMA, FNMA or FHLMC securities at December 31, 2004 and
2003. In addition, the Company held $396.0 million and $327.7 million of
GNMA, FNMA or FHLMC mortgage-backed pass-through securities at December 31,
2004 and 2003, respectively. All of these securities are rated AAA.
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, and reports that liability as
part of other liabilities in the balance
33
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
sheet. At December 31, 2004 and 2003, the Company held cash collateral of
$113.5 million and $154.0 million, respectively. The Company also had $23.7
million of investments held with a third party used as collateral at
December 31, 2004. The Company does not have the right to sell or pledge
this collateral and it is not recorded on the balance sheet. No such
collateral existed at December 31, 2003.
The Company participates in dollar roll repurchase transactions as a way to
generate investment income. These transactions involve the sale of
mortgage-backed securities with the agreement to repurchase substantially
the same securities from the same counterparty. Cash is received from the
sale, which is invested in the Company's short-term money market pool. The
cash is returned at the end of the roll period when the mortgage-backed
securities are repurchased. The Company will generate additional investment
income based upon the difference between the sale and repurchase prices.
These transactions are recorded as secured borrowings. The mortgage-backed
securities remain recorded as assets. The cash proceeds are reflected in
short-term investments and a liability is established to reflect the
Company's obligation to repurchase the securities at the end of the roll
period. This liability is classified as other liabilities in the balance
sheets and fluctuates based upon the timing of the repayments. Although
these types of transactions occurred during the years, there were no
outstanding amounts at December 31, 2004 and 2003.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as
follows:
--------------------------------------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
($ IN MILLIONS) COST GAINS LOSSES VALUE
--------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004
Common stocks $12 $3 $-- $15
Non-redeemable preferred stocks 4 -- -- 4
--------------------------------------------------------------------------------------------------------
Total Equity Securities $16 $3 $-- $19
--------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003
Common stocks $2 $-- $-- $2
Non-redeemable preferred stocks 6 -- -- 6
--------------------------------------------------------------------------------------------------------
Total Equity Securities $8 $-- $-- $8
--------------------------------------------------------------------------------------------------------
Proceeds from sales of equity securities were $18.5 million, $7.8 million
and $35.6 million in 2004, 2003 and 2002, respectively. Gross gains and
losses on sales and impairments were insignificant.
34
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
OTHER-THAN-TEMPORARY LOSSES ON INVESTMENTS
Management has determined that the unrealized losses on the Company's
investments in fixed maturity and equity securities at December 31, 2004 are
temporary in nature. The Company conducts a periodic review to identify and
evaluate investments that have indications of possible 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 other-than-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 tables below shows the fair value of investments in fixed maturities and
equity securities that are available-for-sale and have been in an unrealized
loss position at:
Gross Unrealized Losses
-----------------------
Less Than One Year One Year or Longer Total
-----------------------------------------------------------------------------------
Gross Gross Gross
DECEMBER 31, 2004 Fair Unrealized Fair Unrealized Fair Unrealized
($ IN MILLIONS) Value Losses Value Losses Value Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available-for-sale:
Mortgage-backed securities-CMO's and
pass-through securities $103 $1 $-- $-- $103 $1
U.S. Treasury securities and obligations of
U.S. Government and government agencies
and authorities 5 -- -- -- 5 --
Debt securities issued by foreign governments 1 -- -- -- 1 --
All other corporate bonds 408 4 15 -- 423 4
All other debt securities 141 1 24 1 165 2
Redeemable preferred stock 1 -- -- -- 1 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities $659 $6 $39 $1 $698 $7
Equity securities $1 $-- $3 $-- $4 $--
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2004, the cost of approximately 269 investments in fixed
maturity and equity securities exceeded their fair value by $7 million. Of
the $6 million which represents fixed maturity investments that have been in
a gross unrealized loss position for less than a year and the $1 million in
such a position for a year or more, 93% and 82% of these investments are
rated investment grade, respectively.
35
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Gross Unrealized Losses
-----------------------
Less Than One Year One Year or Longer Total
-----------------------------------------------------------------------------------
Gross Gross Gross
DECEMBER 31, 2003 Fair Unrealized Fair Unrealized Fair Unrealized
($ IN MILLIONS) Value Losses Value Losses Value Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available-for-sale:
Mortgage-backed securities-CMO's and
pass-through securities $143 $2 $-- $-- $143 $2
U.S. Treasury securities and obligations of
U.S. Government and government agencies
and authorities 132 1 -- -- 132 1
Debt securities issued by foreign governments 2 -- -- -- 2 --
All other corporate bonds 238 4 19 1 257 5
All other debt securities 123 2 20 1 143 3
Redeemable preferred stock -- -- 1 -- 1 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities $638 $9 $40 $2 $678 $11
Equity securities $3 $-- $1 $-- $4 $--
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2003, the cost of approximately 220 investments in fixed
maturity and equity securities exceeded their fair value by $11 million. Of
the $9 million which represents fixed maturity investments that have been in
a gross unrealized loss position for less than a year and the $2 million in
such a position for a year or more, 87% and 32% of these investments are
rated investment grade, respectively.
AGING OF GROSS UNREALIZED LOSSES ON AVAILABLE FOR SALE
The aging of gross unrealized losses on fixed maturity investments is as
follows:
TOTAL FIXED MATURITIES WITH
UNREALIZED LOSS TOTALING 20% OR
TOTAL FIXED MATURITIES MORE
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004 AMORTIZED UNREALIZED AMORTIZED UNREALIZED
($ IN MILLIONS) COST LOSS COST LOSS
- -----------------------------------------------------------------------------------------------------------------------------
Six months or less $505 $ 3 $ -- $ --
Greater than six months to nine months 134 2 -- --
Greater than nine months to twelve months 26 1 -- --
Greater than twelve months 40 1 -- --
---- ---- ---- ----
Total $705 $ 7 $ -- $ --
==== ==== ==== ====
36
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
TOTAL FIXED MATURITIES WITH
UNREALIZED LOSS TOTALING 20% OR
TOTAL FIXED MATURITIES MORE
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004 AMORTIZED UNREALIZED AMORTIZED UNREALIZED
($ IN MILLIONS) COST LOSS COST LOSS
- -----------------------------------------------------------------------------------------------------------------------------
Six months or less $540 $ 7 $1 $ --
Greater than six months to nine months 72 1 - --
Greater than nine months to twelve months 35 1 - --
Greater than twelve months 42 2 - --
---- --- -- ----
Total $689 $11 $1 $ --
==== === == ====
Fair values of investments in fixed maturities and equity securities 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 quoted market prices, third-party broker quotations or
validated model prices are not available amounted to $36.0 million and
$124.9 million at December 31, 2004 and 2003, respectively.
MORTGAGE LOANS
At December 31, 2004 and 2003, the Company's mortgage loan portfolios
consisted of the following:
------------------------------------------------------------------------
($ IN MILLIONS) 2004 2003
------------------------------------------------------------------------
Current Mortgage Loans $209 $136
Underperforming Mortgage Loans 3 --
------------------------------------------------------------------------
Total $212 $136
------------------------------------------------------------------------
Underperforming assets include delinquent mortgage loans over 90 days past
due, loans in the process of foreclosure and loans modified at interest
rates below market.
Aggregate annual maturities on mortgage loans at December 31, 2004 are as
shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to prepay obligations with or without
prepayment penalties.
--------------------------------------------------------------------
YEAR ENDING DECEMBER 31,
($ IN MILLIONS)
--------------------------------------------------------------------
2005 $9
2006 25
2007 10
2008 8
2009 9
Thereafter 151
---------------------------------------------------------------
Total $212
===============================================================
37
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
OTHER INVESTED ASSETS
Other invested assets are composed of the following:
----------------------------------------------------------------------
($ IN MILLIONS) 2004 2003
----------------------------------------------------------------------
Private equity and arbitrage investments $219 $203
Derivatives 135 115
Trading Securities 22 33
Policy Loans 32 27
Real estate joint ventures 9 15
----------------------------------------------------------------------
Total $417 $393
----------------------------------------------------------------------
CONCENTRATIONS
The Company participates in a short-term investment pool maintained by TIC.
See Note 11.
The Company's industry concentrations of investments, excluding those in
federal and government agencies, primarily fixed maturities at fair value,
were as follows:
-------------------------------------------------------------------
($ IN MILLIONS) 2004 2003
-------------------------------------------------------------------
Finance $918 $555
Banking 515 364
Electric Utilities 430 455
Real Estate Investment Trust 394 241
Media 342 354
Insurance 323 261
Telecommunications 290 288
-------------------------------------------------------------------
The Company held investments in foreign banks in the amount of $201 million
and $152 million at December 31, 2004 and 2003, 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 $119 million and $157 million in
Electric Utilities, $25 million and $31 million in Media, and $12 million
and $34 million in Telecommunications at December 31, 2004 and 2003,
respectively. Below investment grade assets in other categories were
insignificant. Total below investment grade fixed maturities were $501
million and $506 million at December 31, 2004 and 2003, respectively.
38
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Included in mortgage loans were the following group concentrations:
($ IN MILLIONS)
-------------------------------------------------------------------
At December 31, 2004 2003
-------------------------------------------------------------------
STATE
California $58 $34
New York 40 31
-------------------------------------------------------------------
PROPERTY TYPE
Agricultural $106 $64
Office 70 62
-------------------------------------------------------------------
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, credit limits
and other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees and
letters of credit. The Company's underwriting standards with respect to new
mortgage loans generally require loan to value ratios of 75% or less at the
time of mortgage origination.
NON-INCOME PRODUCING INVESTMENTS
Investments included in the consolidated balance sheets that were non-income
producing were insignificant at December 31, 2004 and 2003, respectively.
RESTRUCTURED INVESTMENTS
Mortgage loan and debt securities which were restructured at below market
terms at December 31, 2004 and 2003 were insignificant. The new terms of
restructured investments typically defer a portion of contract interest
payments to varying future periods. Gross interest income on restructured
assets that would have been recorded in accordance with the original terms
of such assets was insignificant. Interest on these assets, included in net
investment income, was insignificant.
NET INVESTMENT INCOME
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ IN MILLIONS) 2004 2003 2002
---------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $346 $317 $277
Other invested assets 30 32 28
Mortgage loans 18 11 11
Other 1 2 1
---------------------------------------------------------------------
Total gross investment income 395 362 317
---------------------------------------------------------------------
Investment expenses 6 6 5
---------------------------------------------------------------------
Net investment income $389 $356 $312
---------------------------------------------------------------------
39
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized capital gains (losses) by asset class for the periods were as
follows:
-----------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ IN MILLIONS) 2004 2003 2002
-----------------------------------------------------------------------
REALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $(6) $(14) $(11)
Derivatives:
Guaranteed minimum withdrawal benefit
derivatives, net 19 -- --
Other derivatives 2 8 (17)
Other invested assets (1) 1 (3)
Mortgage loans -- (1) --
Other 3 (1) --
-----------------------------------------------------------------------
Total realized investment gains (losses) $17 $(7) $(31)
-----------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are included as
accumulated other changes in equity from nonowner sources in shareholder's
equity were as follows:
-----------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ IN MILLIONS) 2004 2003 2002
-----------------------------------------------------------------------
UNREALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $9 $189 $91
Other invested assets 4 (3) 22
-----------------------------------------------------------------------
Total unrealized investment gains 13 186 113
-----------------------------------------------------------------------
Related taxes 5 65 40
-----------------------------------------------------------------------
Change in unrealized investment gains 8 121 73
Balance beginning of year 207 86 13
-----------------------------------------------------------------------
Balance end of year $215 $207 $86
-----------------------------------------------------------------------
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%
ceded/20% retained 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.
Subsequently, portions of this term coinsurance has reverted to YRT for new
business. Generally, the maximum retention on an ordinary life risk is $2.5
million. 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
40
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
of the Company to obtain reinsurance for amounts above certain retention
limits on individual life policies, which limits vary with age and
underwriting classification.
Total life insurance in-force ceded under reinsurance contracts was $44.3
billion and $35.0 billion at December 31, 2004 and 2003, including $3.4
million and $4.5 million, respectively to TIC. Total life insurance premiums
ceded were $34.4 million, $24.9 million and $14.9 million in 2004, 2003 and
2002, respectively. Ceded premiums paid to TIC were insignificant for these
same periods.
During 2004, The Travelers Life and Annuity Reinsurance Company (TLARC) was
formed as a pure captive insurer in order to permit the Company to cede 100%
of its statutory-based risk associated with the death benefit guarantee
rider on certain universal life contracts. The reinsurance transaction
related to statutory-only reserves, and had no impact on GAAP premiums and
benefits. TLARC is a direct subsidiary of CIHC, TIC's parent. See Note 11.
Prior to April 1, 2001, the Company also reinsured substantially all of the
GMDB on its variable annuity product. Total variable annuity account
balances with GMDB were $11.1 billion, including $4.8 billion or 43% which
was reinsured, and $9.9 billion, of which $5.4 billion or 55% is reinsured
at December 31, 2004 and 2003, 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 $595 million and $887 million at December 31, 2004 and
2003, respectively. NAR included $536 million, or 90%, and $816 million, or
92%, which was reinsured at December 31, 2004 and 2003, respectively.
4. INTANGIBLE ASSETS
The Company has two intangible, amortizable assets, DAC and the value of
insurance in force.
DAC
Traditional Deferred
($ IN MILLIONS) Life Annuity UL Total
----------------------------------------------------------------------------
Balance January 1, 2003 $55 $632 $377 $1,064
Commissions and expenses deferred 14 172 165 351
Amortization expense (10) (107) (19) (136)
-----------------------------------------------------------------------------
Balance December 31, 2003 59 697 523 1,279
Commissions and expenses deferred 11 182 276 469
Amortization expense (10) (147) (43) (200)
Underlying lapse and interest rate
assumptions -- (2) -- (2)
Pattern of estimated gross profit
adjustment -- -- (24) (24)
-----------------------------------------------------------------------------
Balance December 31, 2004 $60 $730 $732 $1,522
----------------------------------------------------------------------------
VALUE OF INSURANCE IN FORCE
The value of insurance in force totaled $10.8 million and $11.7 million at
December 31, 2004 and 2003, respectively, and was reported in other assets.
Amortization expense of value of insurance in force was insignificant for
2004, 2003 and 2002.
41
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
5. DEPOSIT FUNDS AND RESERVES
At December 31, 2004 and 2003, the Company had $6.3 billion and $5.6 billion
of life and annuity deposit funds and reserves, respectively, as follows.
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
($ IN MILLIONS)
Subject to discretionary withdrawal:
With fair value adjustments $2,594 $2,552
Subject to surrender charges 1,672 1,318
Surrenderable without charge 289 99
------ ------
Total $4,555 $3,969
Not subject to discretionary withdrawal: $1,744 $1,637
------ ------
Total $6,299 $5,606
====== ======
Average surrender charges included in the subject to surrender charge
category above were 4.7% in both 2004 and 2003. In addition, during the
payout phase, these funds are credited at significantly reduced interest
rates.
6. FEDERAL INCOME TAXES
EFFECTIVE TAX RATE ($ IN MILLIONS)
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
---------------------------------------------------------------------
Income before federal income taxes $207 $154 $159
Statutory tax rate 35% 35% 35%
---------------------------------------------------------------------
Expected federal income taxes 72 54 56
Tax effect of:
Non-taxable investment income (15) (11) --
Tax reserve release (8) (8) --
----------------------------------------------------------------------
Federal income taxes $49 $35 $56
=====================================================================
Effective tax rate 24% 22% 35%
----------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
----------------------------------------------------------------------
Current:
United States $96 $73 $(31)
Foreign -- 1 --
----------------------------------------------------------------------
Total 96 74 (31)
----------------------------------------------------------------------
Deferred:
United States (47) (39) 87
Foreign -- -- --
----------------------------------------------------------------------
Total (47) (39) 87
---------------------------------------------------------------------
Federal income taxes $49 $35 $56
=====================================================================
42
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 2004 and 2003 were
comprised of the tax effects of temporary differences related to the
following assets and liabilities:
($ IN MILLIONS) 2004 2003
------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $372 $251
Other 7 6
------------------------------------------------------------------------
Total 379 257
------------------------------------------------------------------------
Deferred Tax Liabilities:
Investments, net (131) (117)
Deferred acquisition costs and value
of insurance in force (426) (364)
Other (2) (1)
------------------------------------------------------------------------
Total (559) (482)
------------------------------------------------------------------------
Net Deferred Tax Liability $(180) $(225)
------------------------------------------------------------------------
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. The Company had a $265.3 million payable
to TIC at December 31, 2004 and a $9.1 million recoverable from TIC at
December 31, 2003 pursuant to the Agreement.
At December 31, 2004 and 2003, 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. At current rates the maximum amount of such tax
would be approximately $700 thousand. 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. The 2004 Tax Act provides that this
account can be reduced directly by distributions made by the life insurance
subsidiaries in 2005 and 2006. The Company intends to make sufficient
distributions to eliminate this account within the timeframe permitted under
the Act.
7. SHAREHOLDER'S EQUITY
SHAREHOLDER'S EQUITY AND DIVIDEND AVAILABILITY
The Company's statutory net income (loss) was $(211) million, $37 million
and $(134) million for the years ended December 31, 2004, 2003 and 2002,
respectively. Statutory capital and surplus was $942 million and $494
million at December 31, 2004 and 2003, respectively.
The Company is currently subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to its parent
without prior approval of insurance regulatory authorities. In accordance
with Connecticut statutes, the Company may not pay dividends during 2005
without prior approval of the State of Connecticut Insurance Department.
43
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX
Changes in each component of Accumulated Other Changes in Equity from
Nonowner Sources were as follows:
NET ACCUMULATED
UNREALIZED DERIVATIVE OTHER CHANGES
GAIN/LOSS ON INSTRUMENTS & IN EQUITY FROM
INVESTMENT HEDGING NONOWNER
($ IN MILLIONS) SECURITIES ACTIVITIES SOURCES
-------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2002 $13 $3 $16
-------------------------------------------------------------------------------------------------------------------
Unrealized gains on investment securities, net of tax of $35
Add: Reclassification adjustment for losses included in net
income, net of tax of $4 64 -- 64
Add: Derivative instrument hedging activity gains, net of
tax of $3 -- 7 7
-------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 72 7 79
-------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 3 1, 2002 85 10 95
-------------------------------------------------------------------------------------------------------------------
Unrealized gains on investment securities,
net of tax of $61 114 -- 114
Add: Reclassification adjustment for losses included in net
income, net of tax of $5 9 -- 9
Less: Derivative instrument hedging activity loss, net of
tax benefits of $(1) -- (3) (3)
-------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 123 (3) 120
-------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 208 7 215
Unrealized gains on investment securities,
net of tax of $3 5 -- 5
Add: Reclassification adjustment for losses
included in net income, net of tax of $2 4 -- 4
Less: Derivative instrument hedging activity loss, net of
benefits of $(3) tax -- (5) (5)
-------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 9 (5) 4
-------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004 $217 $2 $219
-------------------------------------------------------------------------------------------------------------------
44
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 2004, 2003 and
2002.
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 2004, 2003
and 2002. See Note 11.
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 the cash flows from assets and related 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
to exchange
45
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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, 2004 and 2003 the Company held collateral under these contracts
amounting to approximately $101.5 million and $69.7 million, respectively.
The table below provides a summary of the notional and fair value of
derivatives by type:
DECEMBER 31, 2004 DECEMBER 31, 2003
($ IN MILLIONS) Fair Value Fair Value
---------- ----------
Notional Notional
DERIVATIVE TYPE Amount Assets Liabilities Amount Assets Liabilities
- --------------- --------------------------------------------------------------------------
Interest rate, equity and currency swaps $228.5 $4.1 $12.5 $331.8 $12.2 $8.5
Financial futures 216.9 -- -- 92.2 -- --
Interest rate and equity options 1,031.6 135.4 -- 491.0 115.1 --
Currency forwards 3.1 -- -- 1.4 -- --
Credit derivatives 8.6 0.2 0.1 8.6 0.2 0.1
---------------------------------------------------------------------------
TOTAL $1,488.70 0.2$ $0.1 $925.0 $0.2 $0.1
===========================================================================
The following table summarizes certain information related to the Company's
hedging activities for the years ended December 31, 2004 and 2003:
Year Ended Year Ended
($ IN MILLIONS) December 31, 2004 December 31, 2003
----------------------------------------------------------------------------
Hedge ineffectiveness recognized
related to fair value hedges $(3.8) $(3.3)
Hedge ineffectiveness recognized
related to cash flow hedges (.1) (.3)
Net gain or loss from economic
hedges in earnings (.6) 8.1
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, 2004 is not significant.
46
NOTES TO 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
notional values of loan commitments at December 31, 2004 and 2003 were $34.4
million and $7.6 million, respectively. The notional values of other
unfunded commitments were $19.9 million and $31.0 million at December 31,
2004 and 2003, 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, 2004, investments in fixed maturities had a carrying value
and a fair value of $6.3 billion compared with a carrying value and a fair
value of $5.4 billion at December 31, 2003. See Notes 1 and 2.
At December 31, 2004, mortgage loans had a carrying value of $212.1 million
and a fair value of $220.8 million and at December 31, 2003 had a carrying
value of $135.4 million and a fair value of $147.6 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 $420.0 million and $195.3
million in 2004 and 2003, respectively, which approximated their fair
values. Policy loans, which are included in other invested assets, had
carrying values of $31.9 million and $26.8 million in 2004 and 2003,
respectively, which also approximated their fair values. The Company had
interest rate and equity options with fair values of $135.4 million and
$115.1 million, at December 31, 2004 and 2003, respectively, also included
in other invested assets.
The carrying values of $208.7 million and $260.6 million of financial
instruments classified as other assets approximated their fair values at
December 31, 2004 and 2003, respectively. The carrying values of $425.9
million and $439.2 million of financial instruments classified as other
liabilities also approximated their fair values at December 31, 2004 and
2003, respectively. Fair value is determined using various methods,
including discounted cash flows, as appropriate for the various financial
instruments.
At December 31, 2004 and 2003, contractholder funds with defined maturities
had a carrying value of $2.8 billion and a fair value of $3.0 billion. 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 $610.6 million and a fair value of $543.2
million at December 31, 2004, compared with a carrying value of $677.7
million and a fair value of $527.3 million at December 31, 2003. These
contracts generally are valued at surrender value.
47
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
10. 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 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. The class action claims against TLA are 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.
In 2003 and 2004, 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. During 2004 the SEC requested additional
information about the Company's variable product operations on market
timing, late trading and revenue sharing, and the SEC, the National
Association of Securities Dealers and the New York Insurance Department have
made inquiries into these issues and other matters associated with the sale
and distribution of insurance products. In addition, like many insurance
companies and agencies, in 2004 and 2005 the Company received inquiries from
certain state Departments of Insurance regarding producer compensation and
bidding practices. The Company is cooperating fully with all of these
requests and is not able to predict their outcomes.
In addition, 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 and regulatory proceedings would not be likely to have a material
adverse effect on the Company's financial condition or liquidity, but, if
involving monetary liability, may be material to the Company's operating
results for any particular period.
48
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
11. RELATED PARTY TRANSACTIONS
TIC handles banking functions, including payment of 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,
payroll, internal auditing, benefit management and administration, property
management and investment technology services to the Company as of December
31, 2004 and 2003. 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 2004, 2003 and 2002.
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, 2004 and 2003, the pool
totaled approximately $4.1 billion and $3.8 billion, respectively. The
Company's share of the pool amounted to $384.2 million and $124.6 million at
December 31, 2004 and 2003, respectively, and is included in short-term
securities in the balance sheet.
At December 31, 2004 and 2003, the Company had investments in Tribeca
Citigroup Investments Ltd., an affiliate of the Company, in the amounts of
$13.8 million and $25.5 million, respectively. Income of $1.3 million, $6.6
million and $1.9 million was earned on these investments in 2004, 2003 and
2002, respectively.
At December 31, 2004 and 2003 the Company had outstanding loaned securities
to an affiliate, Citigroup Global Markets Inc., (CGMI) in the amount of
$38.1 million and $7.1 million, respectively.
The Company has other affiliated investments. The individual investment with
any one affiliate was insignificant at December 31, 2004 and 2003.
The Company's Travelers Target Maturity (TTM) Modified Guaranteed Annuity
Contracts are subject to a limited guarantee agreement by TIC in a principal
amount of up to $450 million. TIC's obligation is to pay in full to any
owner or beneficiary of the TTM Modified Guaranteed Annuity Contracts
principal and interest as and when due under the annuity contract to the
extent that the Company fails to make such payment. In addition, TIC
guarantees that the Company will maintain a minimum statutory capital and
surplus level.
The Company distributes fixed and variable annuity products through its
affiliate Smith Barney (SB), a division of CGMI. Premiums and deposits
related to these products were $506 million, $707 million and $821 million
in 2004, 2003 and 2002, respectively. The Company also markets term and
universal life products through SB. Premiums related to such products were
$107.7 million, $87.5 million and $87.2 million in 2004, 2003 and 2002,
respectively. Commissions and fees paid to SB were $50.2 million, $56.7
million and $57.5 million in 2004, 2003 and 2002, respectively.
The Company also distributes deferred annuity products through its
affiliates Primerica Financial Services, Inc. (PFS), CitiStreet Retirement
Services, a division of CitiStreet LLC, (together with its subsidiaries,
CitiStreet) and Citibank, N.A. (Citibank). Deposits received from PFS were
$636 million, $628 million and $662 million in 2004, 2003 and 2002,
respectively. Commissions and fees paid to PFS were $47.9 million, $52.4
million and $47.1 million in 2004, 2003 and 2002, respectively.
49
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Deposits received from CitiStreet were $116 million, $82 million and $184
million in 2004, 2003 and 2002, respectively. Related commissions and fees
paid to CitiStreet were $3.1 million, $2.3 million and $2.6 million in 2004,
2003 and 2002, respectively.
Deposits received from Citibank were $112 million, $162 million and $117
million in 2004, 2003 and 2002, respectively. Commissions and fees paid to
Citibank were $13.0 million, $12.4 million and $7.2 million in 2004, 2003
and 2002, respectively.
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 2004, 2003 and 2002.
Most leasing functions for TIC and the Company are administered by a
Citigroup subsidiary. Rent expense related to leases is shared by the
companies on a cost allocation method based generally on estimated usage by
department. The Company's rent expense was insignificant in 2004, 2003 and
2002.
During 2004 TLARC was established as a pure captive to reinsure 100% of the
statutory-based risk associated with universal life contracts. Statutory
premiums paid by the Company to TLARC totaled $927 million in 2004. Ceding
commissions and experience refunds paid by TLARC to the Company totaled $913
million in 2004. The net amount paid was $14 million and was reported as a
reduction of other income. See Note 3.
50
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
12. RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES
The following table reconciles net income to net cash used in operating
activities:
---------------------------------------------------- ---------------- ---------------- ----------------
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
($ IN MILLIONS)
---------------------------------------------------- ---------------- ---------------- ----------------
Net Income $158 $119 $103
Adjustments to reconcile net income to
cash used in operating activities:
Realized (gains) losses (17) 7 31
Deferred federal income taxes (47) (39) 87
Amortization of deferred policy acquisition costs 226 136 67
Additions to deferred policy acquisition costs (469) (351) (317)
Investment income accrued (7) (37) (35)
Insurance reserves (49) (16) (9)
Other 314 (44) 72
---------------------------------------------------- ---------------- ---------------- ----------------
Net cash used in operations $109 $(225) $(1)
---------------------------------------------------- ---------------- ---------------- ----------------
13. NON-CASH INVESTING AND FINANCING ACTIVITIES
There were no significant non-cash activities for the years end December 31,
2004, 2003 and 2002.
14. SUBSEQUENT EVENT
On January 31, 2005, Citigroup announced that it had agreed to sell TIC, the
Company and certain other domestic and international insurance businesses
(the Life Insurance and Annuity Businesses) to MetLife, Inc. (MetLife)
pursuant to an Acquisition Agreement (the Agreement). The transaction is
subject to certain regulatory approvals, as well as other customary
conditions to closing. Citigroup currently anticipates that the intended
sale would be completed this summer.
TIC's Primerica segment and certain other assets will remain with Citigroup.
Accordingly, prior to the closing, TIC will distribute to its parent
company, by way of dividend, Primerica Life Insurance Company and certain
other assets.
Subject to closing adjustments described in the Agreement, the contemplated
sale price would be $11.5 billion.
51
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, 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not Applicable
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.
52
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a description of the fees earned by KPMG for services
rendered to the Company for the years ended December 31, 2004 and 2003.
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 the Company's independent registered public
accounting firm. 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 and accounting advice on completed transactions. The aggregate
fees earned by KPMG for audit services rendered to the Company totaled $345
thousand and $70 thousand in each of the years ended December 31, 2004 and
2003, 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 attestation services as
well as certain agreed upon procedures. The aggregate fees earned by KPMG
for audit related services rendered to the Company were $4 thousand for the
year ended December 31, 2004 and $3 thousand for the year ended December 31,
2003.
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, 2004 and 2003.
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, 2004 and 2003.
The Company did not engage KPMG for any additional non-audit services other
than those permitted under its policy, unless such services were
individually approved by the Citigroup audit and risk management committee.
APPROVAL OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SERVICES AND FEES:
Citigroup's audit and risk management committee has reviewed and approved
all fees charged by Citigroup's independent registered public accounting
firm, 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 registered
public accounting firm 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. The policy also includes limitations on the hiring
of KPMG partners and other professionals to ensure that the Company
satisfies the SEC's auditor independence rules.
53
During 2004, the following changes were made in Citigroup's policy for
approval of audit fees and services. Pre-approval of the audit and risk
management committee is required for all internal control engagements and,
effective December 31, 2004, Citigroup further restricted the scope of tax
services that may be provided by KPMG and determined that it will no longer
use KPMG for tax advisory services, including consulting and tax planning,
except as related to tax compliance services.
Under the Citigroup policy approved by the audit and risk management
committee, the committee must pre-approve all services provided by
Citigroup's independent registered public accounting firm 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.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Documents filed:
(1) Financial Statements. See index on page 15 of this report.
(2) Financial Statement Schedules. See index on page 57 of this
report.
(3) Exhibits. See Exhibit Index on the following page.
54
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
55
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 30th day of March,
2005.
THE TRAVELERS LIFE AND ANNUITY COMPANY
(Registrant)
By: /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)
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 30th day of March, 2005.
SIGNATURE CAPACITY
/s/ George C. Kokulis Director, Chief Executive Officer
- ------------------------
(George C. Kokulis) (Principal Executive Officer)
/s/ Glenn D. Lammey Director, Chief Financial Officer and
- ------------------------ Chief Accounting Officer
(Glenn D. Lammey) (Principal Financial Officer and
Principal Accounting Officer)
/s/ Kathleen L. Preston Director
- ------------------------
(Kathleen L. Preston)
/s/ Marla Berman Lewitus Director
- ------------------------
(Marla Berman Lewitus)
/s/ Edward W. Cassidy Director
- ------------------------
(Edward W. Cassidy)
/s/ William P. Krivoshik Director
- ------------------------
(William P. Krivoshik)
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.
56
THE TRAVELERS LIFE AND ANNUITY COMPANY
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
The Travelers Life and Annuity Company
Report of Independent Registered Public Accounting Firm *
Statements of Income *
Balance Sheets *
Statements of Changes in Shareholder's Equity *
Statements of Cash Flows *
Notes to Financial Statements *
Report of Independent Registered Public Accounting Firm 58
Schedule I - Summary of Investments - Other than
Investments in Related Parties 2004 59
Schedule III - Supplementary Insurance Information 2002-2004 60
Schedule IV - Reinsurance 2002-2004 61
All other schedules are inapplicable for this filing.
* See index on page 15.
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholder
The Travelers Life and Annuity Company:
Under date of March 28, 2005, we reported on the balance sheets of The Travelers
Life and Annuity Company as of December 31, 2004 and 2003, 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, 2004, 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 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 financial statements, the Company changed its
methods of accounting and reporting for certain nontraditional long-duration
contracts and for separate accounts in 2004 and for goodwill and intangible
assets in 2002.
/s/ KPMG LLP
Hartford, Connecticut
March 28, 2005
58
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2004
($ IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------------
AMOUNT SHOWN IN
TYPE OF INVESTMENT COST VALUE BALANCE SHEET (1)
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and authorities $719 $741 $741
States, municipalities and political subdivisions 57 65 65
Foreign governments 63 69 69
Public utilities 354 382 382
Convertible bonds and bonds with warrants attached 25 28 28
All other corporate bonds 4,707 4,970 4,970
- ---------------------------------------------------------------------------------------------------------------------------
Total Bonds 5,925 6,255 6,255
Redeemable Preferred Stocks 4 6 6
- ---------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 5,929 6,261 6,261
- ---------------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Industrial, miscellaneous and all other 12 15 15
- ---------------------------------------------------------------------------------------------------------------------------
Total Common Stocks 12 15 15
Non-Redeemable Preferred Stocks 4 4 4
- ---------------------------------------------------------------------------------------------------------------------------
Total Equity Securities 16 19 19
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage Loans 212 212
Policy Loans (4) 32 32
Short-Term Securities 420 420
Other Investments (2) (3) 312 312
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments $6,921 $7,256
===========================================================================================================================
(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 $72
million and $73 million, respectively.
(3) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
(4) Included in other invested assets on balance sheet.
59
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
2002-2004
($ IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
BENEFITS, AMORTIZATION
DEFERRED FUTURE POLICY CLAIMS, OF DEFERRED
POLICY BENEFITS, LOSSES, NET LOSSES AND POLICY OTHER
ACQUISITION CLAIMS AND LOSS PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
COSTS EXPENSES (1) REVENUE INCOME EXPENSES (2) COSTS EXPENSES WRITTEN
- ------------------------------------------------------------------------------------------------------------------------------------
2004 $1,522 $6,306 $40 $389 $326 $226 $63 $40
2003 $1,279 $5,610 $41 $356 $307 $136 $49 $41
2002 $1,064 $5,032 $43 $312 $275 $67 $32 $43
(1) Includes contractholder funds.
(2) Includes interest credited on contractholder funds.
60
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE IV
REINSURANCE
($ IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------------
PERCENTAGE
ASSUMED OF AMOUNT
CEDED TO OTHER FROM OTHER ASSUMED TO
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT NET
- --------------------------------------------------------------------------------------------------------------------------
2004
- ----
Life Insurance In Force $54,886 $44,286 $ -- $10,600 --%
Premiums:
Annuity $6 $ -- $ -- $6
Individual life 68 34 -- 34
------- ---- ------- ---
Total Premiums $74 $ 34 $ -- $40 --%
======= ==== ======= ===
2003
- ----
Life Insurance In Force $43,671 $34,973 $ -- $8,698 --%
Premiums:
Annuity $4 $ -- $ -- $ 4
Individual Life 62 25 -- 37
------- ---- ------- ---
Total Premiums $66 $ 25 $ -- $41 --%
======= ==== ======= ===
2002
- ----
Life Insurance In Force $35,807 $29,261 $ -- $6,546 --%
Premiums:
Annuity $5 $ -- $ -- $ 5
Individual life 53 15 -- 38
------- ---- ------- ---
Total Premiums $58 $15 $ -- $43 --%
======= ==== ======= ===
61
THIS PAGE INTENTIONALLY LEFT BLANK.
"TTM"
TRAVELERS TARGET MATURITY
MODIFIED GUARANTEED ANNUITY CONTRACTS
ISSUED BY
THE TRAVELERS INSURANCE COMPANY
OR
THE TRAVELERS LIFE AND ANNUITY COMPANY
ONE CITYPLACE
HARTFORD, CONNECTICUT 06103-3415
L-12916 5-2005