Filed Pursuant to
Rule 424(b)(3)
Registration No:
333-69793
333-69753
================================================================================
TRAVELERS RETIREMENT ACCOUNT ANNUITY PROSPECTUS:
THE TRAVELERS SEPARATE ACCOUNT FIVE FOR VARIABLE ANNUITIES
THE TRAVELERS SEPARATE ACCOUNT SIX FOR VARIABLE ANNUITIES
This prospectus describes TRAVELERS RETIREMENT ACCOUNT ANNUITY, a flexible
premium deferred variable annuity contract (the "Contract") issued by The
Travelers Insurance Company or The Travelers Life and Annuity Company. The
Travelers Life and Annuity Company does not solicit or issue insurance products
in the state of New York. Refer to the first page of your Contract for the name
of your issuing company. The Contract is available in connection with certain
retirement plans that qualify for special federal income tax treatment
("Qualified Contracts".) We may issue it as an individual Contract or as a group
Contract. When we issue a group Contract, you will receive a certificate
summarizing the Contract's provisions. For convenience, we refer to Contracts
and certificates as "Contracts." You can choose to have your premium ("Purchase
Payments") and any applicable Purchase Payment Credits accumulate on a variable
and, subject to availability, fixed basis in one of our funding options. Your
Contract Value before the Maturity Date and the amount of monthly income
afterwards will vary daily to reflect the investment experience of the Variable
Funding Options you select. You bear the investment risk of investing in the
Variable Funding Options. The Variable Funding Options are:
Capital Appreciation Fund PUTNAM VARIABLE TRUST
High Yield Bond Trust Putnam VT Small Cap Value Fund -- Class IB Shares
Managed Assets Trust SALOMON BROTHERS VARIABLE SERIES FUNDS INC.
Money Market Portfolio All Cap Fund -- Class I
AMERICAN FUNDS INSURANCE SERIES Investors Fund -- Class I
Global Growth Fund -- Class 2 Shares THE TRAVELERS SERIES TRUST
Growth Fund -- Class 2 Shares Convertible Securities Portfolio
Growth-Income Fund -- Class 2 Shares Disciplined Mid Cap Stock Portfolio
CITISTREET FUNDS, INC. Equity Income Portfolio
CitiStreet Diversified Bond Fund -- Class I Large Cap Portfolio
CitiStreet International Stock Fund -- Class I Mercury Large Cap Core Portfolio(1)
CitiStreet Large Company Stock Fund -- Class I MFS Mid Cap Growth Portfolio
CitiStreet Small Company Stock Fund -- Class I MFS Value Portfolio
DELAWARE VIP TRUST Mondrian International Stock Portfolio(2)
Delaware VIP REIT Series -- Standard Class Pioneer Fund Portfolio
Delaware VIP Small Cap Value Series -- Standard Class Pioneer Mid Cap Value Portfolio
DREYFUS VARIABLE INVESTMENT FUND Social Awareness Stock Portfolio
Appreciation Portfolio -- Initial Shares Style Focus Series: Small Cap Growth Portfolio
Developing Leaders Portfolio -- Style Focus Series: Small Cap Value Portfolio
Initial Shares Travelers Quality Bond Portfolio
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST U.S. Government Securities Portfolio
Mutual Shares Securities Fund -- Class 2 Shares TRAVELERS SERIES FUND INC.
Templeton Developing Markets Securities Fund -- Class 2 Shares AIM Capital Appreciation Portfolio
Templeton Foreign Securities Fund -- Class 2 Shares MFS Total Return Portfolio
Templeton Growth Securities Fund -- Class 2 Shares Pioneer Strategic Income Portfolio
GREENWICH STREET SERIES FUND SB Adjustable Rate Income Portfolio Smith Barney Class
Appreciation Portfolio Smith Barney Aggressive Growth Portfolio
Equity Index Portfolio -- Class II Shares Smith Barney High Income Portfolio
JANUS ASPEN SERIES Smith Barney Large Capitalization Growth Portfolio
Mid Cap Growth Portfolio -- Service Shares Strategic Equity Portfolio
LAZARD RETIREMENT SERIES, INC. VAN KAMPEN LIFE INVESTMENT TRUST
Lazard Retirement Small Cap Portfolio Comstock Portfolio Class II Shares
LORD ABBETT SERIES FUND, INC. VARIABLE ANNUITY PORTFOLIOS
Growth and Income Portfolio Smith Barney Small Cap Growth Opportunities Portfolio
Mid-Cap Value Portfolio VARIABLE INSURANCE PRODUCTS FUND II
OPPENHEIMER VARIABLE ACCOUNT FUNDS Contrafund(R) Portfolio -- Service Class 2
Oppenheimer Main Street Fund/VA -- Service Shares VARIABLE INSURANCE PRODUCTS FUND III
PIMCO VARIABLE INSURANCE TRUST Mid Cap Portfolio -- Service Class 2
Real Return Portfolio -- Administrative Class
Total Return Portfolio -- Administrative Class
- ------------------------------
(1) Formerly Merrill Lynch Large Cap Core Portfolio (2) Formerly Lazard International Stock Portfolio
We also offer variable annuity Contracts that do not have Purchase Payment
Credits, and therefore may have lower fees. Over time, the value of the Purchase
Payment Credits could be more than offset by higher charges. You should
carefully consider whether or not this Contract is the most appropriate
investment for you.
The Contract, certain Contract features and/or some of the funding options may
not be available in all states. This prospectus provides the information that
you should know before investing in the Contract. Please keep this prospectus
for future reference. You can receive additional information about your Contract
by requesting a copy of the Statement of Additional Information ("SAI") dated
May 2, 2005. We filed the SAI with the Securities and Exchange Commission
("SEC"), and it is incorporated by reference into this prospectus. To request a
copy, write to The Travelers Insurance Company, Annuity Investor Services, One
Cityplace, 3 CP, Hartford, Connecticut 06103-3415, call 1-800-842-9406 or access
the SEC's website (http://www.sec.gov). See Appendix E for the SAI's table of
contents.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
VARIABLE ANNUITY CONTRACTS ARE NOT DEPOSITS OF ANY BANK, AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
PROSPECTUS DATED MAY 2, 2005
TABLE OF CONTENTS
Glossary............................................. 3 Annuity Options..................................... 36
Summary.............................................. 5 Miscellaneous Contract Provisions...................... 36
Fee Table............................................ 8 Right to Return..................................... 36
Condensed Financial Information...................... 16 Termination......................................... 36
The Annuity Contract................................. 16 Required Reports.................................... 37
Contract Owner Inquiries.......................... 17 Suspension of Payments.............................. 37
Purchase Payments................................. 17 The Separate Accounts.................................. 37
Purchase Payment Credits ......................... 17 Performance Information............................. 37
Conservation Credit............................... 17 Federal Tax Considerations............................. 38
Accumulation Units................................ 18 General Taxation of Annuities....................... 38
The Variable Funding Options...................... 18 Types of Contracts: Qualified and Non-qualified..... 38
Fixed Account ....................................... 24 Qualified Annuity Contracts......................... 38
Charges and Deductions............................... 24 Taxation of Qualified Annuity Contracts........... 39
General........................................... 24 Mandatory Distributions for Qualified Plans....... 39
Withdrawal Charge................................. 25 Non-qualified Annuity Contracts..................... 39
Free Withdrawal Allowance......................... 26 Diversification Requirements for Variable
Transfer Charge................................... 26 Annuities....................................... 40
Mortality and Expense Risk Charge................. 26 Ownership of the Investments...................... 40
Variable Funding Option Expenses.................. 27 Taxation of Death Benefit Proceeds................ 40
Floor Benefit/Liquidity Benefit Charges........... 27 Other Tax Considerations............................ 40
CHART Asset Allocation Program Charges ........... 27 Treatment of Charges for Optional Benefits........ 40
Premium Tax....................................... 27 Penalty Tax for Premature Distribution............ 41
Changes in Taxes Based upon Premium or Puerto Rico Tax Considerations.................... 41
Value............................................. 27 Non-Resident Aliens............................... 41
Transfers............................................ 27 Available Information.................................. 41
Access to Your Money................................. 29 Incorporation of Certain Documents by
Systematic Withdrawals............................ 29 Reference........................................... 42
Ownership Provisions................................. 30 Other Information...................................... 42
Types of Ownership................................ 30 The Insurance Companies............................. 42
Contract Owner.................................. 30 Financial Statements................................ 43
Beneficiary..................................... 30 Distribution of Variable Annuity Contracts.......... 43
Death Benefit........................................ 30 Conformity with State and Federal Laws.............. 45
Death Proceeds before the Maturity Date........... 30 Voting Rights....................................... 45
Step-Up Death Benefit Value....................... 31 Restrictions on Financial Transactions.............. 45
Payment of Proceeds............................... 31 Legal Proceedings and Opinions...................... 45
Beneficiary Contract Continuance.................. 32 Appendix A: Condensed Financial
Planned Death Benefit............................. 32 Information for The Travelers Insurance
Death Proceeds after the Maturity Date............ 33 Company: Separate Account Five...................... A-1
The Annuity Period................................... 33 Appendix B: Condensed Financial Information
Maturity Date..................................... 33 for The Travelers Life and Annuity
Liquidity Benefit ................................ 32 Company: Separate Account Six....................... B-1
Allocation of Annuity............................. 34 Appendix C: Waiver of Withdrawal Charge
Variable Annuity.................................. 34 for Nursing Home Confinement........................ C-1
Fixed Annuity..................................... 35 Appendix D: Market Value Adjustment.................... D-1
Payment Options........................................35 Appendix E: Contents of the Statement
Election of Options.................................35 of Additional Information........................... E-1
2
GLOSSARY
ACCUMULATION UNIT -- an accounting unit of measure used to calculate the value
of this Contract before Annuity Payments begin.
ANNUITANT -- the person on whose life the Maturity Date and Annuity Payments
depend.
ANNUITY PAYMENTS -- a series of periodic payments (a) for life; (b) for life
with a minimum number of payments; (c) for the joint lifetime of the Annuitant
and another person, and thereafter during the lifetime of the survivor; or (d)
for a fixed period.
ANNUITY UNIT -- an accounting unit of measure used to calculate the amount of
Annuity Payments.
CASH SURRENDER VALUE -- the Contract Value less any withdrawal charge and
premium tax not previously deducted.
CODE -- the Internal Revenue Code of 1986, as amended, and all related laws and
regulations that are in effect during the term of this Contract.
CONTINGENT ANNUITANT -- the individual who becomes the Annuitant when the
Annuitant who is not the owner dies prior to the Maturity Date.
CONTRACT DATE -- the date on which the Contract is issued.
CONTRACT OWNER (you) -- the person named in the Contract (on the specifications
page) as the owner of the Contract.
CONTRACT VALUE -- Purchase Payments and any associated Purchase Payment Credits,
plus or minus any investment experience on the amounts allocated to the variable
funds or interest on amounts allocated to the Fixed Account, adjusted by any
applicable charges and withdrawals.
CONTRACT YEARS -- twelve month periods beginning with the Contract Date.
DEATH REPORT DATE -- the day on which we have received 1) Due Proof of Death and
2) written payment instructions or election of spousal or beneficiary contract
continuation.
DUE PROOF OF DEATH -- (i) a copy of a certified death certificate; (ii) a copy
of a certified decree of a court of competent jurisdiction as to the finding of
death; (iii) a written statement by a medical doctor who attended the deceased;
or (iv) any other proof satisfactory to us.
FIXED ACCOUNT -- an account that consists of all of the assets under this
Contract other than those in the Separate Account.
HOME OFFICE -- the Home Office of The Travelers Insurance Company or The
Travelers Life and Annuity Company or any other office that we may designate for
the purpose of administering this Contract.
MATURITY DATE -- the date on which the Annuity Payments are to begin.
PAYMENT OPTION -- an Annuity or Income option elected under your Contract.
PURCHASE PAYMENT -- any premium paid by you to initiate or supplement this
Contract.
PURCHASE PAYMENT CREDIT -- an amount credited to your Contract Value that equals
a percentage of each Purchase Payment made.
QUALIFIED CONTRACT -- a contract used in a retirement plan or program that is
intended to qualify under Sections 401, 403, 408, or 414(d) of the Code.
SEPARATE ACCOUNT -- a segregated account registered with the Securities and
Exchange Commission ("SEC"), the assets of which are invested solely in the
Underlying Funds. The assets of the Separate Account are held exclusively for
the benefit of Contract Owners.
SUBACCOUNT -- that portion of the assets of a Separate Account that is allocated
to a particular Underlying Fund.
3
UNDERLYING FUND -- a portfolio of an open-end management investment company that
is registered with the SEC in which the Subaccounts invest.
VALUATION DATE -- a date on which a Subaccount is valued.
VALUATION PERIOD -- the period between successive valuations.
VARIABLE FUNDING OPTION -- an open-end diversified management investment company
that serves as an investment option under the Separate Account.
WE, US, OUR -- The Travelers Insurance Company or the Travelers Life and Annuity
Company.
WRITTEN REQUEST -- written information sent to us in a form and content
satisfactory to us and received at our Home Office.
YOU, YOUR -- the Contract Owner.
4
SUMMARY:
TRAVELERS RETIREMENT ACCOUNT
THIS SUMMARY DETAILS SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD KNOW AND
CONSIDER BEFORE PURCHASING THE CONTRACT. PLEASE READ THE ENTIRE PROSPECTUS
CAREFULLY.
WHAT COMPANY WILL ISSUE MY CONTRACT? Your issuing company is either The
Travelers Insurance Company or The Travelers Life and Annuity Company, ("the
Company," "we" or "us"). The Travelers Life and Annuity Company does not solicit
or issue insurance products in the state of New York. Refer to your Contract for
the name of your issuing Company. Each company sponsors its own segregated
account ("Separate Account"). The Travelers Insurance Company sponsors the
Travelers Separate Account Five for Variable Annuities ("Separate Account
Five"); The Travelers Life and Annuity Company sponsors the Travelers Separate
Account Six for Variable Annuities ("Separate Account Six"). When we refer to
the Separate Account, we are referring to either Separate Account Five or
Separate Account Six, depending upon your issuing Company. The Contract may not
currently be available for sale in all states.
CAN YOU GIVE ME A GENERAL DESCRIPTION OF THE CONTRACT? We designed the Contract
for retirement savings or other long-term investment purposes. The Contract
provides a death benefit as well as guaranteed payout options. You direct your
payment(s) to one or more of the Variable Funding Options and/or to the Fixed
Account that is part of our general account (the "Fixed Account"). We guarantee
money directed to the Fixed Account as to principal and interest. The Variable
Funding Options fluctuate with the investment performance of the Underlying
Funds and are not guaranteed. You can also lose money in the Variable Funding
Options.
The Contract, like all deferred variable annuity contracts, has two phases: the
accumulation phase and the payout phase (annuity period). During the
accumulation phase generally, your pre-tax contributions accumulate on a
tax-deferred basis and are taxed as income when you make a withdrawal,
presumably when you are in a lower tax bracket. The payout phase occurs when you
begin receiving payments from your Contract. The amount of money you accumulate
in your Contract determines the amount of income (Annuity Payments) you receive
during the payout phase.
During the payout phase, you may choose one of a number of annuity options. You
may receive income payments from the Variable Funding Options and/or the Fixed
Account. If you elect variable income payments, the dollar amount of your
payments may increase or decrease. Once you choose one of the annuity options
and begin to receive payments, it cannot be changed.
WHO CAN PURCHASE THIS CONTRACT? The Contract is currently only available for use
in connection with tax qualified retirement plans ("Plans"), which include
Contracts qualifying under Section 401(a), 403(b), 408 or 457 of the Internal
Revenue Code of 1986, as amended, as well as beneficiary-directed transfers of
death benefit proceeds from another contract. Purchase of this Contract through
a Plan does not provide any additional tax deferral benefits beyond those
provided by the Plan. Accordingly, you should consider purchasing this Contract
for its death benefit, annuity option benefits, and other non-tax-related
benefits.
You may purchase the Contract with an initial payment of at least $20,000. You
may make additional payments of at least $5,000 at any time during the
accumulation phase.
On or after May 2, 2005, the Contract is not available for purchase if the
proposed owner or Annuitant is age 81 or older.
CAN I EXCHANGE MY CURRENT ANNUITY CONTRACT FOR THIS CONTRACT? The Code generally
permits you to exchange one annuity contract for another in a "tax-free
exchange." Therefore, you can transfer the proceeds from another annuity
contract to make Purchase Payments under this Contract. Before making an
exchange to acquire this Contract, you should carefully compare this Contract to
your current contract. You may have to pay a surrender charge under your current
contract to exchange it for this Contract, and this Contract has its own
surrender charges that would apply to you. The other fees and charges under this
Contract may be higher or lower and the benefits may be different than those of
your current contract. In addition, you may have to pay federal income or
penalty taxes on the exchange if it does not qualify for tax-free treatment. You
should not exchange another contract for this Contract unless you determine,
after evaluating all the facts, that the exchange is in your best interests.
Remember that the person selling you the Contract generally will earn a
commission on the sale.
5
WHO IS THE CONTRACT ISSUED TO? If you purchase an individual Contract, you are
the Contract Owner. If a group Contract is purchased, we issue certificates to
the individual participants. Where we refer to "you," we are referring to the
individual Contract Owner or the group participant, as applicable. We refer to
both contracts and certificates as "Contracts." If a group unallocated Contract
is purchased, we issue only the Contract.
We issue group Contracts in connection with retirement plans. Depending on your
Plan, certain features and/or Variable Funding Options described in this
prospectus may not be available to you. Your Plan provisions supercede the
prospectus. If you have any questions about your specific Plan, contact your
Plan administrator.
IS THERE A RIGHT TO RETURN PERIOD? If you cancel the Contract within ten days
after you receive it, you will receive a full refund of your Contract Value plus
any Contract charges and premium taxes you paid (but not fees and charges
assessed by the Underlying Funds). Where state law requires a different right to
return period, or the return of Purchase Payments, the Company will comply. You
bear the investment risk on the Purchase Payment allocated to a Variable Funding
Option during the right to return period; therefore, the Contract Value we
return may be greater or less than your Purchase Payment.
If you purchased your Contract as an Individual Retirement Annuity, and you
return it within the first seven days after delivery, or longer if your state
permits, we will refund your full Purchase Payment. During the remainder of the
right to return period, we will refund your Contract Value (including charges we
assessed). We will determine your Contract Value at the close of business on the
day we receive a Written Request for a refund.
During the right to return period, you will not bear any Contract fees
associated with the Purchase Payment Credits. If you exercise your right to
return, you will be in the same position as if you had exercised the right to
return in a variable annuity Contract with no Purchase Payment Credit. You
would, however, receive any gains, and we would bear any losses attributable to
the Purchase Payment Credits.
CAN YOU GIVE A GENERAL DESCRIPTION OF THE VARIABLE FUNDING OPTIONS AND HOW THEY
OPERATE? Through its Subaccounts, the Separate Account uses your Purchase
Payments to purchase shares, at your direction, of one or more of the Variable
Funding Options. In turn, each Variable Funding Option invests in an underlying
mutual fund ("Underlying Fund") that holds securities consistent with its own
investment policy. Depending on market conditions, you may make or lose money in
any of these Variable Funding Options.
You can transfer among the Variable Funding Options as frequently as you wish
without any current tax implications. Currently there is no charge for
transfers, nor a limit to the number of transfers allowed. We may, in the
future, charge a fee for any transfer request, or limit the number of transfers
allowed. At a minimum, we would always allow one transfer every six months. We
reserve the right to restrict transfers that we determine will disadvantage
other Contract Owners.
WHAT EXPENSES WILL BE ASSESSED UNDER THE CONTRACT? The Contract has insurance
features and investment features, and there are costs related to each. We deduct
a mortality and expense risk ("M&E") charge daily from the amounts you allocate
to the Separate Account. We deduct the M&E at an annual rate of 0.80% for the
Standard Death Benefit, and 1.25% for the Optional Death Benefit. Each
Underlying Fund also charges for management costs and other expenses.
We will apply a withdrawal charge to withdrawals from the Contract, and will
calculate it as a percentage of the Purchase Payments and any associated
Purchase Payment Credits withdrawn. The maximum percentage is 5%, decreasing to
0% in years six and later.
Upon annuitization, if you select the Variable Annuitization Floor Benefit,
there is a Floor Benefit charge assessed. This charge will vary based upon
market conditions, and will be set at the time you choose this option. Once
established, this charge will remain the same throughout the term of the
annuitization. If you select the Liquidity Benefit, there is a charge of 5% of
the amounts withdrawn.
HOW WILL MY PURCHASE PAYMENTS AND WITHDRAWALS BE TAXED? Generally, the payments
you make to a Qualified Contract during the accumulation phase are made with
before-tax dollars. Generally, you will be taxed on your Purchase Payments,
Purchase Payment Credits and on any earnings when you make a withdrawal or begin
receiving Annuity Payments. Payments to the Contract are made with after-tax
dollars, and any credits and earnings will generally accumulate tax-deferred.
You will be taxed on these earnings when they are withdrawn from the Contract.
If you are younger than 59 1/2 when you take money out, you may be charged a 10%
federal penalty tax on the amount withdrawn.
6
HOW MAY I ACCESS MY MONEY? You can take withdrawals any time during the
accumulation phase. Withdrawal charges may apply, and income taxes, and/or a
penalty tax may apply to taxable amounts withdrawn.
WHAT IS THE DEATH BENEFIT UNDER THE CONTRACT? You may choose to purchase the
Standard or Optional Death Benefit. If you die before the Contract is in the
payout phase, the person you have chosen as your beneficiary will receive a
death benefit. We calculate the death benefit value at the close of the business
day on which our Home Office receives (1) Due Proof of Death and (2) written
payment instructions or the election of beneficiary contract continuance. Please
refer to the Death Benefit section in the prospectus for more details.
WHERE MAY I FIND OUT MORE ABOUT ACCUMULATION UNIT VALUES? The Condensed
Financial Information in Appendix A or Appendix B to this prospectus provides
more information about Accumulation Unit values.
ARE THERE ANY ADDITIONAL FEATURES? This Contract has other features you may be
interested in. These include:
o DOLLAR COST AVERAGING. This is a program that allows you to invest a
fixed amount of money in Variable Funding Options each month,
theoretically giving you a lower average cost per unit over time than
a single one-time purchase. Dollar Cost Averaging requires regular
investments regardless of fluctuating price levels, and does not
guarantee profits or prevent losses in a declining market. Potential
investors should consider their financial ability to continue
purchases through periods of low price levels.
o SYSTEMATIC WITHDRAWAL OPTION. Before the Maturity Date, you can
arrange to have money sent to you at set intervals throughout the
year. Of course, any applicable income and penalty taxes will apply
on amounts withdrawn. Withdrawals in excess of the free withdrawal
allowance may be subject to a withdrawal charge.
o MANAGED DISTRIBUTION PROGRAM. This program allows us to automatically
calculate and distribute to you, in November of the applicable tax
year, an amount that will satisfy the Internal Revenue Service's
minimum distribution requirements imposed on certain Contracts once
the owner reaches age 70 1/2or retires. These minimum distributions
occur during the accumulation phase.
o ASSET ALLOCATION ADVICE. If allowed, you may elect to enter into a
separate advisory agreement with CitiStreet Financial Services LLC.
("CitiStreet"), an affiliate of the Company, for the purpose of
receiving asset allocation advice under CitiStreet's CHART Program.
The CHART Program allocates all Purchase Payments among the
CitiStreet Funds. The CHART Program and applicable fees are fully
described in a separate disclosure statement.
O BENEFICIARY CONTRACT CONTINUANCE (NOT PERMITTED FOR NON-NATURAL
BENEFICIARIES). If you die before the Maturity Date, and if the value
of any beneficiary's portion of the death benefit is between $20,000
and $1,000,000 as of the date of your death, that beneficiary(s) may
elect to continue his/her portion of the Contract.
7
FEE TABLE
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses that you will pay when
buying, owning, and surrendering the Contract. The first table describes the
fees and expenses that you will pay at the time that you buy the Contract,
surrender the Contract, or transfer Contract Value between Variable Funding
Options. Expenses shown do not include premium taxes, which may be applicable.
CONTRACT OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGE............................................. 5%(1)
(AS A PERCENTAGE OF THE PURCHASE PAYMENTS AND ANY APPLICABLE PURCHASE PAYMENT
CREDITS WITHDRAWN)
TRANSFER CHARGE............................................... $10(2)
(ASSESSED ON TRANSFERS THAT EXCEED 12 PER YEAR)
LIQUIDITY BENEFIT CHARGE...................................... 5%
(DURING THE ANNUITY PERIOD, IF YOU HAVE ELECTED THE LIQUIDITY BENEFIT, A
SURRENDER CHARGE OF 5% OF THE AMOUNT WITHDRAWN WILL BE ASSESSED. SEE
"LIQUIDITY BENEFIT").
- --------------
(1) The withdrawal charge declines to zero after the Purchase Payment has
been in the Contract for 5 years. The charge is as follows:
YEARS SINCE PURCHASE WITHDRAWAL
PAYMENT MADE CHARGE
- ------------------------------------------- ----------------------
GREATER THAN OR EQUAL TO BUT LESS THAN
0 years 1 years 5%
1 years 2 years 4%
2 years 3 years 3%
3 years 4 years 2%
4 years 5 years 1%
5 years+ 0%
(2) We do not currently assess the transfer charge.
The next table describes the fees and expenses that you will pay periodically
during the time that you own the Contract, not including Underlying Fund fees
and expenses.
ANNUAL SEPARATE ACCOUNT CHARGES
(AS A PERCENTAGE OF THE AVERAGE DAILY NET ASSETS OF THE SEPARATE ACCOUNT)
STANDARD DEATH BENEFIT: OPTIONAL DEATH BENEFIT:
- -------------------------------------------------- -----------------------------------------------
Mortality and Expense Risk Charge............... 0.80% Mortality and Expense Risk Charge............. 1.25%
Administrative Expense Charge................... None Administrative Expense Charge................. None
--------- ---------
Total Annual Separate Account Charges...... 0.80% Total Annual Separate Account Charges.... 1.25%
During the annuity period, if you have elected the Variable Annuitization Floor
Benefit, a total annual separate account charge of up to 3.80% or 4.25% may
apply. See "Variable Annuitization Floor Benefit".
8
UNDERLYING FUND EXPENSES AS OF DECEMBER 31, 2004 (UNLESS OTHERWISE INDICATED):
The first table below shows the range (minimum and maximum) of the total annual
operating expenses charged by all of the Underlying Funds, before any voluntary
or contractual fee waivers and/or expense reimbursements. The second table shows
each Underlying Fund's management fee, distribution and/or service fees (12b-1)
if applicable, and other expenses. The Underlying Funds provided this
information and we have not independently verified it. More detail concerning
each Underlying Fund's fees and expenses is contained in the prospectus for each
Underlying Fund. Current prospectuses for the Underlying Funds can be obtained
by calling 1-800-842-9406.
MINIMUM AND MAXIMUM TOTAL ANNUAL UNDERLYING FUND OPERATING EXPENSES
MINIMUM MAXIMUM
TOTAL ANNUAL FUND OPERATING EXPENSES ------ -------
(expenses that are deducted from Underlying Fund
assets, including management fees, distribution
and/or service fees (12b-1) fees, and other expenses.).... 0.42% 1.79%
UNDERLYING FUND FEES AND EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
DISTRIBUTION
AND/OR TOTAL CONTRACTUAL NET TOTAL
SERVICE ANNUAL FEE WAIVER ANNUAL
MANAGEMENT (12B-1) OTHER OPERATING AND/OR EXPENSE OPERATING
UNDERLYING FUND: FEE FEES EXPENSES EXPENSES REIMBURSEMENT EXPENSES
- ----------------- -------------- ------------- ---------- ------------ ---------------- ----------------
Capital Appreciation Fund.... 0.70% -- 0.08% 0.78% -- --(1), (38)
High Yield Bond Trust........ --(2), (38)
0.45% -- 0.18% 0.63% --
Managed Assets Trust......... --(17), (38)
0.50% -- 0.11% 0.61% --
Money Market Portfolio....... --(17), (38)
0.32% -- 0.10% 0.42% --
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Premier Equity
Fund -- Series I Shares+. 0.61% -- 0.30% 0.91% -- 0.91%(3)
AMERICAN FUNDS INSURANCE
SERIES
Global Growth Fund --
Class 2 Shares*......... 0.61% 0.25% 0.04% 0.90% -- --(38)
Growth Fund -- Class 2
Shares*................. 0.35% 0.25% 0.01% 0.61% -- 0.61%
Growth-Income Fund --
Class 2 Shares*......... 0.29% 0.25% 0.02% 0.56% -- --(38)
CITISTREET FUNDS, INC.
CitiStreet Diversified
Bond Fund -- Class I..... 0.44% -- 0.10% 0.54% -- 0.54%
CitiStreet International
Stock Fund -- Class I.... 0.71% -- 0.18% 0.89% -- 0.89%
CitiStreet Large Company
Stock Fund -- Class I.... 0.53% -- 0.11% 0.64% -- 0.64%
CitiStreet Small Company
Stock Fund -- Class I.... 0.59% -- 0.15% 0.74% -- 0.74%
CITISTREET FUNDS, INC. **
CitiStreet Diversified
Bond Fund -- Class I..... 0.44% -- 1.35% 1.79% -- 1.79%
CitiStreet International
Stock Fund -- Class I.... 0.71% -- 1.43% 2.14% -- 2.14%
CitiStreet Large Company
Stock Fund -- Class I.... 0.53% -- 1.36% 1.89% -- 1.89%
CitiStreet Small Company
Stock Fund -- Class I.... 0.59% -- 1.40% 1.99% -- 1.99%
9
DISTRIBUTION
AND/OR TOTAL CONTRACTUAL NET TOTAL
SERVICE ANNUAL FEE WAIVER ANNUAL
MANAGEMENT (12B-1) OTHER OPERATING AND/OR EXPENSE OPERATING
UNDERLYING FUND: FEE FEES EXPENSES EXPENSES REIMBURSEMENT EXPENSES
- ----------------- -------------- ------------- ---------- ------------ ---------------- ----------------
CREDIT SUISSE TRUST
Credit Suisse Trust
Emerging Market --(4), (38)
Portfolio+.............. 1.25% -- 0.44% 1.69% --
DELAWARE VIP TRUST
Delaware VIP REIT Series
-- Standard Class........ 0.74% -- 0.10% 0.84% -- 0.84%(5)
Delaware VIP Small Cap
Value Series -- Standard
Class................... 0.74% -- 0.09% 0.83% -- 0.83%(5)
DREYFUS VARIABLE INVESTMENT
FUND
Dreyfus Variable
Investment Fund --
Appreciation Portfolio
-- Initial Shares........ 0.75% -- 0.04% 0.79% -- 0.79%
Dreyfus Variable
Investment Fund --
Developing Leaders
Portfolio -- Initial
Shares.................. 0.75% -- 0.04% 0.79% -- 0.79%
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
Mutual Shares Securities
Fund -- Class 2 Shares*.. 0.60% 0.25% 0.15% 1.00% -- 1.00%(6)
Templeton Developing
Markets Securities Fund
-- Class 2 Shares*....... 1.25% 0.25% 0.29% 1.79% -- 1.79%
Templeton Foreign
Securities Fund -- Class
2 Shares*............... 0.68% 0.25% 0.19% 1.12% 0.05% 1.07%(7)
Templeton Growth
Securities Fund -- Class
2 Shares*............... 0.79% 0.25% 0.07% 1.11% -- 1.11%(8)
GREENWICH STREET SERIES FUND
Appreciation Portfolio.... 0.73% -- 0.02% 0.75% -- 0.75%(9)
Equity Index Portfolio --
Class II Shares*........ 0.31% 0.25% 0.03% 0.59% -- 0.59%
Fundamental Value
Portfolio+.............. 0.75% -- 0.02% 0.77% -- 0.77%(10)
JANUS ASPEN SERIES
Balanced Portfolio --
Service Shares*+........ 0.55% 0.25% 0.01% 0.81% -- 0.81%
Mid Cap Growth Portfolio
-- Service Shares*....... 0.64% 0.25% 0.01% 0.90% -- 0.90%
Worldwide Growth
Portfolio -- Service
Shares*+................ 0.60% 0.25% 0.03% 0.88% -- 0.88%
LAZARD RETIREMENT SERIES,
INC.
Lazard Retirement Small
Cap Portfolio*.......... 0.75% 0.25% 0.37% 1.37% 0.12% 1.25%(11)
LORD ABBETT SERIES FUND, INC.
Growth and Income
Portfolio............... 0.50% -- 0.39% 0.89% -- 0.89%
Mid-Cap Value Portfolio... 0.75% -- 0.42% 1.17% -- 1.17%
OPPENHEIMER VARIABLE ACCOUNT
FUNDS
Oppenheimer Main Street
Fund/VA -- Service
Shares*................. 0.66% 0.25% 0.01% 0.92% -- 0.92%
PIMCO VARIABLE INSURANCE
TRUST
Real Return Portfolio --
Administrative Class*... 0.25% 0.15% 0.25% 0.65% -- 0.65%(12)
Total Return Portfolio --
Administrative Class*... 0.25% 0.15% 0.25% 0.65% -- 0.65%(12)
10
DISTRIBUTION
AND/OR TOTAL CONTRACTUAL NET TOTAL
SERVICE ANNUAL FEE WAIVER ANNUAL
MANAGEMENT (12B-1) OTHER OPERATING AND/OR EXPENSE OPERATING
UNDERLYING FUND: FEE FEES EXPENSES EXPENSES REIMBURSEMENT EXPENSES
- ----------------- -------------- ------------- ---------- ------------ ---------------- ----------------
PUTNAM VARIABLE TRUST
Putnam VT Discovery
Growth Fund -- Class IB
Shares*+................ 0.70% 0.25% 0.38% 1.33% -- 1.33%(13)
Putnam VT International
Equity Fund -- Class IB
Shares*+................ 0.75% 0.25% 0.19% 1.19% -- 1.19%
Putnam VT Small Cap Value
Fund -- Class IB Shares*. 0.77% 0.25% 0.10% 1.12% -- 1.12%
SALOMON BROTHERS VARIABLE
SERIES FUNDS INC.
All Cap Fund -- Class I.... 0.81% -- 0.08% 0.89% -- 0.89%(14)
Investors Fund -- Class I.. 0.68% -- 0.09% 0.77% -- 0.77%(15)
Small Cap Growth Fund --
Class I+................ 0.75% -- 0.28% 1.03% -- 1.03%
Total Return Fund --
Class I+................ 0.78% -- 0.18% 0.96% -- 0.96%
SMITH BARNEY INVESTMENT
SERIES
Smith Barney Dividend
Strategy Portfolio+..... 0.73% -- 0.15% 0.88% -- 0.88%(16)
Smith Barney Premier
Selections All Cap
Growth Portfolio+....... 0.75% -- 0.19% 0.94% -- 0.94%
THE TRAVELERS SERIES TRUST
Convertible Securities --(17), (38)
Portfolio............... 0.60% -- 0.15% 0.75% --
Disciplined Mid Cap Stock --(17), (38)
Portfolio............... 0.70% -- 0.12% 0.82% --
Equity Income Portfolio... 0.73% -- 0.11% 0.84% --
Federated Stock
Portfolio+ ............. 0.63% -- 0.31% 0.94% --
Large Cap Portfolio....... 0.75% -- 0.11% 0.86% -- 0.86%(18)
Mercury Large Cap Core --(19), (38)
Portfolio............... 0.79% -- 0.16% 0.95% --
MFS Mid Cap Growth --(20), (38)
Portfolio............... 0.75% -- 0.13% 0.88% -- --(21), (38)
MFS Value Portfolio....... 0.72% -- 0.39% 1.11% --
Mondrian International --(22), (38)
Stock Portfolio......... 0.72% -- 0.19% 0.91% -- --(23), (38)
Pioneer Fund Portfolio.... 0.75% -- 0.37% 1.12% --
Pioneer Mid Cap Value
Portfolio............... 0.75% -- 0.43% 1.18% 0.18% 1.00%(24)
Social Awareness Stock --(25), (38)
Portfolio............... 0.61% -- 0.14% 0.75% --
Style Focus Series: Small
Cap Growth Portfolio.... 0.85% -- 0.43% 1.28% 0.18% 1.10%(26)
Style Focus Series: Small
Cap Value Portfolio..... 0.83% -- 0.43% 1.26% 0.16% 1.10%(27)
Travelers Quality Bond
Portfolio............... 0.32% -- 0.12% 0.44% -- --(17), (38)
U.S. Government
Securities Portfolio.... 0.32% -- 0.11% 0.43% -- --(17), (38)
11
DISTRIBUTION
AND/OR TOTAL CONTRACTUAL NET TOTAL
SERVICE ANNUAL FEE WAIVER ANNUAL
MANAGEMENT (12B-1) OTHER OPERATING AND/OR EXPENSE OPERATING
UNDERLYING FUND: FEE FEES EXPENSES EXPENSES REIMBURSEMENT EXPENSES
- ----------------- -------------- ------------- ---------- ------------ ---------------- ----------------
TRAVELERS SERIES FUND INC.
AIM Capital Appreciation
Portfolio............... 0.80% -- 0.05% 0.85% -- 0.85%
MFS Total Return
Portfolio .............. 0.77% -- 0.02% 0.79% -- 0.79%(28)
Pioneer Strategic Income
Portfolio............... 0.75% -- 0.15% 0.90% -- 0.90%
SB Adjustable Rate Income
Portfolio Smith Barney
Class*.................. 0.60% 0.25% 0.46% 1.31% -- 1.31%
Smith Barney Aggressive
Growth Portfolio........ 0.80% -- 0.02% 0.82% -- 0.82%(29)
Smith Barney High Income
Portfolio............... 0.60% -- 0.06% 0.66% -- 0.66%
Smith Barney
International All Cap
Growth Portfolio+....... 0.88% -- 0.13% 1.01% -- 1.01%(30)
Smith Barney Large
Capitalization Growth
Portfolio............... 0.75% -- 0.03% 0.78% -- 0.78%(31)
Strategic Equity
Portfolio .............. 0.80% -- 0.05% 0.85% -- 0.85%
VAN KAMPEN LIFE INVESTMENT
TRUST
Comstock Portfolio Class
II Shares*.............. 0.57% 0.25% 0.04% 0.86% -- 0.86%
Emerging Growth Portfolio
Class II Shares*+....... 0.70% 0.25% 0.07% 1.02% -- 1.02%
Enterprise Portfolio
Class II Shares*+....... 0.50% 0.25% 0.13% 0.88% -- --(32), (38)
VARIABLE ANNUITY PORTFOLIOS
Smith Barney Small Cap
Growth Opportunities
Portfolio............... 0.75% -- 0.35% 1.10% -- --(38)
VARIABLE INSURANCE PRODUCTS
FUND
Asset Manager SM
Portfolio -- Service
Class 2*+............... 0.53% 0.25% 0.14% 0.92% -- --(33), (38)
Contrafund(R) Portfolio --
Service Class 2*........ 0.57% 0.25% 0.11% 0.93% -- --(34), (38)
Dynamic Capital
Appreciation Portfolio
-- Service Class 2*+..... 0.58% 0.25% 0.38% 1.21% -- --(35), (38)
Mid Cap Portfolio --
Service Class 2*........ 0.57% 0.25% 0.14% 0.96% -- --(36), (38)
WELLS FARGO VARIABLE TRUST
Wells Fargo Advantage
Multi Cap Value Fund*+.. 0.75% 0.25% 0.36% 1.36% 0.22% 1.14%(37)
- --------------
* The 12b-1 fees deducted from these classes cover certain distribution,
shareholder support and administrative services provided by
intermediaries (the insurance company, broker dealer or other service
provider).
** Includes CHART asset allocation fee.
+ Closed to new investors.
NOTES
(1) Effective September 1, 2004, the investment advisory fee was revised from
the annual rate of 0.75% to the following breakpoints: 0.70% on first $1.5
billion of net assets and 0.65% on assets in excess of $1.5 billion. The
Fund has a voluntary expense cap of 1.25%.
(2) Management fee is based on 0.50% on first $50 million of net assets; 0.40%
on the next $100 million; 0.30% on the next $100 million and 0.25% on
assets in excess of $250 million.
(3) Except as otherwise noted, figures shown in the table are for the year
ended December 31, 2004 and are expressed as a percentage of the Fund's
average daily net assets. There is no guarantee that actual expenses will
be the same as those shown in the table. The Fund's advisor has
contractually agreed to waive advisory fees and/or reimburse expenses of
Series I shares to the extent necessary
12
to limit Total Annual Fund Operating Expenses (excluding certain items
discussed below) of Series I shares to 1.30% of average daily nets assets
for each series portfolio of AIM Variable Insurance Funds. In determining
the advisor's obligation to waive advisory fees and/or reimburse expenses,
the following expenses are not taken into account, and could cause the
Total Annual Fund Operating Expenses to exceed the limit stated above: (i)
Rule 12b-1 plan fees, if any; (ii) interest; (iii) taxes; (iv) dividend
expense on short sales; (v) extraordinary items (these are expenses that
are not anticipated to arise from the Fund's day-to day operations), or
items designated as such by the Fund's Board of Trustees; (vi) expenses
related to a merger or reorganization, as approved by the Fund's Board of
Trustees; and (vii) expenses that the Fund has incurred but did not
actually pay because of an expense offset arrangement. Currently, the only
expense offset arrangements from which the Fund benefits are in the form of
credits that the Fund receives from banks where the Fund or its transfer
agent has deposit accounts in which it holds uninvested cash. Those credits
are used to pay certain expenses incurred by the Fund. The expense
limitation is in effect through April 30, 2006.
(4) Fee waivers and or expense reimbursements reduced expenses for the
Portfolio, without which the performance would be lower. Waivers and/or
reimbursements may be discontinued at any time.
(5) The investment advisor for the Delaware VIP REIT Series and the Delaware
VIP Small Cap Value Series is Delaware Management Company ("DMC"). For the
period May 1, 2002 through April 30, 2005, the advisor contractually waived
its management fee and/or reimbursed the Series for expenses to the extent
that total expenses (excluding any taxes, interest, brokerage fees,
extraordinary expenses and certain insurance expenses) would not exceed
0.95%. Effective May 1, 2005 through April 30, 2006, DMC has contractually
agreed to waive its management fee and/or reimburse the Series for expenses
to the extent that total expenses (excluding any taxes, interest, brokerage
fees, extraordinary expenses and certain insurance expenses) will not
exceed 0.95%. Under its Management Agreement, the Series pays a management
fee based on average daily net assets as follows: 0.75% on the first $500
million, 0.70% on the next $500 million, 0.65% on the next $1.5 billion,
0.60% on assets in excess of $2.5 billion million, all per year.
(6) While the maximum amount payable under the Fund's Class 2 rule 12b-1 plan
is 0.35% through May 1, 2006 of the Fund's Class 2 average annual net
assets, the Fund's Board of Trustees has set the current rate at 0.25%
through May 1, 2006.
(7) The Fund's manager has agreed in advance to reduce its fees from assets
invested by the Fund in a Franklin Templeton Money Market Fund (the Sweep
Money Fund). This reduction is required by the Board and an order of the
Securities and Exchange Commission.
(8) The Fund administration fee is paid indirectly through the management fee.
While the maximum amount payable under the Fund's Class 2 rule 12b-1 plan
is 0.35% through May 1, 2006 of the Fund's Class 2 average annual net
assets, the Fund's Board of Trustees has set the current rate at 0.25%
through May 1, 2006. (9) Effective August 1, 2004, the management fee
(including the administration fee), was reduced from 0.75% to the following
breakpoints: 0.75% on first $250 million of net assets; 0.70% on next $250
million; 0.65% on next $500 million; 0.60% on the next $1 billion; 0.55% on
the next $1 billion; and 0.50% on net assets in excess of $3 billion.
(10) Effective August 1, 2004, the management fee (including the administration
fee), was reduced from 0.75% to the following breakpoints: 0.75% on first
$1.5 billion of net assets; 0.70% on next $0.5 billion; 0.65% on next $0.5
billion; 0.60% on the next $1 billion; and 0.50% on net assets in excess of
$3.5 billion.
(11) Reflects a contractual obligation by the Investment Manager to waive its
fee and, if necessary, reimburse the Portfolio through December 31, 2005 to
the extent Total Annual Portfolio Operating Expenses exceed 1.25% of the
Portfolio's average daily net assets.
(12) "Other Expenses" reflects a 0.25% administrative fee. PIMCO has
contractually agreed, for the Portfolio's current fiscal year, to reduce
total annual portfolio operating expenses for the Administrative Class
shares to the extent they would exceed, due to the payment of Trustees'
fees, 0.65% of average daily net assets. Under the Expense Limitation
Agreement, PIMCO may recoup these waivers and reimbursements in future
periods, not exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
(13) Putnam Management has agreed to limit fund expenses through December 31,
2005. Including such limitations, Net Total Annual Operating Expenses are
1.19%.
(14) Effective August 1, 2004, the management fees were reduced from 0.85% to
the following breakpoints: First $1.5 billion 0.75%; next $0.5 billion
0.70%; next $0.5 billion 0.65%; next $1 billion 0.60%; over $3.5 billion
0.50%.
(15) Effective August 1, 2004, the management fees were reduced from 0.70% to
the following breakpoints: First $350 million 0.65%; next $150 million
0.55%; next $250 million 0.53%; next $250 million 0.50%; over $1 billion
0.45%.
(16) Effective September 1, 2004, the management fees were reduced from 0.75% to
the following breakpoints: First $1 billion 0.65%; next $1 billion 0.60%;
next $1 billion 0.55%; next $1 billion 0.50%; over $4 billion 0.45%.
(17) Other expenses include 0.06% administrative services fee the Fund pays to
The Travelers Insurance Company.
(18) Effective September 1, 2004, the investment advisory fee was revised from
the annual rate of 0.75% to the following breakpoints: 0.75% on first $250
million of net assets; 0.70% on the next $500 million and 0.65% on assets
in excess of $2 billion. Other Expenses include 0.06% administrative
services fee the Fund pays to The Travelers Insurance Company. The expense
information in the table has been restated to reflect the current fee
schedule.
(19) Effective September 1, 2004, the investment advisory fee was revised from
the annual rate of 0.80% to the following breakpoints: 0.775% on first $250
million of net assets; 0.75% on the next $250 million; 0.725% on next $500
million; 0.70% on next $1 billion and 0.65% on assets in excess of $2
billion. Other Expenses include 0.06% administrative services fee the Fund
pays to The Travelers Insurance Company.
(20) Effective February 25, 2005, the investment advisory fee was revised to the
following breakpoints: For the first $500 million of average daily net
assets the advisory fee is 0.7775%; the next $300 million 0.7525%; the next
$600 million 0.7275%; the next $1 billion 0.7025%; over $2.5 billion
0.625%. Also effective February 25, 2005, for purposes of meeting the
various asset levels and determining an effective fee rate, the combined
average daily net assets of: (1) the Fund; and (2) other portfolios of The
Travelers Series Trust that are subadvised by MFS; and (3) another
portfolio of the Travelers Series Fund that is subadvised by MFS, are used
in performing the calculation. The expense information in the table has
been restated to reflect the current fee schedule. Between February 25,
2004 and February 24, 2005 the investment advisory fee was as follows: for
the first $600 million of average daily net assets the advisor fee is
0.800%; the next $300 million 0.775%; the next $600 million 0.750%; the
next $1 billion 0.725%; over $2.5 billion 0.675%. Previous to September 1,
2004 the fee was an annual rate of 0.80%. Other expenses include a 0.06%
administrative services fee the Fund pays to The Travelers Insurance
Company.
(21) Effective September 1, 2004, the investment advisory fee was revised from
the annual rate of 0.75% to the following breakpoints: 0.75% on first $600
million of net assets; 0.725% on the next $300 million; 0.70% on the next $600
million; 0.675% on the next $1 billion and 0.625% on assets in excess of $2.5
billion. Other Expenses include 0.06% administrative services fee the Fund pays
to The Travelers Insurance Company. Fund has a voluntary waiver of 1.00%.
Effective February 25, 2005, for purposes of meeting
13
the various asset levels and determining an effective fee rate, the
combined average daily net assets of: (1) the Fund; and (2) other
portfolios of The Travelers Series Trust that are subadvised by MFS; and
(3) another portfolio of the Travelers Series Fund that is subadvised by
MFS, are used in performing the calculation. The expense information in the
table has been restated to reflect the current fee schedule.
(22) Effective May 1, 2005, the investment advisory fee is revised to the
following schedule: 0.775% on the first $100 million in assets and 0.65% on
assets in excess of $100 million. The expense information in the table has
been restated to reflect the current fee schedule. Between September 1,
2004 and May 1, 2005, the investment advisory fee was as follows: 0.825% on
the first $100 million of assets, 0.775% on the next $400 million of
assets, 0.725% on the next $500 million, and 0.700% on assets in excess of
$1 billion. Previous to September 1, 2004, the investment advisory fee was
an annual rate of 0.825%.
(23) Effective December 1, 2004, the Management fee was reduced from 0.75% to
the following breakpoints: 0.75% on the first $250 million of net assets;
0.70% on the next $250 million; 0.675% on the next $500 million; 0.65% on
the next $1 billion and 0.60% on assets in excess of $2 billion. Other
expenses include a 0.06% administrative services fee the Fund pays to The
Travelers Insurance Company.
(24) The Fund has a contractual expense cap of 1.00% that continues to May 1,
2006. Other expenses are estimates and include a 0.06% administrative
service fee the Fund pays to The Travelers Insurance Company.
(25) Management fee is based on 0.65% on first $50 million of net assets; 0.55%
on the next $50 million; 0.45% on the next $100 million and 0.40% on assets
in excess of $200 million. Other Expenses include a 0.06% administrative
services fee the Fund pays to The Travelers Insurance Company.
(26) The Fund has a contractual expense cap of 1.10% that continues to May 1,
2006. Other expenses are estimates and include a 0.06% administrative
service fee the Fund pays to The Travelers Insurance Company.
(27) The Fund has a contractual expense cap of 1.10% that continues to May 1,
2006. Other expenses are estimates and include a 0.06% administrative
service fee the Fund pays to The Travelers Insurance Company.
(28) Effective November 1, 2004, the advisory fee was reduced from 0.80% to the
following breakpoints: 0.80% on first $600 million of net assets; 0.775% on
next $300 million; 0.75% on next $600 million; 0.725% on next $1 billion
and 0.675% in excess of $2.5 billion. Effective February 25, 2005, for
purposes of meeting the various asset levels and determining an effective
fee rate, the combined average daily net assets of: (1) the Fund; and (2)
other portfolios of The Travelers Series Trust that are subadvised by MFS
are used in performing the calculation. The expense information in the
table has been restated to reflect the current fee schedule.
(29) Effective July 1, 2004, the advisory fee was reduced from 0.80% to the
following breakpoints: 0.80% on first $5 billion of net assets; 0.775% on
next $2.5 billion; 0.75% on next $2.5 billion and 0.70% in excess of $10
billion.
(30) Effective July 1, 2004, the management fee was reduced from 0.90% to 0.85%
of the Fund's daily net assets.
(31) Effective July 1, 2004, the management fee was reduced from 0.75% to the
following breakpoints: 0.75% on the first $5 billion of net assets; 0.725%
on the next $2.5 billion; 0.70% on the next $2.5 billion and 0.65% on
assets in excess of $10 billion.
(32) Under the terms of the Advisory agreement, if the total ordinary business
expenses, exclusive of taxes, distribution fees and interest, exceed .95%
of the average daily net assets of the Portfolio, the Adviser will
reimburse the Portfolio for the amount of the excess. Additionally, the
Adviser has voluntarily agreed to reimburse the Portfolio for all expenses
as a percentage of average daily net assets in excess of .60% and .85% for
Classes I and II, respectively. For the year ended December 31, 2004, the
Adviser waived $49,190 of its investment advisory fees. This waiver is
voluntary in nature and can be discontinued at the Adviser's discretion.
(33) The annual class operating expenses for the fund are based on historical
expenses adjusted to reflect current fees. A portion of the brokerage
commissions that the fund pays may be reimbursed and used to reduce the
fund's expenses. In addition, through arrangements with the fund's
custodian, credits realized as a result of uninvested cash balances are
used to reduce the fund's custodian expenses. Including these reductions,
the total class operating expenses would have been 0.91%. These offsets may
be discontinued at any time.
(34) A portion of the brokerage commissions that the fund pays may be reimbursed
and used to reduce the fund's expenses. In addition, through arrangements
with the fund's custodian, credits realized as a result of uninvested cash
balances are used to reduce the fund's custodian expenses. Including these
reductions, the total class operating expenses would have been 0.91%. These
offsets may be discontinued at any time.
(35) The annual class operating expenses for the fund are based on historical
expenses adjusted to reflect current fees. A portion of the brokerage
commissions that the fund pays may be reimbursed and used to reduce the
fund's expenses. In addition, through arrangements with the fund's
custodian, credits realized as a result of uninvested cash balances are
used to reduce the fund's custodian expenses. Including these reductions,
the total class operating expenses would have been 1.02%. These offsets may
be discontinued at any time. The fund's manager has voluntarily agreed to
reimburse the class to the extent that the total operating expenses
(excluding interest, taxes, certain securities lending costs, brokerage
commissions and extraordinary expenses) exceed 1.10%. The expense ratio
shown reflects the expense cap in effect at February 1, 2005. This
arrangement can be discontinued by the fund's manager at any time.
(36) A portion of the brokerage commissions that the fund pays may be reimbursed
and used to reduce the fund's expenses. In addition, through arrangements
with the fund's custodian, credits realized as a result of uninvested cash
balances are used to reduce the fund's custodian expenses. Including these
reductions, the total class operating expenses would have been 0.93%. These
offsets may be discontinued at any time.
(37) On May 25, 2004, Wells Fargo & Company entered into a purchase agreement
with Strong Financial Corporation ("SFC") to acquire the assets of SFC and
certain of its affiliates, including Strong Capital Management, Inc., the
investment adviser to the Strong Family of Funds. Pursuant to the receipt
of approval from the Strong Board, shareholders of the Strong Funds met and
approved the reorganization of each Strong Fund into a Wells Fargo Fund on
December 10 and December 22, 2004. Effective on or about April 11, 2005,
the Strong Multi Cap Value Fund II reorganized into the Wells Fargo
Advantage Multi Cap Value Fund. The Funds' investment adviser has
implemented a breakpoint schedule for the Funds' management fees. The
management fees charged to the Funds will decline as a Fund's assets grow
and will continue to be based on a percentage of the Fund's average daily
net assets. The breakpoint schedule for the Multi Cap Value is as follows:
0.75% for assets from $0 to $499 million; 0.70% for assets from $500
million to $999 million; 0.65% for assets from $1 billion to $2.99 billion;
0.625% for assets from $3 billion to $4.99 billion; and 0.60% for assets $5
billion and higher. Other expenses may include expenses payable to
affiliates of Wells Fargo & Company. Other expenses for the Multi Cap Value
Funds are based on estimates for the current fiscal year. The adviser has
committed through April 30, 2006 to waive fees and/or reimburse expenses to
the extent necessary to maintain the net operating expense ratio shown,
except for the Multi Cap Value Funds. For the Multi Cap Value Funds, the
adviser has committed through April 30, 2007 to waive fees and/ or
reimburse expenses to the extent necessary to maintain the net operating
expense ratios shown.
14
(38) The table below shows the amount of the waiver or reimbursement and the net
total annual operating expenses for underlying funds that have entered into
a voluntary fee waiver and/or expense reimbursement arrangement. The net
total annual operating expense figure reflects the fee waivers and/or
expense reimbursements that were in effect as of the underlying fund's
fiscal year end. However, as these arrangements are voluntary, they may be
changed or terminated at any time, in which case the underlying fund would
be subject to different net total annual operating expenses. Without such
waivers performance would be lower.
VOLUNTARY FEE
WAIVER AND/OR
EXPENSE NET TOTAL ANNUAL
FUNDING OPTION REIMBURSEMENT OPERATING EXPENSES
---------------- ---------------------- ----------------------
Capital Appreciation Fund.......................................... 0.01% 0.77%
High Yield Bond Trust.............................................. 0.03% 0.60%
Managed Assets Trust............................................... 0.01% 0.60%
Money Market Portfolio............................................. 0.02% 0.40%
Global Growth Fund -- Class 2 Shares............................... 0.01% 0.89%
Growth-Income Fund -- Class 2 Shares............................... 0.01% 0.55%
Credit Suisse Trust Emerging Market Portfolio...................... 0.29% 1.40%
Convertible Securities Portfolio................................... 0.01% 0.74%
Disciplined Mid Cap Stock Portfolio................................ 0.02% 0.80%
Equity Income Portfolio............................................ 0.01% 0.83%
Federated Stock Portfolio.......................................... 0.11% 0.83%
Mercury Large Cap Core Portfolio................................... 0.03% 0.92%
MFS Mid Cap Growth Portfolio....................................... 0.02% 0.86%
MFS Value Portfolio................................................ 0.11% 1.00%
Mondrian International Stock Portfolio............................. 0.02% 0.89%
Pioneer Fund Portfolio............................................. 0.13% 0.99%
Social Awareness Stock Portfolio................................... 0.04% 0.71%
Travelers Quality Bond Portfolio................................... 0.02% 0.42%
U.S. Government Securities Portfolio............................... 0.01% 0.42%
Enterprise Portfolio Class II Shares............................... 0.03% 0.85%
Smith Barney Small Cap Growth Opportunities Portfolio.............. 0.20% 0.90%
Asset Manager SM Portfolio -- Service Class 2...................... 0.01% 0.91%
Contrafund(R) Portfolio -- Service Class 2......................... 0.02% 0.91%
Dynamic Capital Appreciation Portfolio -- Service Class 2.......... 0.19% 1.02%
Mid Cap Portfolio -- Service Class 2............................... 0.03% 0.93%
EXAMPLES
These examples are intended to help you compare the cost of investing in the
Contract with the cost of investing in other variable annuity Contracts. These
costs include Contract Owner transaction expenses, Contract fees, separate
account annual expenses, and Underlying Fund total annual operating expenses.
These examples do not represent past or future expenses. Your actual expenses
may be more or less than those shown.
These examples assume that you invest $10,000 in the Contract for the time
periods indicated and that your investment has a 5% return each year. The
examples reflect the annual Contract administrative charge, factoring in that
the charge is waived for contracts over a certain value. Additionally, the
examples are based on the minimum and maximum Underlying Fund total annual
operating expenses shown above, and do not reflect any Underlying Fund fee
waivers and/or expense reimbursements.
The examples assume you have elected the Optional Death Benefit and that you
have allocated all of your Contract Value to either the Underlying Fund with the
maximum total annual operating expenses or the Underlying Fund with the minimum
total annual operating expenses. Your actual expenses will be less than those
shown if you do not elect the Optional Death Benefit.
15
EXAMPLE MAXIMUM CHARGES (ASSUMING YOU SELECT THE OPTIONAL DEATH BENEFIT)
IF CONTRACT IS SURRENDERED AT THE IF CONTRACT IS NOT SURRENDERED OR
END OF PERIOD SHOWN: ANNUITIZED AT END OF PERIOD SHOWN:
---------------------------------------- ------------------------------------------
FUNDING OPTION 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------- -------- --------- ---------- ---------- -------- --------- ---------- -----------
Underlying Fund with Minimum Total Annual 670 826 1007 1976 170 526 907 1976
Operating Expenses........................
Underlying Fund with Maximum Total Annual
Operating Expenses 807 1239 1696 3355 307 939 1596 3355
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
See Appendices A and B.
THE ANNUITY CONTRACT
- --------------------------------------------------------------------------------
Travelers Retirement Account Annuity is a Contract between the Contract Owner
("you") and the Company. This is the prospectus -- it is not the Contract. The
prospectus highlights many Contract provisions to focus your attention on the
Contract's essential features. Your rights and obligations under the Contract
will be determined by the language of the Contract itself. When you receive your
Contract, we suggest you read it promptly and carefully. There may be
differences in your Contract from the descriptions in this prospectus because of
the requirements of the state where we issued your Contract. We will include any
such differences in your Contract.
The Company offers several different annuities that your investment professional
may be authorized to offer to you. Each annuity offers different features and
benefits that may be appropriate for you. In particular, the annuities differ
based on variations in the standard and optional death benefit protection
provided for your beneficiaries, the availability of optional living benefits,
the ability to access your Contract Value if necessary and the charges that you
will be subject to if you make a withdrawal or surrender the annuity. The
separate account charges and other charges may be different between each annuity
we offer. Optional death benefits and living benefits are subject to a separate
charge for the additional protections they offer to you and your beneficiaries.
Furthermore, annuities that offer greater flexibility to access your Contract
Value generally are subject to higher separate account charges than annuities
that deduct charges if you make a withdrawal or surrender.
We encourage you to evaluate the fees, expenses, benefits and features of this
annuity against those of other investment products, including other annuity
products offered by us and other insurance companies. Before purchasing this or
any other investment product you should consider whether the product you
purchase is consistent with your risk tolerance, investment objectives,
investment time horizon, financial and tax situation, liquidity needs and how
you intend to use the annuity.
You make Purchase Payments to us and we credit them to your Contract. We promise
to pay you an income, in the form of Annuity Payments, beginning on a future
date that you choose, the Maturity Date. The Purchase Payments accumulate tax
deferred in the funding options of your choice. We offer multiple Variable
Funding Options. We may also offer a Fixed Account option. Where permitted by
law, we reserve the right to restrict Purchase Payments into the Fixed Account
whenever the credited interest rate on the Fixed Account is equal to the minimum
guaranteed interest rate specified under the Contract. The Contract Owner
assumes the risk of gain or loss according to the performance of the Variable
Funding Options. The Contract Value is the amount of Purchase Payments and any
associated Purchase Payment Credits, plus or minus any investment experience on
the amounts you allocate to the Separate Account ("Separate Account Contract
Value") or interest on the amounts you allocate to the Fixed Account ("Fixed
Account Contract Value"). The Contract Value also reflects all withdrawals made
and charges deducted. There is generally no guarantee that at the Maturity Date
the Contract Value will equal or exceed the total Purchase Payments made under
the Contract. The date the Contract and its benefits become effective is
referred to as the Contract Date. Each 12-month period following the Contract
Date is called a Contract Year.
16
Certain changes and elections must be made in writing to the Company. Where the
term "Written Request" is used, it means that you must send written information
to our Home Office in a form and content satisfactory to us.
On or after May 2, 2005, the Contract is not available for purchase if the
proposed owner or Annuitant is age 81 or older.
Purchase of this Contract through a tax qualified retirement plan or IRA does
not provide any additional tax deferral benefits beyond those provided by the
plan or the IRA. Accordingly, if you are purchasing this Contract through a plan
or IRA, you should consider purchasing this Contract for its Death Benefit,
Annuity Option Benefits, and other non-tax-related benefits. You should consult
with your financial adviser to determine if this Contract is appropriate for
you.
CONTRACT OWNER INQUIRIES
Any questions you have about your Contract should be directed to our Home Office
at 1-800-842-9406.
PURCHASE PAYMENTS
Your initial Purchase Payment is due and payable before the Contract becomes
effective. The initial Purchase Payment must be at least $20,000. You may make
additional payments of at least $5,000 at any time. No additional payments are
allowed if this Contract is purchased with a beneficiary-directed transfer of
death benefit proceeds. Under certain circumstances, we may waive the minimum
Purchase Payment requirement. Purchase Payments over $1,000,000 may be made only
with our prior consent.
We will apply the initial Purchase Payment less any applicable premium tax
within two business days after we receive it at our Home Office with a properly
completed application or order request. If your request or other information
accompanying the initial Purchase Payment is incomplete when received, we will
hold the Purchase Payment for up to five business days. If we cannot obtain the
necessary information within five business days, we will return the Purchase
Payment in full, unless you specifically consent for us to keep it until you
provide the necessary information.
We will credit subsequent Purchase Payments to a Contract on the same business
day we receive it, if it is received in good order by our Home Office by 4:00
p.m. Eastern time. A business day is any day that the New York Stock Exchange is
open for regular trading (except when trading is restricted due to an emergency
as defined by the Securities and Exchange Commission). Purchase Payments
allocated to the Fixed Account are not eligible for Purchase Payment Credits.
Where permitted by state law, we reserve the right to restrict Purchase Payments
into the Fixed Account whenever the credited interest rate on the Fixed Account
is equal to the minimum guaranteed interest rate specified under the Contract.
PURCHASE PAYMENT CREDITS
If, for an additional charge, you select the Optional Death Benefit, we will add
a credit to your Contract with each Purchase Payment. Each credit is added to
the Contract Value when the corresponding Purchase Payment is applied, and will
equal 2% of each Purchase Payment. These credits are applied pro rata to the
same Variable Funding Options to which your Purchase Payment was applied.
Purchase Payments allocated to the Fixed Account are not eligible for Purchase
Payment Credits.
You should know that over time and under certain circumstances (such as a period
of poor market performance) the costs associated with the Purchase Payment
Credits may more than offset the Purchase Payment Credits and related earnings.
You should consider this possibility before purchasing the Optional Death
Benefit.
CONSERVATION CREDIT
If you are purchasing this Contract with funds from another Contract issued by
us or our affiliates, you may receive a conservation credit to your Purchase
Payments. If applied, we will determine the amount of such credit.
17
ACCUMULATION UNITS
The period between the Contract Date and the Maturity Date is the Accumulation
Period. During the Accumulation Period, and Accumulation Unit is used to
calculate the value of a Contract. Each Variable Funding Option has a
corresponding Accumulation Unit value. The Accumulation Units are valued each
business day and their values may increase or decrease from day to day. The
daily change in value of an Accumulation Unit each day is based on the
investment performance of the corresponding Underlying Fund, and the deduction
of separate account charges shown in the Fee Table in this prospectus. The
number of Accumulation Units we will credit to your Contract once we receive a
Purchase Payment is determined by dividing the amount directed to each Variable
Funding Option by the value of its Accumulation Unit. Normally, we calculate the
value of an Accumulation Unit for each Variable Funding Option as of the close
of regular trading (generally 4:00 p.m. Eastern time) each day the New York
Stock Exchange is open. After the value is calculated, we credit your Contract.
During the Annuity Period (i.e., after the Maturity Date), you are credited with
Annuity Units.
THE VARIABLE FUNDING OPTIONS
You choose the Variable Funding Options to which you allocate your Purchase
Payments. These Variable Funding Options are Subaccounts of the Separate
Account. The Subaccounts invest in the Underlying Funds. You are not investing
directly in the Underlying Fund. Each Underlying Fund is a portfolio of an
open-end management investment company that is registered with the SEC under the
Investment Company Act of 1940. These Underlying Funds are not publicly traded
and are offered only through variable annuity and variable life insurance
products. They are not the same retail mutual funds as those offered outside of
a variable annuity or variable life insurance product, although the investment
practices and fund names may be similar, and the portfolio managers may be
identical. Accordingly, the performance of the retail mutual fund is likely to
be different from that of the Underlying Fund, and Contract Owners should not
compare the two.
The Underlying Funds offered though this product are selected by the Company
based on several criteria, including asset class coverage, the strength of the
manager's reputation and tenure, brand recognition, performance, and the
capability and qualification of each sponsoring investment firm. Another factor
the Company considers during the initial selection process is whether the
Underlying Fund or an affiliate of the Underlying Fund will compensate the
Company for providing administrative, marketing, and support services that would
otherwise be provided by the Fund, the Fund's investment advisor, or its
distributor. Finally, when the Company develops a variable annuity product in
cooperation with a fund family or distributor (e.g. a "private label" product),
the Company will generally include Underlying Funds based on recommendations
made by the fund family or distributor, whose selection criteria may differ from
the Company's selection criteria.
Each Underlying Fund is reviewed periodically after having been selected. Upon
review, the Company may remove an Underlying Fund or restrict allocation of
additional Purchase Payments to an Underlying Fund if the Company determines the
Underlying Fund no longer meets one or more of the criteria and/or if the
Underlying Fund has not attracted significant contract owner assets.
In addition, if any of the Underlying Funds become unavailable for allocating
Purchase Payments, or if we believe that further investment in an Underlying
Fund is inappropriate for the purposes of the Contract, we may substitute
another funding option. However, we will not make any substitutions without
notifying you and obtaining any state and SEC approval, if necessary. From time
to time we may make new funding options available.
You will find detailed information about the Underlying Funds and their inherent
risks in the current prospectuses for the Underlying Funds. Since each option
has varying degrees of risk, please read the prospectuses carefully. There is no
assurance that any of the Underlying Funds will meet its investment objectives.
Contact your registered representative or call 1-800-842-9406 to request copies
of the prospectuses.
ADMINISTRATIVE, MARKETING AND SUPPORT SERVICE FEES. As described above, the
Company and TDLLC have arrangements with the investment adviser, subadviser,
distributor, and/or affiliated companies of most of the Underlying Funds under
which the Company and TDLLC receive payments in connection with our provision of
administrative, marketing or other support services to the Funds. Proceeds of
these payments may be used for any corporate purpose, including payment of
expenses that the Company and TDLLC incur in promoting, issuing, distributing
and administering the contracts. The Company and its affiliates may profit from
these fees.
18
The payments are generally based on a percentage of the average assets of each
Underlying Fund allocated to the Variable Funding Options under the Contract or
other contracts offered by the Company. The amount of the fee that an Underlying
Fund and its affiliates pay the Company and/or the Company's affiliates is
negotiated and varies with each Underlying Fund. Aggregate fees relating to the
different Underlying Funds may be as much as 0.65% of the average net assets of
an Underlying Fund attributable to the relevant contracts. A portion of these
payments may come from revenue derived from the Distribution and/or Service Fees
(12b-1 fees) that are paid by an Underlying Fund out its assets as part of its
Total Annual Operating Expenses.
The current Variable Funding Options are listed below, along with their
investment advisers and any subadviser:
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
Capital Appreciation Fund Seeks growth of capital. The Fund Travelers Asset Management
normally invests in equity securities International Company LLC ("TAMIC")
of issuers of any size and in any Subadviser: Janus Capital Corp.
industry.
High Yield Bond Trust Seeks high current income. The Fund TAMIC
normally invests in below
investment-grade bonds and debt
securities.
Managed Assets Trust Seeks high total return. The Fund TAMIC
normally invests in equities, Subadviser: Travelers Investment
convertible and fixed-income Management Company ("TIMCO")
securities. The Fund's policy is to
allocate investments among asset
classes.
Money Market Portfolio Seeks high current return with TAMIC
preservation of capital and liquidity.
The Fund normally invests in
high-quality short term money market
instruments.
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Premier Equity Fund -- Seeks to achieve long-term growth of A I M Advisors, Inc.
Series I Shares+ capital. Income is a secondary
objective. The Fund invests, normally,
at least 80% of its net assets, plus
the amount of any borrowings for
investment purposes, in equity
securities, including convertible
securities.
AMERICAN FUNDS INSURANCE SERIES
Global Growth Fund -- Class 2 Shares Seeks capital appreciation. The Fund Capital Research and Management
normally invests in common stocks of Co. ("CRM")
companies located around the world.
Growth Fund -- Class 2 Shares Seeks capital appreciation. The Fund CRM
normally invests in common stocks of
companies that appear to offer superior
opportunities for growth of capital.
Growth-Income Fund -- Class 2 Shares Seeks capital appreciation and income. CRM
The Fund normally invests in common
stocks or other securities that
demonstrate the potential for
appreciation and/or dividends.
CITISTREET FUNDS, INC.
CitiStreet Diversified Bond Fund -- Seeks maximum long-term total return. CitiStreet Funds Management LLC
Class I The Fund primarily invests in fixed ("CitiStreet")
income securities. Subadviser: Western
AssetManagement Company; Salomon
Brothers Asset Management
("SBAM"); and SSgA Funds
Management ("SSgA")
CitiStreet International Stock Seeks maximum long-term total return. CitiStreet
Fund -- Class I The Fund primarily invests in the Subadviser: Alliance Capital
common stocks of established non-U.S. Management L.P.; Oechsle
companies. International
Advisors
LLC;
and
SSgA
CitiStreet Large Company Stock Seeks maximum long-term total return. CitiStreet
Fund -- Class I The Fund primarily invests in the Subadviser: Wellington Management
common stocks of well established Company; Smith Barney Fund
companies. Management LLC ("SBFM"), and SSgA
CitiStreet Small Company Stock Seeks maximum long-term total return. CitiStreet
Fund -- Class I The Fund primarily invests in the Subadviser: TCW Investment
common stocks of small companies. Management; Babson Capital
Management LLC; and SSgA
19
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
CREDIT SUISSE TRUST
Credit Suisse Trust Emerging Seeks long term growth of capital. The Credit Suisse Asset Management, LLC
Market Portfolio+ Fund normally invests in equity Subadviser: Credit Suisse Asset
securities of companies located in, or Management Limited (U.K.),
conducting a majority of their (Australia)
business, in emerging markets.
DELAWARE VIP TRUST
Delaware VIP REIT Series -- Seeks to achieve maximum long term Delaware Management
Standard Class total return with capital appreciation Company("Delaware")
as a secondary objective. The Fund
normally invests in companies that
manage a portfolio of real estate to
earn profits for shareholders (REITS).
Delaware VIP Small Cap Value Seeks capital appreciation. The Fund Delaware
Series -- Standard Class normally invests in securities of small
capitalization companies.
DREYFUS VARIABLE INVESTMENT FUND
Dreyfus Variable Investment Fund -- Seeks long term capital growth The Dreyfus Corporation ("Dreyfus")
Appreciation Portfolio -- Initial consistent with the preservation of Subadviser: Fayez Sarofim & Co.
Shares capital. Current income is a secondary
objective. The Fund normally invests
in common stocks of established
companies.
Dreyfus Variable Investment Fund -- Seeks to maximize capital appreciation. Dreyfus
Developing Leaders Portfolio -- The Fund normally invests in companies
Initial Shares with market capitalizations of less
than $2 billion at the time of purchase.
FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST
Mutual Shares Securities Fund -- Seeks capital appreciation. Income is a Franklin Mutual Advisers, LLC
Class 2 Shares secondary objective. The Fund normally
invests in U.S. equity securities, and
substantially in undervalued stocks,
risk arbitrage securities and
distressed companies.
Templeton Developing Markets Seeks long-term capital appreciation. Templeton Asset Management Ltd.
Securities Fund -- Class 2 Shares The Fund normally invests at least 80%
of its net assets in the emerging
market investments, and invests
primarily to predominantly in equity
securities.
Templeton Foreign Securities Fund Seeks long-term capital growth. The Templeton Investment Counsel, LLC
-- Class 2 Shares Fund normally invests at least 80% of
its net assets in investments of
issuers located outside of the U.S.,
including those in emerging markets.
Templeton Growth Securities Fund -- Seeks long-term capital growth. The Templeton Global Advisors Limited
Class 2 Shares Fund normally invests in equity
securities of companies located
anywhere in the world, including the
U.S. and emerging markets.
GREENWICH STREET SERIES FUND
Appreciation Portfolio Seeks long- term appreciation of SBFM
capital. The Fund normally invests in
equity securities of U.S. companies of
medium and large capitalization.
Equity Index Portfolio -- Class II Seeks investment results that, before TIMCO
Shares expenses, correspond to the price and
yield performance of the S&P 500
Index. The Fund normally invests in
equity securities, or other
investments with similar economic
characteristics that are included in
the S&P 500 Index.
Fundamental Value Portfolio+ Seeks long-term capital growth. Current SBFM
income is a secondary consideration.
The Fund normally invests in common
stocks, and common stock equivalents of
companies, the manager believes are
undervalued.
20
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
JANUS ASPEN SERIES
Balanced Portfolio -- Service Seeks long term capital growth, Janus Capital Management
Shares+ consistent with preservation of capital LLC("Janus Capital")
and balanced by current income. The
Fund normally invests in common stocks
selected for their growth potential
and other securities selected for
their income potential.
Mid Cap Growth Portfolio -- Seeks capital growth. The Fund normally Janus Capital
Service Shares invests in equity securities of
mid-sized companies.
Worldwide Growth Portfolio -- Seeks growth of capital in a manner Janus Capital
Service Shares+ consistent with the preservation of
capital. The Fund normally invests in
the common stocks of companies of any
size throughout the world.
LAZARD RETIREMENT SERIES, INC.
Lazard Retirement Small Cap Seeks long-term capital appreciation. Lazard Asset Management, LLC
Portfolio The Fund normally invests in equity
securities, principally common stocks,
of relatively small U.S. companies that
are believed to be undervalued based on
their earnings, cash flow or asset
values.
LORD ABBETT SERIES FUND, INC.
Growth and Income Portfolio Seeks long-term growth of capital and Lord Abbett & Co.
income without excessive fluctuations
in market value. The Fund primarily
invests in equity securities of large,
seasoned, U.S. and multinational
companies believed to be undervalued.
Mid-Cap Value Portfolio Seeks capital appreciation. The Fund Lord Abbett & Co.
normally invests primarily in equity
securities, which are believed to be
undervalued in the marketplace.
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Main Street Fund/VA -- Seeks high total return (which includes Oppenheimer Funds, Inc.
Service Shares growth in the value of its shares as
well as current income) from equity and
debt securities.
PIMCO VARIABLE INSURANCE TRUST
Real Return Portfolio -- Seeks maximum real return, consistent Pacific Investment Management
Administrative Class with preservation of real capital and Company LLC
prudent investment management.
Total Return Portfolio -- Seeks maximum total return, consistent Pacific Investment Management
Administrative Class with preservation of capital and Company LLC
prudent investment management. The Fund
normally invests in intermediate
maturity fixed income securities.
PUTNAM VARIABLE TRUST
Putnam VT Discovery Growth Fund -- Seeks long-term growth of capital. The Putnam Investment Management
Class IB Shares+ Fund invests mainly in common stocks of
U.S. companies, with a focus on growth
stocks. Growth stocks are issued by
companies that Putnam Management
believes are fast-growing and whose
earnings are likely to increase over
time.
Putnam VT International Equity Seeks capital appreciation. The Fund Putnam Investment Management
Fund -- Class IB Shares+ invests mainly in common stocks of
companies outside the United States
that Putnam Management believes have
investment potential.
Putnam VT Small Cap Value Fund -- Seeks capital appreciation. The Fund Putnam Investment Management
Class IB Shares invests mainly in common stocks of U.S.
companies, with a focus on value
stocks. Value stocks are those that
Putnam Management believes are
currently undervalued by the market.
21
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
SALOMON BROTHERS VARIABLE SERIES
FUNDS INC.
All Cap Fund -- Class I Seeks capital appreciation. The Fund SBAM
normally invests in common stocks and
their equivalents of companies the
manager believes are undervalued in
the marketplace.
Investors Fund -- Class I Seeks long term growth of capital. SBAM
Secondarily seeks current income. The
Fund normally invests in common stocks
of established companies.
Small Cap Growth Fund -- Class I+ Seeks long term growth of capital. The SBAM
Fund normally invests in equity
securities of companies with small
market capitalizations.
Total Return Fund -- Class I+ Seeks above average income (compared to SBAM
a portfolio invested entirely in equity
securities). Secondarily seeks growth
of capital and income. The Fund
normally invests in a broad range of
equity and fixed-income securities of
U.S. and foreign issuers.
SMITH BARNEY INVESTMENT SERIES
Smith Barney Dividend Strategy Seeks capital appreciation. Principally SBFM
Portfolio+ through investing in dividend paying
stocks.
Smith Barney Premier Selections Seeks long term capital growth. The SBFM
All Cap Growth Portfolio+ Fund consists of a Large Cap Growth
segment, Mid Cap Growth segment and
Small Cap Growth segment. All three
segments normally invest in equity
securities. The Large Cap Growth
segment invests in large sized
companies. The Mid Cap Growth segment
invests in medium sized companies. The
Small Cap Growth segment invests in
small sized companies.
THE TRAVELERS SERIES TRUST
Convertible Securities Portfolio Seeks current income and capital TAMIC
appreciation. The Fund normally invests
in convertible securities.
Disciplined Mid Cap Stock Portfolio Seeks growth of capital. The Fund TAMIC
normally invests in the equity Subadviser: TIMCO
securities of companies with mid-size
market capitalizations.
Equity Income Portfolio Seeks reasonable income by investing TAMIC
primarily in income producing equity Subadviser: Fidelity Management &
securities. In choosing these Research Company ("FMR")
securities, the fund will also consider
the potential for capital appreciation.
The fund's goal is to achieve a yield
which exceeds the composite yield on
the securities compromising the S&P
500.
Federated Stock Portfolio+ Seeks growth of income and capital. The TAMIC
Fund normally invests in equity Subadviser: Federated Equity
securities of high quality companies. Management Company of Pennsylvania
Large Cap Portfolio Seeks long term growth of capital. TAMIC
The Fund normally invests in Subadviser: FMR
the securities of companies with large
market capitalizations.
Mercury Large Cap Core Portfolio Seeks long-term capital growth. The TAMIC
Fund normally invests in a diversified Subadviser: Merrill Lynch
portfolio of equity securities of large Investment Managers, L.P. ("MLIM")
cap companies.
MFS Mid Cap Growth Portfolio Seeks long term growth of capital. The TAMIC
Fund normally invests in equity
Subadviser: Massachusetts Fund
securities of companies with medium
Services ("MFS") market
capitalization.
MFS Value Portfolio Seeks capital appreciation and TAMIC
reasonable income. The Fund normally Subadviser: MFS
invests in income producing equity
securities of companies believed to be
undervalued in the market.
Mondrian International Stock Seeks capital appreciation. The Fund TAMIC
Portfolio normally invests in equity securities Subadviser: Mondrian Investment
of relatively large non-U.S. companies. Partners Ltd.
22
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
Pioneer Fund Portfolio Seeks reasonable income and capital TAMIC
growth. The Fund invests in equity
Subadviser: Pioneer Investment
securities, primarily of U.S. issuers.
Management, Inc.
Pioneer Mid Cap Value Portfolio Seeks capital appreciation. The Fund TAMIC
normally invests in the equity Subadviser: Pioneer Investment
securities of mid-size companies. Management, Inc.
Social Awareness Stock Portfolio Seeks long term capital appreciation and SBFM
retention of net investment income. The
Fund normally invests in equity
securities of large and mid-size
companies that meet certain investment
and social criteria.
Style Focus Series: Small Cap Seeks capital appreciation. The Fund TAMIC
Growth Portfolio normally invests in common stocks and Subadviser: TIMCO and Janus
other equity securities of small U.S. Capital
companies.
Style Focus Series: Small Cap Seeks capital appreciation. The Fund TAMIC
Value Portfolio normally invests in common stocks and Subadviser: TIMCO and Dreman Value
other equity securities of small U.S. Management L.L.C. ("Dreman")
companies.
Travelers Quality Bond Portfolio Seeks current
income and total return TAMIC with
moderate capital volatility. The Fund
normally invests in investment-grade
bonds and debt securities.
U.S. Government Securities Seeks current income, total return and TAMIC
Portfolio high credit quality. The Fund normally
invests in securities issued or
guaranteed by the U.S. Government, its
agencies or instrumentalities.
TRAVELERS SERIES FUND INC.
AIM Capital Appreciation Portfolio Seeks capital appreciation. The Fund Travelers Investment Adviser Inc.
normally invests in common stocks of ("TIA")
companies that are likely to benefit Subadviser: AIM Capital
from new products, services or Management Inc.
processes or have experienced
above-average earnings growth.
MFS Total Return Portfolio Seeks above average income consistent TIA
with the prudent employment of capital. Subadviser: MFS
Secondarily, seeks growth of capital
and income. The Fund normally invests
in a broad range of equity and
fixed-income securities of both U.S.
and foreign issuers.
Pioneer Strategic Income Portfolio Seeks high current income. The Fund TIA
normally invests in debt securities and Subadviser: Pioneer Investment
has the flexibility to invest in a Management, Inc.
broad range of issuers and segments of
the debt securities market.
SB Adjustable Rate Income Seeks high current income and to limit SBFM
Portfolio Smith Barney Class the degree of fluctuation of its net
asset value resulting from movements in
interest rates.
Smith Barney Aggressive Growth Seeks long-term capital appreciation. SBFM
Portfolio The Fund normally invests in common
stocks of companies that are
experiencing, or are expected to
experience, growth in earnings that
exceeds the average rate earnings
growth of the companies comprising the
S&P 500 Index.
Smith Barney High Income Portfolio Seeks high current income. Secondarily, SBFM
seeks capital appreciation. The Fund
normally invests in high yield
corporate debt and preferred stock of
U.S. and foreign issuers.
Smith Barney International All Cap Seeks total return on assets from SBFM
Growth Portfolio+ growth of capital and income. The Fund
normally invests in equity securities
of foreign companies.
Smith Barney Large Capitalization Seeks long term growth of capital. The SBFM
Growth Portfolio Fund normally invests in equities, or
similar securities, of companies with
large market capitalizations.
Strategic Equity Portfolio Seeks capital appreciation. The Fund TIA
normally invests in U.S. and foreign Subadviser: FMR
equity securities.
23
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
VAN KAMPEN LIFE INVESTMENT TRUST
Comstock Portfolio Class II Shares Seeks capital growth and income. The Van Kampen Asset Management
normally invests in common and preferred Fund Inc. ("Van Kampen")
stocks, and convertible securities, of
well established undervalued companies.
Emerging Growth Portfolio Class II Seeks capital appreciation. The Fund Van Kampen
Shares+ normally invests in common stocks of
companies that the manager believes
are experiencing or will experience
growth in earnings and/or cash flow
that exceeds the average rate of
earnings growth of the companies that
comprise the S&P 500.
Enterprise Portfolio Class II Seeks capital appreciation. The Fund Van Kampen
Shares+ normally invests in common stocks of
companies believed to have
above-average potential for capital
appreciation.
VARIABLE ANNUITY PORTFOLIOS
Smith Barney Small Cap Growth Seeks long term capital growth. The Citi Fund Management, Inc.
Opportunities Portfolio Fund normally invests in equity
securities of small cap companies and
related investments.
VARIABLE INSURANCE PRODUCTS FUND
Asset Manager SM Portfolio -- Seeks high total return with reduced FMR
Service Class 2+ risk over the long-term. The Fund
normally invests by allocating assets
among stocks, bonds and short-term
instruments.
Contrafund(R) Portfolio -- Service Seeks long-term capital appreciation by FMR
Class 2 investing in common stocks of companies
whose value Fidelity Management &
Research Co. believes is not fully
recognized by the public.
Dynamic Capital Appreciation Seeks capital appreciation by investing FMR
Portfolio -- Service Class 2+ in common stocks of domestic and
foreign issuers.
Mid Cap Portfolio -- Service Class 2 Seeks long-term growth of capital by FMR
investing in common stocks of companies
with medium market capitalizations.
WELLS FARGO VARIABLE TRUST
Wells Fargo Advantage Multi Cap Seeks long term capital growth. Current Wells Fargo Funds Management, LLC
Value Fund+ income is a secondary objective. The Subadviser: Wells Capital
Fund normally invests in the common Management, Inc.
stocks of U.S. companies believed to be
undervalued relative to the market.
- --------------
+ Closed to new investors.
FIXED ACCOUNT
- --------------------------------------------------------------------------------
We may offer our Fixed Account as a funding option. Please see separate
prospectus for more information.
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
GENERAL
We deduct the charges described below. The charges are for the service and
benefits we provide, costs and expenses we incur, and risks we assume under the
Contracts. Services and benefits we provide include:
o the ability for you to make withdrawals and surrenders under the
Contracts
o the death benefit paid on the death of the Contract Owner, Annuitant,
or first of the joint owners
24
o the available funding options and related programs (including dollar
cost averaging, portfolio rebalancing, and systematic withdrawal
programs)
o administration of the annuity options available under the Contracts
o the distribution of various reports to Contract Owners
Costs and expenses we incur include:
o losses associated with various overhead and other expenses associated
with providing the services and benefits provided by the Contracts
o sales and marketing expenses including commission payments to your
sales agent
o other costs of doing business.
Risks we assume include:
o that Annuitants may live longer than estimated when the annuity
factors under the Contracts were established
o that the amount of the death benefit will be greater than the
Contract Value
o that the costs of providing the services and benefits under the
Contracts will exceed the charges deducted.
We may also deduct a charge for taxes.
Unless otherwise specified, charges are deducted proportionately from all
funding options in which you are invested.
We may reduce or eliminate the withdrawal charge and/or the mortality and
expense risk charge under the Contract when certain sales or administration of
the Contract result in savings or reduced expenses and/or risks. For certain
trusts, we may change the order in which Purchase Payments and earnings are
withdrawn in order to determine the withdrawal charge. We will not reduce or
eliminate the withdrawal charge where such reduction or elimination would be
unfairly discriminatory to any person.
The amount of a charge may not necessarily correspond to the costs associated
with providing the services or benefits indicated by the designated charge. For
example, the withdrawal charge we collect may not fully cover all of the sales
and distribution expenses we actually incur. The amount of any fee or charge is
not impacted by an outstanding loan. We may also profit on one or more of the
charges. We may use any such profits for any corporate purpose, including the
payment of sales expenses.
WITHDRAWAL CHARGE
We do not deduct a sales charge from Purchase Payments when they are made to the
Contract. However, a withdrawal charge will apply if Purchase Payments and any
applicable Purchase Payment Credits are withdrawn before they have been in the
Contract for five years. We will assess the charge as a percentage of the
Purchase Payment and any applicable Purchase Payment Credits withdrawn as
follows:
YEARS SINCE PURCHASE WITHDRAWAL
PAYMENT MADE CHARGE
--------------------------------------------- --------------
GREATER THAN OR EQUAL TO BUT LESS THAN
0 years 1 year 5%
1 year 2 years 4%
2 years 3 years 3%
3 years 4 years 2%
4 years 5 years 1%
5+ years 0%
For purposes of the withdrawal charge calculation, withdrawals are deemed to be
taken first from:
(a) any Purchase Payment and any applicable Purchase Payment Credits to
which no withdrawal charge applies then;
25
(b) any remaining free withdrawal allowance (as described below) (after
being reduced by (a), then;
(c) any remaining Purchase Payment and any applicable Purchase Payment
Credits to which a withdrawal charge applies (on a first-in,
first-out basis), then;
(d) any Contract earnings.
Unless you instruct us otherwise, we will deduct the withdrawal charge from the
amount requested.
IF YOU DID NOT PURCHASE YOUR CONTRACT UNDER A 457 OR 403(B) QUALIFIED PLAN, WE
WILL NOT DEDUCT A WITHDRAWAL CHARGE:
o from payments we make due to the death of the Annuitant
o if a life annuity payout has begun, other than the Liquidity Benefit
Option (See "Liquidity Benefit")
o if an income option of at least ten years' duration is elected
o from amounts withdrawn which are deposited to other contracts issued
by us or our affiliate, subject to our approval
o if withdrawals are taken under our Managed Distribution Program, if
elected by you (see Access to Your Money) or
o if you are confined to an eligible nursing home, as described in
Appendix C
IF YOU PURCHASED YOUR CONTRACT UNDER A 457 OR 403(B) QUALIFIED PLAN, WE WILL NOT
DEDUCT A WITHDRAWAL CHARGE:
o from payments we make due to the death of the Annuitant
o if a life annuity payout has begun
o if payments for a period of at least five years have begun
o from amounts withdrawn which are deposited to other contracts issued
by us or our affiliate, subject to our approval
o if withdrawals are taken as a minimum distribution, as defined under
The Code
o if withdrawals are taken due to a hardship, as defined under The Code
o if withdrawals are taken due to a disability, as defined under The
Code, of the Annuitant;
o if you are confined to an eligible nursing home, as described in
Appendix C (403 (B) PLANS ONLY).
FREE WITHDRAWAL ALLOWANCE
Beginning in the second Contract Year, you may withdraw up to 20% of the
Contract Value annually. We calculate the available withdrawal amount as of the
end of the previous Contract Year. The free withdrawal provision applies to all
withdrawals except those transferred directly to annuity contracts issued by
other financial institutions. We reserve the right to modify the free withdrawal
provision.
Any withdrawal is subject to federal income taxes on the taxable portion. In
addition, a 10% federal penalty may be assessed on any withdrawal if the
Contract Owner is under age 59 1/2. You should consult with your tax adviser
regarding the tax consequences of a withdrawal.
TRANSFER CHARGE
We reserve the right to assess a transfer charge of up to $10.00 on transfers
exceeding 12 per year. We will notify you in writing at your last known address
at least 31 days before we impose any such transfer charge.
MORTALITY AND EXPENSE RISK CHARGE
Each business day, we deduct a mortality and expense risk ("M&E") charge from
amounts we hold in the Variable Funding Options. We reflect the deduction in our
calculation of accumulation and Annuity Unit values. The charges stated are the
maximum for this product. We reserve the right to lower this charge at any time.
If you choose the Standard Death Benefit, the M&E charge is 0.80% annually. If
you choose the Optional Death
26
Benefit, the M&E charge is 1.25% annually. This charge compensates the Company
for risks assumed, benefits provided and expenses incurred, including the
payment of commissions to your sales agent.
VARIABLE FUNDING OPTION EXPENSES
We summarized the charges and expenses of the Underlying Funds in the fee table.
Please review the prospectus for each Underlying Fund for a more complete
description of that fund and its expenses. Underlying Fund expenses are not
fixed or guaranteed and are subject to change by the Fund.
FLOOR BENEFIT/LIQUIDITY BENEFIT CHARGES
If you select the Variable Annuitization Floor Benefit, we deduct a charge upon
election of this benefit. This charge compensates us for guaranteeing a minimum
variable Annuity Payment regardless of the performance of the Variable Funding
Options you selected. This charge will vary based upon market conditions, but
will never increase your annual Separate Account charge by more than 3%. The
charge will be set at the time of election, and will remain level throughout the
term of annuitization. If the Liquidity Benefit is selected, there is a
surrender charge of 5% of the amounts withdrawn. Please refer to Payment Options
for a description of these benefits.
CHART ASSET ALLOCATION PROGRAM CHARGES
Under the CHART Program, Purchase Payments and cash values are allocated among
the specified asset allocation funds. The charge for this advisory service is
equal to a maximum of 0.80% of the assets subject to the CHART Program. The
CHART Program fee will be paid by quarterly withdrawals from the cash values
allocated to the asset allocation funds. We will not treat these withdrawals as
taxable distributions. Please refer to Miscellaneous Contract Provisions for
further information.
PREMIUM TAX
Certain state and local governments charge premium taxes ranging from 0% to 5%,
depending upon jurisdiction. We are responsible for paying these taxes and will
determine the method used to recover premium tax expenses incurred. We will
deduct any applicable premium taxes from your Contract Value either upon death,
surrender, annuitization, or at the time you make Purchase Payments to the
Contract, but no earlier than when we have a tax liability under state law.
CHANGES IN TAXES BASED UPON PREMIUM OR VALUE
If there is any change in a law assessing taxes against the Company based upon
premiums, Contract gains or value of the Contract, we reserve the right to
charge you proportionately for this tax.
TRANSFERS
- --------------------------------------------------------------------------------
Subject to the limitations described below, you may transfer all or part of your
Contract Value between Variable Funding Options at any time up to 30 days before
the Maturity Date. After the Maturity Date, you may make transfers only if
allowed by your Contract or with our consent. Transfer requests received at our
Home Office that are in good order before the close of the New York Stock
Exchange (NYSE) will be processed according to the value(s) next computed
following the close of business. Transfer requests received on a non-business
day or after the close of the NYSE will be processed based on the value(s) next
computed on the next business day.
Where permitted by state law, we reserve the right to restrict transfers from
the Variable Funding Options to the Fixed Account whenever the credited interest
rate on the Fixed Account is equal to the minimum guaranteed interest rate
specified under the Contract.
Currently, there are no charges for transfers; however, we reserve the right to
charge a fee for any transfer request which exceeds twelve per year. Since each
Underlying Fund may have different overall expenses, a transfer of Contract
Values from one Variable Funding Option to another could result in your
investment becoming subject to higher or lower expenses. Also, when making
transfers, you should consider the inherent risks associated with the Variable
Funding Options to which your Contract Value is allocated.
27
MARKET TIMING/EXCESSIVE TRADING
THE CONTRACT IS INTENDED FOR USE AS A LONG-TERM INVESTMENT VEHICLE AND IS NOT
DESIGNED TO SERVE AS A VEHICLE FOR EXCESSIVE TRADING OR MARKET TIMING IN AN
ATTEMPT TO TAKE ADVANTAGE OF SHORT-TERM FLUCTUATIONS IN THE STOCK market.
EXCESSIVE TRADING IS DISRUPTIVE TO THE MANAGEMENT OF AN UNDERLYING FUND AND
INCREASES OVERALL COSTS TO ALL INVESTORS IN THE UNDERLYING FUND. If, in our sole
discretion, we determine you are engaging in excessive trading activity, trading
activity that we believe is indicative of market timing, or any similar trading
activity which will potentially hurt the rights or interests of other Contract
Owners, we will exercise our contractual right to restrict your number of
transfers to one every six months. We will notify you in writing if we choose to
exercise our contractual right to restrict your transfers.
In determining whether we believe you are engaged in excessive trading or market
timing activity, we will consider, among other things, the following factors:
o the dollar amount you request to transfer;
o the number of transfers you made within the previous three
months;
o whether your transfers follow a pattern designed to take
advantage of short term market fluctuations; and
o whether your transfers are part of a group of transfers made
by a third party on behalf of several individual Contract
Owners.
Transfers made under a Dollar Cost Averaging Program, a rebalancing program, or,
if applicable, any asset allocation program described in this prospectus are not
treated as a transfer when we evaluate trading patterns for market timing or
excessive trading.
In addition to the above, we also reserve the right, but do not have the
obligation, to further restrict the right to request transfers by any market
timing firm or any other third party who has been authorized to initiate
transfers on behalf of multiple Contract Owners. We may, among other things:
o reject the transfer instructions of any agent acting under a
power of attorney on behalf of more than one owner, or
o reject the transfer or exchange instructions of individual
owners who have executed pre-authorized transfer forms which
are submitted by market timing firms or other third parties
on behalf of more than one owner.
We will notify you in writing before we restrict your right to request transfers
through such market timing firm or other third party.
The policy of the Company is to seek to apply its anti-market timing and
excessive trading procedures uniformly. These procedures, however, will not
prevent all excessive trading and market timing activity from occurring. For
example:
o Some of the Underlying Funds are available as investments for variable
insurance contracts offered by other insurance companies. These other
insurance companies may have different procedures to prevent excessive
trading and market timing activity or may not have any such procedures
because of contractual limitations.
o The Company issues Contracts to qualified retirement plans that request
financial transactions with the Company on an omnibus basis on behalf
of all plan participants. These plans generally employ a record-keeper
to maintain records of participant financial activity. Because the
Company does not have the records to monitor the trading activity of
the individual participants, the Company may not be able to identify
plan participants who may be engaging in excessive trading or market
timing activity and/or may not be able to apply its contractual trade
restrictions to such participants.
o There may be other circumstances where the Company does not identify
trading activity as market timing or excessive trading or take action
to restrict trading activity that does not qualify as excessive trading
or market timing activity under our current anti-market timing
procedures. For example, Contract Owners may engage in trading activity
involving dollar amounts that are less than the threshold that we use
for trade surveillance. Or, Contract Owners may request trades in a
frequency or pattern
28
that does not qualify as excessive trading or market timing activity
under our current anti-market timing procedures.
Excessive trading and market timing activity increases the overall transaction
costs of an Underlying Fund, which may serve to decrease the Underlying Fund's
performance. Further, excessive trading and market timing activity may disrupt
the management of an Underlying Fund because the portfolio's advisor must react
to frequent requests to purchase and redeem investments.
FUTURE MODIFICATIONS. We will continue to monitor the transfer activity
occurring among the Variable Funding Options, and may modify these transfer
restrictions at any time if we deem it necessary to protect the interest of all
Contract Owners. These modifications may include curtailing or eliminating,
without notice, the ability to use the Internet, facsimile or telephone in
making transfers.
ACCESS TO YOUR MONEY
- --------------------------------------------------------------------------------
Any time before the Maturity Date, you may redeem all or any portion of the Cash
Surrender Value, that is, the Contract Value less any withdrawal charge and any
premium tax not previously deducted. Unless you submit a Written Request
specifying the fixed or Variable Funding Option(s) from which we are to withdraw
amounts, we will make the withdrawal on a pro rata basis. We will determine the
Cash Surrender Value as of the close of business after we receive your surrender
request at our Home Office. The Cash Surrender Value may be more or less than
the Purchase Payments you made. You may not make withdrawals during the annuity
period.
For amounts allocated to the Variable Funding Options, we may defer payment of
any Cash Surrender Value for a period of up to five business days after the
Written Request is received. For amounts allocated to the Fixed Account, we may
defer payment of any Cash Surrender Value for a period up to six months. In
either case, it is our intent to pay as soon as possible. We cannot process
requests for withdrawals that are not in good order. We will contact you if
there is a deficiency causing a delay and will advise what is needed to act upon
the withdrawal request.
If your Contract is issued as part of a 403(b) plan, there are restrictions on
your ability to make withdrawals from your Contract. You may not withdraw
contributions or earnings made to your Contract after December 31, 1988 unless
you are (a) age 59 1/2, (b) no longer employed, (c) deceased, (d) disabled, or
(e) experiencing a financial hardship. Even if you are experiencing a financial
hardship, you may only withdraw contributions, not earnings. You should consult
with your tax adviser before making a withdrawal from your Contract.
SYSTEMATIC WITHDRAWALS
Before the Maturity Date, you may choose to withdraw a specified dollar amount
(at least $100) on a monthly, quarterly, semiannual or annual basis. We will
deduct any applicable premium taxes and withdrawal charge. To elect systematic
withdrawals, you must have a Contract Value of at least $15,000 and you must
make the election on the form we provide. We will surrender Accumulation Units
pro rata from all funding options in which you have an interest, unless you
instruct us otherwise. You may begin or discontinue systematic withdrawals at
any time by notifying us in writing, but you must give at least 30 days notice
to change any systematic withdrawal instructions that are currently in place.
We reserve the right to discontinue offering systematic withdrawals or to assess
a processing fee for this service upon 30 days written notice to Contract Owners
(where allowed by state law).
Each systematic withdrawal is subject to federal income taxes on the taxable
portion. In addition, a 10% federal penalty tax may be assessed on systematic
withdrawals if the Contract Owner is under age 59 1/2. There is no additional
fee for electing systematic withdrawals. You should consult with your tax
adviser regarding the tax consequences of systematic withdrawals.
MANAGED DISTRIBUTION PROGRAM. Under the systematic withdrawal option, you may
choose to participate in the Managed Distribution Program. At no cost to you,
you may instruct us to calculate and make minimum distributions that may be
required by the IRS upon reaching age 701/2. (See Federal Tax Considerations")
These payments will not be subject to the withdrawal charge and will be in lieu
of the free withdrawal allowance. No Dollar Cost Averaging will be permitted if
you are participating in the Managed Distribution Program.
29
OWNERSHIP PROVISIONS
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TYPES OF OWNERSHIP
CONTRACT OWNER
The Contract belongs to the Contract Owner named in the Contract (on the
Contract Specifications page). The Annuitant is the individual upon whose life
the Maturity Date and the amount of monthly payments depend. Because this is a
Qualified Contract, the owner and the Annuitant must always be the same person,
and there can be only one Contract Owner. You have sole power to exercise any
rights and to receive all benefits given in the Contract provided you have not
named an irrevocable beneficiary.
If this Contract is purchased by a beneficiary of another contract who directly
transferred the death proceeds due under that contract, he/she will be granted
the same rights the owner has under the Contract except that he/she cannot take
a loan or make additional Purchase Payments.
BENEFICIARY
You name the beneficiary in a Written Request. The beneficiary has the right to
receive any death benefit proceeds remaining under the Contract upon the death
of the Contract Owner. If more than one beneficiary survives the Annuitant or
Contract Owner, they will share equally in benefits unless you recorded
different shares with the Company by Written Request before the death of the
Contract Owner. In the case of a non-spousal beneficiary or a spousal
beneficiary who has not chosen to assume the Contract, we will not transfer or
otherwise remove the death benefit proceeds from either the Variable Funding
Options or the Fixed Account, as most recently elected by the Contract Owner,
until the Death Report Date.
Unless you have named an irrevocable beneficiary you have the right to change
any beneficiary by Written Request during the lifetime of the Annuitant and
while the Contract continues.
DEATH BENEFIT
- --------------------------------------------------------------------------------
Before the Maturity Date, generally, a death benefit is payable when you die. At
purchase, you elect either the standard death benefit or the optional death
benefit. We calculate the death benefit at the close of the business day on
which our Home Office receives (1) Due Proof of Death and (2) written payment
instructions or election of beneficiary contract continuance ("Death Report
Date").
DEATH PROCEEDS BEFORE THE MATURITY DATE
STANDARD DEATH BENEFIT
- ---------------------------------------- -- ------------------------------------
ANNUITANT'S AGE ON THE CONTRACT DATE DEATH BENEFIT PAYABLE
- ---------------------------------------- -- ------------------------------------
Before Age 80 Greater of:
------------------------------------
1) Contract Value on the Death
Report Date, or
2) Total Purchase Payments
less the total of any
withdrawals (and
related charges).
- ---------------------------------------- -- ------------------------------------
On or after Age 80 Contract Value
- ---------------------------------------- -- ------------------------------------
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OPTIONAL DEATH BENEFIT AND CREDIT
The Optional Death Benefit and Credit varies depending on the Annuitant's age on
the Contract Date.
- -------------------------------------- -- --------------------------------------
ANNUITANT'S AGE ON THE CONTRACT DATE DEATH BENEFIT PAYABLE
- -------------------------------------- -- --------------------------------------
Under Age 70 Greater of:
1) Contract Value on the Death Report
Date, or
2) Total Purchase Payments less
the total of any withdrawals
(and related charges); or
3) Maximum Step-Up death benefit
value (described below)
associated with Contract Date
anniversaries beginning with
the 5th, and ending with the
last before the Annuitant's
76th birthday.
- -------------------------------------- -- --------------------------------------
Age 70-75 Greater of:
1) Contract Value, or
2) Total Purchase Payments less
the total of any withdrawals
(and related charges); or
3) Step-Up death benefit value
(described below) associated
with the 5th Contract Date
anniversary.
- -------------------------------------- -- --------------------------------------
Age 76-80 Greater of (1) or (2) above.
- -------------------------------------- -- --------------------------------------
Age over 80 Contract Value
- -------------------------------------- -- --------------------------------------
STEP-UP DEATH BENEFIT VALUE
We will establish a separate Step-Up death benefit value on the fifth Contract
Date anniversary and on each subsequent Contract Date anniversary on or before
the Death Report Date. The Step-Up death benefit value will initially equal the
Contract Value on that anniversary. After a Step-Up death benefit value has been
established, we will recalculate it each time a Purchase Payment is made or a
withdrawal is taken until the Death Report Date. We will recalculate Step-Up
death benefit values by increasing them by the amount of each applicable
Purchase Payment and by reducing them by a partial surrender reduction (as
described below) for each applicable withdrawal. Recalculations of Step-Up death
benefit values related to any Purchase Payments or any withdrawals will be made
in the order that such Purchase Payments or partial surrender reductions occur.
PARTIAL SURRENDER REDUCTION. If you make a withdrawal, we will reduce the
Step-Up value by a partial surrender reduction which equals: (1) the step-up
value immediately prior to the withdrawal, multiplied by (2) the amount of the
withdrawal, divided by (3) the Contract Value before the withdrawal.
For example, assume your current Contract Value is $55,000. If your step-up
value immediately prior to the withdrawal is $50,000, and you decide to make a
withdrawal of $10,000, we would reduce the step-up value as follows:
50,000 x (10,000/55,000) = 9,090
Your new step-up value would be 50,000-9,090, or $40,910.
The following example shows what would happen in a declining market. Assume your
current Contract Value is $30,000. If your step-up value immediately prior to
the withdrawal is $50,000, and you decide to make a withdrawal of $10,000, we
would reduce the step-up value as follows:
50,000 x (10,000/30,000) = 16,666
Your new step-up value would be 50,000-16,666, or $33,334.
PAYMENT OF PROCEEDS
We describe the process of paying death benefit proceeds before the Maturity
Date in the chart below. The chart does not encompass every situation and is
merely intended as a general guide. More detailed information is
31
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.
- --------------------------------------- --- ---------------------------------------- --- ----------------------------------
MANDATORY
BEFORE THE MATURITY DATE, THE COMPANY WILL PAYOUT RULES
UPON THE DEATH OF THE PAY THE PROCEEDS TO: APPLY*
- --------------------------------------- --- ---------------------------------------- --- ----------------------------------
OWNER/ANNUITANT The beneficiary (ies), or if none, to Yes
the CONTRACT OWNER's estate.
- --------------------------------------- --- ---------------------------------------- --- ----------------------------------
BENEFICIARY No death proceeds are payable; N/A
Contract continues.
- --------------------------------------- --- ---------------------------------------- --- ----------------------------------
CONTINGENT BENEFICIARY No death proceeds are payable; N/A
Contract continues.
- --------------------------------------- --- ---------------------------------------- --- ----------------------------------
- --------------
* Certain payout rules of the Internal Revenue Code (IRC) are triggered upon
the death of the Owner. Non-spousal beneficiaries (as well as spousal
beneficiaries who choose not to assume the Contract) must begin taking
distributions based on the beneficiary's life expectancy within one year of
death or take a complete distribution of Contract proceeds within 5 years of
death. If mandatory distributions have begun, the 5 year payout option is
not available.
BENEFICIARY CONTRACT CONTINUANCE (NOT PERMITTED FOR NON-NATURAL BENEFICIARIES)
If you die before the Maturity Date, and if the value of any beneficiary's
portion of the death benefit is between $20,000 and $1,000,000 as of the Death
Report Date, (more than $1,000,000 is subject to Home Office approval), your
beneficiary(s) may elect to continue his/her portion of the Contract subject to
applicable Internal Revenue Code distribution requirements, rather than receive
the death benefit in a lump sum. If the beneficiary chooses to continue the
Contract, the beneficiary can extend the payout phase of the Contract enabling
the beneficiary to "stretch" the death benefit distributions out over his life
expectancy as permitted by the Internal Revenue Code.
If your beneficiary elects to continue the Contract, the death benefit will be
calculated as of the Death Report Date. The initial Contract Value of the
continued Contract (the "adjusted Contract Value") will equal the greater of the
Contract Value or the death benefit calculated on the Death Report Date and will
be allocated to the funding options in the same proportion as prior to the Death
Report Date. If the adjusted Contract Value is allocated to the Variable Funding
Options, the beneficiary bears the investment risk.
The beneficiary who continues the Contract will be granted the same rights as
the owner under the original Contract, except the beneficiary cannot:
o take a loan
o make additional Purchase Payments
The beneficiary may also name his/her own beneficiary ("succeeding beneficiary")
and has the right to take withdrawals at any time after the Death Report Date
without a withdrawal charge. All other fees and charges applicable to the
original Contract will also apply to the continued Contract. All benefits and
features of the continued Contract will be based on the beneficiary's age on the
Death Report Date as if the beneficiary had purchased the Contract with the
adjusted Contract Value on the Death Report Date.
PLANNED DEATH BENEFIT (INDIVIDUAL CONTRACTS ONLY)
You may request that rather than receive a lump-sum death benefit, the
beneficiary(ies) receive all or a portion of the death benefit proceeds either:
o through an annuity for life or a period that does not exceed the
beneficiary's life expectancy or
o under the terms of the Beneficiary Continuance provision described
above. If the Beneficiary Continuance provision is selected as a
planned death benefit, no surrenders will be allowed other than
payments meant to satisfy minimum distribution amounts or systematic
withdrawal amounts, if greater.
32
You must make the planned death benefit request as well as any revocation of
this request in writing. Upon your death, your beneficiary(s) cannot revoke or
modify this request. If the death benefit at the time we receive Due Proof of
Death is less than $2,000, we will only pay a lump sum to the beneficiary. If
periodic payments due under the planned death benefit election are less than
$100, we reserve the right to make Annuity Payments at less frequent intervals,
resulting in a payment of at least $100 per year. If no beneficiary is alive
when death benefits become payable, we will pay the death benefit as provided in
your Contract.
DEATH PROCEEDS AFTER THE MATURITY DATE
If any Contract Owner or the Annuitant dies on or after the Maturity Date, the
Company will pay the beneficiary a death benefit consisting of any benefit
remaining under the annuity or income option then in effect.
THE ANNUITY PERIOD
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MATURITY DATE
Under the Contract, you can receive regular payments ("Annuity Payments"). You
can choose the month and the year in which those payments begin ("Maturity
Date"). You can also choose among income payouts (annuity options) or elect a
lump sum distribution. While the Annuitant is alive, you can change your
selection any time up to the Maturity Date. Annuity Payments will begin on the
Maturity Date stated in the Contract unless (1) you fully surrendered the
Contract; (2) we paid the proceeds to the beneficiary before that date; or (3)
you elected another date. Annuity Payments are a series of periodic payments (a)
for life; (b) for life with either a minimum number of payments or a specific
amount assured; or (c) for the joint lifetime of the Annuitant and another
person, and thereafter during the lifetime of the survivor. We may require proof
that the Annuitant is alive before we make Annuity Payments. Not all options may
be available in all states.
You may choose to annuitize at any time after you purchase your Contract. Unless
you elect otherwise, the Maturity Date will be the Annuitant's 90th birthday or
ten years after the effective date of the Contract, if later.
At least 30 days before the original Maturity Date, you may elect to extend the
Maturity Date to any time prior to the Annuitant's 90th birthday or to a later
date with our consent. You may use certain annuity options taken at the Maturity
Date to meet the minimum required distribution requirements of federal tax law,
or you may use a program of withdrawals instead. These mandatory distribution
requirements take effect generally upon the death of the Contract Owner, or with
certain Qualified Contracts upon either the later of the Contract Owner's
attainment of age 70 1/2 or year of retirement; or the death of the Contract
Owner. You should seek independent tax advice regarding the election of minimum
required distributions.
LIQUIDITY BENEFIT (BENEFIT NOT AVAILABLE UNDER 457 PLANS)
If you select any annuity option that guarantees you payments for a minimum
period of time ("period certain"), you may take a lump sum payment (equal to a
portion or all of the value of the remaining payments) any time after the first
Contract Year. There is a charge of 5% of the amount withdrawn under this
option.
For variable Annuity Payments, we use the Assumed Net Investment Factor,
("ANIF") as the interest rate to determine the lump sum amount. If you request
only a percentage of the amount available, we will reduce the amount of each
payment during the rest of the period certain by that percentage. After the
period expires, your payments will increase to the level they would have been
had no liquidation taken place.
For fixed Annuity Payments, we calculate the present value of the remaining
period certain payments using a current interest rate. The current interest rate
used depends on the amount of time left in the annuity option you elected. The
current rate will be the same rate we would give someone electing an annuity
option for that same amount of time. If you request a percentage of the amount
available during the period certain, we will reduce the amount of each payment
during the rest of the period certain by that percentage. After the period
certain expires, your payments will increase to the level they would have been
had no liquidation taken place.
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The market value adjustment formula for calculating the present value described
above for fixed Annuity Payments is as follows:
n
Present Value = Sigma [Payments X (1/1 + iC)(t/365)
s = 1
Where
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iC = the interest rate described above
n = the number of payments remaining in the Contract Owner's period
certain at the time of request for this benefit
t = the number of days remaining until that payment is made, adjusting
for leap years.
See Appendix E for examples of this market value adjustment.
ALLOCATION OF ANNUITY
You may elect to receive your Annuity Payments in the form of a variable
annuity, a fixed annuity, or a combination of both. If, at the time Annuity
Payments begin, you have not made an election, we will apply your Contract Value
to provide an annuity funded by the same funding options as you have selected
during the accumulation period. At least 30 days before the Maturity Date, you
may transfer the Contract Value among the funding options in order to change the
basis on which we will determine Annuity Payments. (See Transfers.)
ANNUITIZATION CREDIT. This credit is applied to the Contract Value used to
purchase one of the annuity options described below. The credit equals 0.5% of
your Contract Value if you annuitize during Contract Years 2-5, 1% during
Contract Years 6-10, and 2% after Contract Year 10. There is no credit applied
to Contracts held less than 1 year.
VARIABLE ANNUITY
You may choose an annuity payout that fluctuates depending on the investment
experience of the Variable Funding Options. We determine the number of Annuity
Units credited to the Contract by dividing the first monthly Annuity Payment
attributable to each Variable Funding Option by the corresponding Accumulation
Unit value as of 14 days before the date Annuity Payments begin. We use an
Annuity Unit to measure the dollar value of an Annuity Payment. The number of
Annuity Units (but not their value) remains fixed during the annuity period.
DETERMINATION OF FIRST ANNUITY PAYMENT. Your Contract contains the tables we use
to determine your first monthly Annuity Payment. If you elect a variable
annuity, the amount we apply to it will be the Contract Value as of 14 days
before the date Annuity Payments begin, less any applicable premium taxes not
previously deducted.
The amount of your first monthly payment depends on the annuity option you
elected and the Annuitant's adjusted age. Your Contract contains the formula for
determining the adjusted age. We determine the total first monthly Annuity
Payment by multiplying the benefit per $1,000 of value shown in the Contract
tables by the number of thousands of dollars of Contract Value you apply to that
annuity option. The Contract tables factor in an assumed daily net investment
factor of 3.0%. We call this your net investment rate. Your net investment rate
of 3% corresponds to an annual interest rate of 3%. This means that if the
annualized investment performance, after expenses, of your Variable Funding
Options is less than 3%, then the dollar amount of your variable Annuity
Payments will decrease. However, if the annualized investment performance, after
expenses, of your Variable Funding Options is greater than 3%, then the dollar
amount of your variable Annuity Payments will increase.
DETERMINATION OF SECOND AND SUBSEQUENT ANNUITY PAYMENTS. The dollar amount of
all subsequent Annuity Payments changes from month to month based on the
investment experience, as described above, of the applicable funding options.
The total amount of each Annuity Payment will equal the sum of the basic
payments in each funding option. We determine the actual amounts of these
payments by multiplying the number of Annuity Units
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we credited to each funding option by the corresponding Annuity Unit value as of
the date 14 days before the date the payment is due.
FIXED ANNUITY
You may choose a fixed annuity that provides payments that do not vary during
the annuity period. We will calculate the dollar amount of the first fixed
Annuity Payment as described under Variable Annuity, except that the amount we
apply to begin the annuity will be your Contract Value as of the date Annuity
Payments begin. Payout rates will not be lower than that shown in the Contract.
If it would produce a larger payment, the first fixed Annuity Payment will be
determined using the Life Annuity Tables in effect on the Maturity Date.
If you have elected the Increasing Benefit Option, the payments will be
calculated as above. However, the initial payment will be less than that
reflected in the table and the subsequent payments will be increased by the
percentage you elected.
PAYMENT OPTIONS
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ELECTION OF OPTIONS
While the Annuitant is alive, you can change your annuity option selection any
time up to the Maturity Date. Once Annuity Payments have begun, no further
elections are allowed.
During the Annuitant's lifetime, if you do not elect otherwise before the
Maturity Date, we will pay you (or another designated payee) the first of a
series of monthly Annuity Payments based on the life of the Annuitant, in
accordance with Annuity Option 2 (Life Annuity with 120 monthly payments
assured). For certain Qualified Contracts, Annuity Option 4 (Joint and Last
Survivor Life Annuity -- Annuity Reduced on Death of Primary Payee) will be the
automatic option as described in the Contract.
The minimum amount that can be placed under an annuity option will be $2,000
unless we agree to a lesser amount. If any monthly periodic payment due is less
than $100, the Company reserves the right to make payments at less frequent
intervals, or to pay the Contract Value in a lump-sum.
On the Maturity Date, we will pay the amount due under the Contract in
accordance with the Payment Option that you select. You may choose to receive a
single lump-sum payment. You must elect an option in writing, in a form
satisfactory to the Company. Any election made during the lifetime of the
Annuitant must be made by the Contract Owner.
VARIABLE ANNUITIZATION FLOOR BENEFIT (BENEFIT NOT AVAILABLE UNDER 457 PLANS).
This benefit may not be available, or may only be available under certain
annuity options, if we determine market conditions so dictate. If available, we
will guarantee that, regardless of the performance of the Variable Funding
Options selected by you, your Annuity Payments will never be less than a certain
percentage of your first Annuity Payment. This percentage will vary depending on
market conditions, but will never be less than 50%. You may not elect this
benefit if you are over age 80. Additionally, you must select from certain funds
available under this guarantee. Currently, these funds are the Equity Index
Portfolio Class II, the Travelers Quality Bond Portfolio, and the U.S.
Government Securities Portfolio. We may, at our discretion, increase or decrease
the number of funds available under this benefit. This benefit is not currently
available under Annuity Option 5. The benefit is not available with the 5% ANIF
under any Option. If you select this benefit, you may not elect to liquidate any
portion of your Contract.
There is a charge for this guarantee, which will begin upon election of this
benefit. This charge will vary based upon market conditions, and will be
established at the time the benefit is elected. Once established, the charge
will remain level throughout the remainder of the annuitization, and will never
increase your annual Separate Account charge by more than 3% per year.
We reserve the right to restrict the amount of Contract Value to be annuitized
under this benefit.
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ANNUITY OPTIONS
Subject to the conditions described in "Election of Options" above, we may pay
all or any part of the Cash Surrender Value under one or more of the following
annuity options. Payments under the annuity options are generally made on a
monthly basis. We may offer additional options.
Option 1 -- Life Annuity -- No Refund. The Company will make Annuity Payments
during the lifetime of the Annuitant ending with the last payment before death.
This option offers the maximum periodic payment, since there is no assurance of
a minimum number of payments or provision for a death benefit for beneficiaries.
Option 2 -- Life Annuity with 120, 180 or 240 Monthly Payments Assured. The
Company will make monthly Annuity Payments during the lifetime of the Annuitant,
with the agreement that if, at the death of that person, payments have been made
for less than 120, 180 or 240 months, as elected, we will continue making
payments to the beneficiary during the remainder of the period.
Option 3 -- Joint and Last Survivor Life Annuity -- No Refund. The Company will
make regular Annuity Payments during the lifetime of the Annuitant and a second
person. When either person dies, we will continue making payments to the
survivor. No further payments will be made following the death of the survivor.
Option 4 -- Joint and Last Survivor Life Annuity -- Annuity Reduced on Death of
Primary Payee. The Company will make Annuity Payments during the lifetimes of
the Annuitant and a second person. You will designate one as primary payee, and
the other will be designated as secondary payee. On the death of the secondary
payee, the Company will continue to make monthly Annuity Payments to the primary
payee in the same amount that would have been payable during the joint lifetime
of the two persons. On the death of the primary payee, the Company will continue
to make Annuity Payments to the secondary payee in an amount equal to 50% of the
payments, which would have been made during the lifetime of the primary payee.
No further payments will be made once both payees have died.
Option 5 -- Payments for a Fixed Period without Life Contingency. We will make
periodic payments for the period selected.
Option 6 -- Other Annuity Options. We will make any other arrangements for
Annuity Payments as may be mutually agreed upon.
MISCELLANEOUS CONTRACT PROVISIONS
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RIGHT TO RETURN
You may return the Contract for a full refund of the Contract Value plus any
Contract charges and premium taxes you paid (but not any fees and charges the
Underlying Fund assessed) within ten days after you receive it (the "right to
return period"). You bear the investment risk of investing in the Variable
Funding Options during the right to return period; therefore, the Contract Value
we return may be greater or less than your Purchase Payment.
If you purchase the Contract as an Individual Retirement Annuity, and return it
within the first seven days after delivery, or longer if your state permits, we
will refund your Purchase Payment in full; during the remainder of the right to
return period, we will refund the Contract Value (including charges).
We will determine the Contract Value following the close of the business day on
which we receive your Contract and a Written Request for a refund. Where state
law requires a different period, or the return of Purchase Payments or other
variations of this provision, we will comply. Refer to your Contract for any
state-specific information.
TERMINATION
We reserve the right to terminate the Contract on any business day if your
Contract Value as of that date is less than $2,000 and you have not made
Purchase Payments for at least two years, unless otherwise specified by state
law. Termination will not occur until 31 days after we have mailed notice of
termination to your last known address and to any assignee of record. If we
terminate the Contract, we will pay you the Cash Surrender Value less any
applicable taxes.
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REQUIRED REPORTS
As often as required by law, but at least once in each Contract Year before the
due date of the first Annuity Payment, we will furnish a report showing the
number of Accumulation Units credited to the Contract and the corresponding
Accumulation Unit value(s) as of the report date for each funding option to
which the Contract Owner has allocated amounts during the applicable period. The
Company will keep all records required under federal and state laws.
SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the date of any payment or
determination of values on any business day (1) when the New York Stock Exchange
("the Exchange") is closed; (2) when trading on the Exchange is restricted; (3)
when an emergency exists, as determined by the SEC, so that the sale of
securities held in the Separate Account may not reasonably occur, or so that the
Company may not reasonably determine the value the Separate Account's net
assets; or (4) during any other period when the SEC, by order, so permits for
the protection of security holders. Payments from the Fixed Account may be
delayed up to 6 months.
THE SEPARATE ACCOUNTS
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The Travelers Insurance Company and The Travelers Life and Annuity Company each
sponsor Separate Accounts: Separate Account Five and Separate Account Six,
respectively. Both Separate Account Five and Separate Account Six were
established on March 27, 1997 and are registered with the SEC as unit investment
trusts ("Separate Account") under the Investment Company Act of 1940, as
amended. We will invest Separate Account assets attributable to the Contracts
exclusively in the shares of the Variable Funding Options.
We hold the assets of Separate Account Five and Separate Account Six for the
exclusive and separate benefit of the owners of each Separate Account, according
to the laws of Connecticut. Income, gains and losses, whether or not realized,
from assets allocated to the Separate Account are, in accordance with the
Contracts, credited to or charged against the Separate Account without regard to
other income, gains and losses of the Company. The assets held by the Separate
Account are not chargeable with liabilities arising out of any other business
that we may conduct. Obligations under the Contract are obligations of the
Company.
All investment income and other distributions of the funding options are payable
to the Separate Account. We reinvest all such income and/or distributions in
shares of the respective funding option at net asset value. Shares of the
funding options are currently sold only to life insurance company Separate
Accounts to fund variable annuity and variable life insurance contracts.
Certain variable annuity Separate Accounts and variable life insurance Separate
Accounts may invest in the funding options simultaneously (called "mixed" and
"shared" funding). It is conceivable that in the future it may be
disadvantageous to do so. Although the Company and the Variable Funding Options
do not currently foresee any such disadvantages either to variable annuity
Contract Owners or variable life policy owners, each Variable Funding Option's
Board of Directors intends to monitor events in order to identify any material
conflicts between them and to determine what action, if any, should be taken. If
a Board of Directors was to conclude that separate funds should be established
for variable life and variable annuity Separate Accounts, the variable annuity
Contract Owners would not bear any of the related expenses, but variable annuity
Contract Owners and variable life insurance policy owners would no longer have
the economies of scale resulting from a larger combined fund.
PERFORMANCE INFORMATION
In advertisements for the Contract, we may include performance figures to show
you how a Variable Funding Option has performed in the past. These figures are
rates of return or yield quotations shown as a percent. These figures show past
performance of a Variable Funding Option and are not an indication of how a
Variable Funding Option will perform in the future.
Our advertisements may show performance figures assuming that you do not elect
any optional features such as the Optional Death Benefit. However, if you elect
optional features, they involve additional charges that will serve to decrease
the performance of your Variable Funding Options. You may wish to speak with
your
37
registered representative to obtain performance information specific to the
optional features you may wish to select.
Performance figures for each Variable Funding Option are based in part on the
performance of a corresponding Underlying Fund. In some cases, the Underlying
Fund may have existed before the technical inception of the corresponding
Variable Fund Option. In those cases, we can create "hypothetical historical
performance" of a Variable Fund Option. These figures show the performance that
the Variable Fund Option would have achieved had it been available during the
entire history of the Underlying Fund.
In a low interest rate environment, yields for money market Subaccounts, after
deduction of the Mortality and Expense Risk Charge, Administrative Expense
Charge and the charge for any optional benefit riders (if applicable), may be
negative even though the Underlying Fund's yield, before deducting for such
charges, is positive. If you allocate a portion of your Contract Value to a
money market Subaccount or participate in an asset allocation program where
Contract Value is allocated to a money market Subaccount under the applicable
asset allocation model, that portion of your Contract Value may decrease in
value.
FEDERAL TAX CONSIDERATIONS
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The following general discussion of the federal income tax consequences related
to your investment in this Contract is not intended to cover all situations, and
is not meant to provide tax or legal advice. Because of the complexity of the
law and the fact that the tax results will vary depending on many factors, you
should consult your tax and/or legal adviser regarding the tax implications of
purchasing this Contract based upon your individual situation. For further tax
information, an additional discussion of certain tax matters is contained in the
SAI.
GENERAL TAXATION OF ANNUITIES
Congress has recognized the value of saving for retirement by providing certain
tax benefits, in the form of tax deferral, for premiums paid under an annuity
and permitting tax-free transfers between the various investment options offered
under the Contract. The Internal Revenue Code ("Code") governs how earnings on
your investment in the Contract are ultimately taxed, depending upon the type of
Contract, Qualified or Non-qualified, and the manner in which the money is
distributed, as briefly described below. In analyzing the benefits of tax
deferral it is important to note that the Jobs and Growth Tax Relief
Reconciliation Act of 2003 amended Code Section 1 to reduce the marginal tax
rates on long-term capital gains and dividends to 5% and 15%. The reduced rates
apply during 2003 through 2008, and thereafter will increase to prior levels.
Earnings under annuity Contracts, like interest payable as fixed investments
(notes, bonds, etc.), continue to be taxed as ordinary income (top rate of 35%).
TAX-FREE EXCHANGES: Code Section 1035 provides that, if certain conditions are
met, no gain or loss is recognized when an annuity contract is received in
exchange for a life, endowment, or annuity Contract. Since different annuity
contracts have different expenses, fees and benefits, a tax-free exchange could
result in your investment becoming subject to higher or lower fees and/or
expenses.
TYPES OF CONTRACTS: QUALIFIED AND NON-QUALIFIED
QUALIFIED ANNUITY CONTRACTS
If you purchase your Contract with proceeds of an eligible rollover distribution
from any qualified employee pension plan or individual retirement annuity (IRA),
your Contract is referred to as a Qualified Contract. Some examples of Qualified
Contracts are: IRAs, tax-sheltered annuities established by public school
systems or certain tax-exempt organizations under Code Section 403(b), corporate
sponsored pension and profit-sharing plans (including 401(k) plans), Keogh Plans
(for self-employed individuals), and certain other qualified deferred
compensation plans. Another type of Qualified Contract is a Roth IRA, under
which after-tax contributions accumulate until maturity, when amounts (including
earnings) may be withdrawn tax-free. The rights and benefits under a Qualified
Contract may be limited by the terms of the retirement plan, regardless of the
terms and conditions of the Contract. Plan participants making contributions to
Qualified Contracts will be subject to the required minimum distribution rules
as provided by the Code and described below.
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TAXATION OF QUALIFIED ANNUITY CONTRACTS
Under a qualified annuity, since amounts paid into the Contract have generally
not yet been taxed, the full amount of such distributions, including the amount
attributable to Purchase Payments, whether paid in the form of lump-sum
withdrawals or Annuity Payments, are generally taxed at the ordinary income tax
rate unless the distribution is transferred to an eligible rollover account or
Contract. The Contract is available as a vehicle for IRA rollovers and for other
Qualified Contracts. There are special rules which govern the taxation of
Qualified Contracts, including withdrawal restrictions, requirements for
mandatory distributions, and contribution limits. Amounts rolled over to the
Contract from other qualified plan funding vehicles are generally not subject to
current taxation. We have provided a more complete discussion in the SAI.
MANDATORY DISTRIBUTIONS FOR QUALIFIED PLANS
Federal tax law requires that minimum annual distributions begin by April 1st of
the calendar year following the calendar year in which an IRA owner attains age
701/2. Participants in qualified plans and 403(b) annuities may defer minimum
distributions until the later of April 1st of the calendar year following the
calendar year in which they attain age 701/2 or the year of retirement. If you
own more than one individual retirement annuity and/or account, you may satisfy
the minimum distribution rules on an aggregate basis (i.e. determine the total
amount of required distributions from all IRAs and take the required amount from
any one or more IRAs). A similar aggregate approach is available to meet your
403(b) minimum distribution requirements if you have multiple 403(b) annuities.
Recently promulgated Treasury regulations changed the distribution requirements;
therefore, it is important that you consult your tax adviser as to the impact of
these regulations on your personal situation.
MINIMUM DISTRIBUTIONS FOR BENEFICIARIES UPON THE CONTRACT OWNER'S DEATH: Upon
the death of the Contract Owner and/or Annuitant of a Qualified Contract, the
funds remaining in the Contract must be completely withdrawn within 5 years from
the date of death (including in a single lump sum) or minimum distributions may
be taken over the life expectancy of the individual beneficiaries (and in
certain situations, trusts for individuals), provided such distributions are
payable at least annually and begin within one year from the date of death.
Special rules apply where the beneficiary is the surviving spouse, which allow
the spouse to assume the Contract and defer the minimum distribution
requirements.
NOTE TO PARTICIPANTS IN QUALIFIED PLANS INCLUDING 401, 403(B), 457 AS WELL AS
IRA OWNERS: While annual plan contribution limits may be increased from time to
time by Congress and the IRS for federal income tax purposes, these limits must
be adopted by each state for the higher limits to be effective at a state income
tax level. In other words, the permissible contribution limit for income tax
purposes may be different at the federal level from your state's income tax
laws. Therefore, in certain states, a portion of the contributions may not be
excludible or deductible from state income taxes. Please consult your employer
or tax adviser regarding this issue.
NON-QUALIFIED ANNUITY CONTRACTS
If you purchase the Contract on an individual basis with after-tax dollars and
not under one of the programs described above, your Contract is referred to as
non-qualified.
As the owner of a non-qualified annuity, you do not receive any tax benefit
(deduction or deferral of income) on Purchase Payments, but you will not be
taxed on increases in the value of your Contract until a distribution occurs --
either as a withdrawal (distribution made prior to the Maturity Date), or as
periodic Annuity Payments. When a withdrawal is made, you are taxed on the
amount of the withdrawal that is considered earnings under federal tax laws.
Similarly, when you receive an Annuity Payment, part of each periodic payment is
considered a return of your Purchase Payments and will not be taxed. The
remaining portion of the Annuity Payment (i.e., any earnings) will be considered
ordinary income for federal income tax purposes.
If a non-qualified annuity is owned by other than an individual, however, (e.g.,
by a corporation), increases in the value of the Contract attributable to
Purchase Payments made after February 28, 1986 are includable in income annually
and taxed at ordinary income tax rates. Furthermore, for Contracts issued after
April 22, 1987, if you transfer the Contract to another person or entity without
adequate consideration, all deferred increases in value will be includable in
your income for federal income tax purposes at the time of the transfer.
If you make a partial withdrawal of your annuity balance, the distribution will
generally be taxed as first coming from earnings, (income in the contract), and
then from your Purchase Payments. These withdrawn earnings are
39
includable in your taxable income. (See Penalty Tax for Premature Distributions
below.) As a general rule, there is income in the Contract to the extent the
Contract Value exceeds your investment in the Contract. The investment in the
Contract equals the total Purchase Payments you paid less any amount received
previously which was excludible from gross income. Any direct or indirect
borrowing against the value of the Contract or pledging of the Contract as
security for a loan will be treated as a cash distribution under the tax law,
and will have tax consequences in the year taken. It should be noted that there
is no guidance as to the determination of the amount of income in a Contract if
it is issued with a guaranteed minimum withdrawal benefit. Therefore, you should
consult with your tax adviser as to the potential tax consequences of a partial
surrender if your Contract is issued with a guaranteed minimum withdrawal
benefit.
Code Section 72(s) requires that non-qualified annuity Contracts meet minimum
mandatory distribution requirements upon the death of the Contract Owner,
including the death of either of the joint owners. If these requirements are not
met, the Contract will not be treated as an annuity Contract for federal income
tax purposes and earnings under the Contract will be taxable currently, not when
distributed. The distribution required depends, among other things, upon whether
an annuity option is elected or whether the succeeding Contract Owner is the
surviving spouse. We will administer Contracts in accordance with these rules
and we will notify you when you should begin receiving payments. There is a more
complete discussion of these rules in the SAI.
DIVERSIFICATION REQUIREMENTS FOR VARIABLE ANNUITIES
The Code requires that any non-qualified variable annuity Contracts based on a
Separate Account must meet specific diversification standards. Non-qualified
variable annuity contracts shall not be treated as an annuity for Federal income
tax purposes if investments made in the account are not adequately diversified.
Final tax regulations define how Separate Accounts must be diversified. The
Company monitors the diversification of investments constantly and believes that
its accounts are adequately diversified. The consequence of any failure to
diversify is essentially the loss to the Contract Owner of tax-deferred
treatment, requiring the current inclusion of a proportionate share of the
income and gains from the Separate Account assets in the income of each Contract
Owner. The Company intends to administer all Contracts subject to this provision
of law in a manner that will maintain adequate diversification.
OWNERSHIP OF THE INVESTMENTS
In certain circumstances, owners of variable annuity contracts have been
considered to be the owners of the assets of the underlying Separate Account for
Federal income tax purposes due to their ability to exercise investment control
over those assets. When this is the case, the contract owners have been
currently taxed on income and gains attributable to the variable account assets.
There is little guidance in this area, and some features of the Contract, such
as the number of funds available and the flexibility of the Contract Owner to
allocate premium payments and transfer amounts among the funding options, have
not been addressed in public rulings. While we believe that the Contract does
not give the Contract Owner investment control over Separate Account assets, we
reserve the right to modify the Contract as necessary to prevent a Contract
Owner from being treated as the owner of the Separate Account assets supporting
the Contract.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a Non-qualified Contract because of the death of
an owner or Annuitant. Generally, such amounts are includable in the income of
the recipient as follows: (i) if distributed in a lump sum, they are taxed in
the same manner as a full surrender of the contract; or (ii) if distributed
under a payment option, they are taxed in the same way as Annuity Payments.
OTHER TAX CONSIDERATIONS
TREATMENT OF CHARGES FOR OPTIONAL BENEFITS
The Contract may provide one or more optional enhanced death benefits or other
minimum guaranteed benefit that in some cases may exceed the greater of purchase
price or the Contract Value. It is possible that the Internal Revenue Service
may take the position that the charges for the optional enhanced benefit(s) are
deemed to be taxable distributions to you. Although we do not believe that a
charge under such optional enhanced benefit
40
should be treated as a taxable withdrawal, you should consult with your tax
adviser before selecting any rider or endorsement to the Contract.
PENALTY TAX FOR PREMATURE DISTRIBUTIONS
For both Qualified and Non-qualified Contracts, taxable distributions taken
before the Contract Owner has reached the age of 591/2 will be subject to a 10%
additional tax penalty unless the distribution is taken in a series of periodic
distributions, for life or life expectancy, or unless the distribution follows
the death or disability of the Contract Owner. Other exceptions may be available
in certain qualified plans. The 10% additional tax is in addition to any
penalties that may apply under your Contract and the normal income taxes due on
the distribution.
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.
AVAILABLE INFORMATION
- --------------------------------------------------------------------------------
The Companies are both subject to the information requirements of the Securities
and Exchange Act of 1934 ("the 1934 Act"), as amended, and file reports, proxy
statements and other information with the Securities and Exchange Commission
("Commission"). You may read and copy this information and other information at
the following locations:
o public reference facilities of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C., 20549
o the Commission's Regional Offices located at 233 Broadway, New York,
New York 10279
o the Commission's Regional Offices located at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661.
Under the Securities Act of 1933, the Companies have each filed with the
Commission registration statements (the "Registration Statement") relating to
the Contracts offered by this prospectus. This prospectus has been filed as a
part of the Registration Statement and does not contain all of the information
set forth in the Registration Statement and the exhibits. Reference is hereby
made to such Registration Statement and exhibits for further information about
the Companies and the Contracts. The Registration Statement and the exhibits may
be
41
inspected and copied as described above. Although the Companies each furnish
the annual reports on Form 10-K for the year ended December 31, 2004 to owners
of Contracts or certificates, we do not plan to furnish subsequent annual
reports containing financial information to the owners of Contracts or
certificates described in this prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- --------------------------------------------------------------------------------
The latest annual report on Form 10-K for The Travelers Insurance Company and
the latest annual report on Form 10-K for The Travelers Life and Annuity Company
have been filed with the Securities and Exchange Commission. Both annual reports
are incorporated by reference into this prospectus and a copy of both annual
reports must accompany this prospectus.
The Forms 10-K for the fiscal year ended December 31, 2004 contain additional
information about each Company including audited financial statements for the
latest fiscal year. The Travelers Insurance Company filed its Form 10-K on March
30, 2005 via Edgar, File No. 33-03094. The Travelers Life and Annuity Company
filed its Form 10-K on March 30, 2005 via Edgar, File No. 33-58677.
If requested, we will furnish, without charge, a copy of any and all of the
documents incorporated by reference, other than exhibits to those documents
(unless such exhibits are specifically incorporated by reference in those
documents.) You may direct your requests to: The Travelers Insurance Company,
One Cityplace, 3 CP, Hartford, Connecticut 06103-3415, Attention: Annuity
Services. The telephone number is (800) 842-9406. You may also obtain copies of
any documents, incorporated by reference into this prospectus by accessing the
SEC's website (http://www.sec.gov).
OTHER INFORMATION
- --------------------------------------------------------------------------------
THE INSURANCE COMPANIES
Please refer to your Contract to determine which Company issued your Contract.
The Travelers Insurance Company is a stock insurance company chartered in 1863
in Connecticut and continuously engaged in the insurance business since that
time. It is licensed to conduct life insurance business in all states of the
United States, the District of Columbia, Puerto Rico, Guam, the U.S. and British
Virgin Islands and the Bahamas. The Company is an indirect wholly owned
subsidiary of Citigroup Inc. The Company's Home Office is located at One
Cityplace, Hartford, Connecticut 06103-3415.
The Travelers Life and Annuity Company is a stock insurance company chartered in
1973 in Connecticut and continuously engaged in the insurance business since
that time. It is licensed to conduct life insurance business in all states of
the United States (except New York), the District of Columbia and Puerto Rico.
The Company is an indirect wholly-owned subsidiary of Citigroup Inc. The
Company's Home Office is located at One Cityplace, Hartford, Connecticut
06103-3415.
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 variable annuity or
variable life insurance contract described in your prospectus:
o The Travelers Insurance Company ("TIC")
o The Travelers Life and Annuity Company ("TLAC")
The proposed sale would also include TIC and TLAC's affiliated investment
advisory companies, Travelers Asset Management International Company LLC, and
Travelers Investment Adviser Inc., each of which serves as the investment
advisor for certain of the funding options that may be available under your
variable contract.
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
42
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 variable annuity
or variable life insurance contract, and The Travelers Insurance Company or The
Travelers Life and Annuity Company will remain fully responsible for their
respective contractual obligations to variable annuity or variable life
insurance contract owners.
FINANCIAL STATEMENTS
The financial statements for the Company and its Separate Account are located in
the Statement of Additional Information.
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
DISTRIBUTION AND PRINCIPAL UNDERWRITING AGREEMENT. The Travelers Insurance
Company and The Travelers Life and Annuity Company (together the "Company") have
appointed Travelers Distribution LLC ("TDLLC") to serve as the principal
underwriter and distributor of the securities offered through this Prospectus,
pursuant to the terms of a Distribution and Principal Underwriting Agreement.
TDLLC, which is an affiliate of the Company, also acts as the principal
underwriter and distributor of other variable annuity contracts and variable
life insurance policies issued by the Company and its affiliated companies. The
Company reimburses TDLLC for expenses TDLLC incurs in distributing the Contracts
(e.g. commissions payable to retail broker-dealers who sell the Contracts).
TDLLC does not retain any fees under the Contracts; however, TDLLC may receive
12b-1 fees from the Underlying Funds.
TDLLC's principal executive offices are located at One Cityplace, Hartford,
Connecticut 06103. TDLLC is registered as a broker-dealer with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as
well as the securities commissions in the states in which it operates, and is a
member of the National Association of Securities Dealers, Inc. ("NASD").
TDLLC and the Company enter into selling agreements with broker-dealers who are
registered with the SEC and are members of the NASD, and with entities that may
offer the Contracts but are exempt from registration. Applications for the
Contract are solicited by registered representatives who are associated persons
of such broker-dealer firms. Such representatives act as appointed agents of the
Company under applicable state insurance law and must be licensed to sell
variable insurance products. The Company intends to offer the Contract in all
jurisdictions where it is licensed to do business and where the Contract is
approved. The Contracts are offered on a continuous basis.
COMPENSATION. Broker-dealers who have selling agreements with TDLLC and the
Company are paid compensation for the promotion and sale of the Contracts.
Registered representatives who solicit sales of the Contract typically receive a
portion of the compensation payable to the broker-dealer firm, depending on the
agreement between the firm and the registered representative. A broker-dealer
firm or registered representative of a firm may receive different compensation
for selling one product over another and/or may be inclined to favor or disfavor
one product provider over another product provider due to differing compensation
rates.
We generally pay compensation as a percentage of purchase payments invested in
the Contract. Alternatively, we may pay lower compensation on purchase payments
but pay periodic asset-based compensation based on all or a portion of the
Contract Value. The amount and timing of compensation may vary depending on the
selling agreement but is not expected to exceed 7.50% of Purchase Payments (if
up-front compensation is paid to registered representatives) and up to 1.50%
annually of average Contract Value (if asset-based compensation is paid to
registered representatives). We may periodically establish compensation specials
whereby we pay a higher amount for sales of the Contract during a specified
period. While a compensation special is in effect, registered representatives
may be inclined to favor a product that pays a higher compensation over another
product where a compensation special is not in effect. We are not currently
offering any compensation specials.
This Contract does not assess a front-end sales charge, so you do not directly
pay for sales and distribution expenses. Instead, you indirectly pay for sales
and distribution expenses through the overall charges and fees assessed under
your Contract. For example, any profits the Company may realize through
assessing the mortality and expense risk charge under your Contract may be used
to pay for sales and distribution expenses.
43
The Company may also pay for sales and distribution expenses out of any payments
the Company or TDLLC may receive from the Underlying Funds for providing
administrative, marketing and other support and services to the Underlying
Funds. If your Contract assesses a Contingent Deferred Sales Charge, proceeds
from this charge may be used to reimburse the Company for sales and distribution
expenses. No additional sales compensation is paid if you select any optional
benefits under your Contract.
To the extent permitted by NASD rules and other applicable laws and regulations,
TDLLC may pay or allow other promotional incentives or payments in the form of
cash or other compensation.
The Company and TDLLC have also entered into preferred distribution arrangements
with certain broker-dealer firms. These arrangements are sometimes called "shelf
space" arrangements. Under these arrangements, the Company and TDLLC pay
separate, additional compensation to the broker-dealer firm for services the
broker-dealer provides in connection with the distribution of the Company's
products. These services may include providing the Company with access to the
distribution network of the broker-dealer, the hiring and training of the
broker-dealer's sales personnel, the sponsoring of conferences and seminars by
the broker-dealer, or general marketing services performed by the broker-dealer.
The broker-dealer may also provide other services or incur other costs in
connection with distributing the Company's products.
These preferred distribution arrangements will not be offered to all
broker-dealer firms and the terms of such arrangements may differ between
broker-dealer firms. Compensation payable under such arrangements may be based
on aggregate, net or anticipated sales of the Contracts, total assets
attributable to sales of the Contract by registered representatives of the
broker-dealer firm or based on the length of time that a Contract owner has
owned the Contract. Any such compensation payable to a broker-dealer firm will
be made by TDLLC or the Company out of their own assets and will not result in
any additional direct charge to you. Such compensation may cause the
broker-dealer firm and its registered representatives to favor the Company's
products. The Company and TDLLC have entered into preferred distribution
arrangements with AIG Advisor Group (including Advantage Capital Corporation,
FSC Securities Corporation, Royal Alliance Associates, Inc., Sentra Securities
Corporation, Spelman & Co., Inc. and SunAmerica Securities, Inc.), CitiStreet
Equities LLC, Piper Jaffray & Co.and Tower Square Securities, Inc.
SALE OF VARIABLE ANNUITIES BY AFFILIATES OF THE COMPANY. The Company and TDLLC
may offer the Contracts through retail broker-dealer firms that are affiliates
of the Company. Because of the affiliation, these broker-dealer firms and their
registered representatives may favor the Company's products.
TOWER SQUARE SECURITIES. The Company and TDLLC have entered into a selling
agreement with Tower Square Securities, Inc. ("Tower Square"), which is
affiliated with the Company. Registered representatives of Tower Square, who are
properly licensed and appointed, may offer the Contract to customers. In
addition to compensation described above, Tower Square representatives are
eligible for various cash benefits, such as bonuses, commission advances and
non-cash compensation programs offered by the Company, such as retirement and
other benefit plans for agents and the ability to purchase Citigroup common
stock at a discount. Sales of the Contracts may help qualify a Tower Square
representative for such benefits. Sales representatives may receive other
payments from the Company for services that do not directly involve the sale of
the Contracts, including payments made for the recruitment and training of
personnel, production of promotional literature, and similar services. In
addition, sales representatives who meet certain Company productivity,
persistency and length of the services standards may be eligible for additional
compensation. In addition to the compensation described above, Tower Square
receives compensation for meeting certain gross sales goals and net sales goals
(sales less redemptions) which may cause Tower Square or its representatives to
favor the Company's products.
CITISTREET EQUITIES LLC/CITISTREET ASSOCIATES LLC. The Company and TDLLC have
entered into a selling agreement with CitiStreet Equities LLC. CitiStreet
Equities LLC and its affiliate, CitiStreet Associates LLC, are part of a joint
venture between Citigroup Inc., the Company's ultimate parent, and State Street
Corporation. Registered representatives of CitiStreet Equities LLC, who are
properly licensed and appointed, may offer the Contract to customers. In
addition to compensation described above, CitiStreet Equities LLC receives
compensation for the hiring and training of sales representatives and for
meeting certain gross sales goals and net sales goals (sales less redemptions)
which may cause CitiStreet Equities LLC or its representatives to favor the
Company's products. The Company has also entered into an agreement with
CitiStreet Associates LLC whereby the Company pays CitiStreet Associates LLC
fees in connection with CitiStreet Associates' provision of certain
administrative, recordkeeping, marketing and support services in relation to
annuity contracts sold by CitiStreet Equities LLC in connection with Section
401(a), 401(k), 403(b), 457(b) and 408(b) plans. Any compensation
44
payable to CitiStreet Associates LLC or CitiStreet Equities LLC will be made by
TDLLC or the Company out of its own assets and will not result in any additional
direct charge to you.
CONFORMITY WITH STATE AND FEDERAL LAWS
The laws of the state in which the Contract is issued govern that Contract.
Where a state has not approved a Contract feature or funding option, it will not
be available in that state. Any paid-up annuity, Cash Surrender Value or death
benefits that are available under the Contract are not less than the minimum
benefits required by the statutes of the state in which we delivered the
Contract. We reserve the right to make any changes, including retroactive
changes, in the Contract to the extent that the change is required to meet the
requirements of any law or regulation issued by any governmental agency to which
the Company, the Contract or the Contract Owner is subject.
VOTING RIGHTS
The Company is the legal owner of the shares of the Underlying Funds. However,
we believe that when an Underlying Fund solicits proxies in conjunction with a
vote of shareholders we are required to obtain from you and from other owners
instructions on how to vote those shares. We will vote all shares, including
those we may own on our own behalf, and those where we have not received
instructions from Contract Owners, in the same proportion as shares for which we
received voting instructions. Should we determine that we are no longer required
to comply with the above, we will vote on the shares in our own right. In
certain limited circumstances, and when permitted by law, we may disregard
voting instructions. If we do disregard voting instructions, a summary of that
action and the reasons for such action would be included in the next annual
report to Contract Owners.
RESTRICTIONS ON FINANCIAL TRANSACTIONS
Federal laws designed to counter terrorism and prevent money laundering might,
in certain circumstances, require us to block a Contract Owner's ability to make
certain transactions and thereby refuse to accept any request for transfers,
withdrawals, surrenders, or death benefits, until the instructions are received
from the appropriate regulator. We may also be required to provide additional
information about you and your Contract to government regulators.
LEGAL PROCEEDINGS AND OPINIONS
Legal matters in connection with the federal laws and regulations affecting the
issue and sale of the contract described in this prospectus, as well as the
organization of the Companies, their authority to issue variable annuity
contracts under Connecticut law and the validity of the forms of the variable
annuity contracts under Connecticut law, have been passed on by the Deputy
General Counsel of the Companies.
In 2003 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.
Notwithstanding the above, there are no pending legal proceedings affecting
either the Separate Account or the principal underwriter. There are no pending
legal proceedings against either Company likely to have a material adverse
affect on the ability of either Company to meet its obligations under the
applicable Contract.
45
THIS PAGE INTENTIONALLY LEFT BLANK.
APPENDIX A -- CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS SEPARATE ACCOUNT FIVE FOR VARIABLE ANNUITIES
ACCUMULATION UNIT VALUES (IN DOLLARS)
The following Accumulation Unit Value ("AUV") information should be read in
conjunction with the Separate Account's audited financial statement and notes,
which are included in the Statement of Additional Information ("SAI"). The first
table provides the AUV information for the MINIMUM Separate Account Charge
available under the contract. The second table provides the AUV information for
the MAXIMUM Separate Account Charge available under the contract. The Separate
Account Charges that fall in between this range are included in the SAI, which
is free of charge. You may request a copy of the SAI by calling the toll-free
number found on the first page of this prospectus or by mailing in the coupon
attached in Appendix E. Please refer to the Fee Table section of this prospectus
for more information on Separate Account Charges.
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Capital Appreciation Fund (5/00)......................... 2004 0.503 0.597 286,860
2003 0.406 0.503 148,185
2002 0.547 0.406 213,843
2001 0.745 0.547 6,402
2000 1.000 0.745 --
High Yield Bond Trust (9/99)............................. 2004 1.418 1.530 100,536
2003 1.107 1.418 27,244
2002 1.067 1.107 --
2001 0.982 1.067 --
2000 0.980 0.982 --
1999 1.000 0.980 --
Managed Assets Trust (6/99).............................. 2004 1.111 1.206 41,606
2003 0.918 1.111 25,510
2002 1.013 0.918 25,510
2001 1.076 1.013 25,510
2000 1.102 1.076 20,767
1999 1.000 1.102 13,609
Money Market Portfolio (9/99)............................ 2004 1.125 1.127 236,987
2003 1.125 1.125 289,912
2002 1.119 1.125 264,365
2001 1.087 1.119 77,342
2000 1.032 1.087 76,073
1999 1.000 1.032 36,453
A-1
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
AIM Variable Insurance Funds, Inc.
AIM V.I. Premier Equity Fund -- Series I (5/01)........... 2004 0.763 0.800 --
2003 0.615 0.763 --
2002 0.888 0.615 --
2001 1.000 0.888 --
American Funds Insurance Series
Global Growth Fund -- Class 2 Shares (5/04)............... 2004 1.000 1.109 --
Growth Fund -- Class 2 Shares (5/04)...................... 2004 1.000 1.091 14,605
Growth-Income Fund -- Class 2 Shares (5/04)............... 2004 1.000 1.082 18,354
CitiStreet Funds, Inc.
CitiStreet Diversified Bond Fund -- Class I (9/99)........ 2004 1.310 1.360 764,591
2003 1.251 1.310 481,357
2002 1.157 1.251 470,261
2001 1.092 1.157 --
2000 0.979 1.092 12,041
1999 1.000 0.979 37,502
CitiStreet International Stock Fund -- Class I (7/99)..... 2004 0.899 1.024 349,627
2003 0.697 0.899 291,178
2002 0.904 0.697 223,222
2001 1.160 0.904 --
2000 1.272 1.160 1,916
1999 1.000 1.272 6,933
CitiStreet Large Company Stock Fund -- Class I (9/99)..... 2004 0.683 0.746 656,590
2003 0.537 0.683 525,471
2002 0.702 0.537 430,013
2001 0.840 0.702 --
2000 0.995 0.840 10,384
1999 1.000 0.995 21,459
CitiStreet Small Company Stock Fund -- Class I (9/99)..... 2004 1.732 1.974 107,116
2003 1.220 1.732 83,489
2002 1.612 1.220 66,192
2001 1.600 1.612 --
A-2
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
CitiStreet Small Company Stock Fund -- Class I
(continued).............................................. 2000 1.465 1.600 1,472
1999 1.000 1.465 6,201
Credit Suisse Trust
Credit Suisse Trust Emerging Markets Portfolio (10/99)... 2004 1.140 1.412 11,251
2003 0.804 1.140 11,251
2002 0.916 0.804 11,251
2001 1.022 0.916 --
2000 1.506 1.022 --
1999 1.000 1.506 --
Delaware VIP Trust
Delaware VIP REIT Series -- Standard Class (9/00)......... 2004 1.816 2.368 85,371
2003 1.366 1.816 31,398
2002 1.318 1.366 19,794
2001 1.221 1.318 --
2000 1.000 1.221 --
Delaware VIP Small Cap Value Series -- Standard
Class (10/99)............................................ 2004 1.701 2.050 22,455
2003 1.208 1.701 22,455
2002 1.289 1.208 10,600
2001 1.162 1.289 --
2000 0.991 1.162 --
1999 1.000 0.991 --
Dreyfus Variable Investment Fund
Dreyfus Variable Investment Fund -- Developing Leaders
Portfolio -- Initial Shares (10/99)....................... 2004 1.360 1.503 102,644
2003 1.041 1.360 57,302
2002 1.298 1.041 58,130
2001 1.394 1.298 13,264
2000 1.240 1.394 3,246
1999 1.000 1.240 --
Dreyfus Variable Investment Fund -- Appreciation
Portfolio -- Initial Shares (7/99)........................ 2004 0.952 0.992 123,030
2003 0.792 0.952 42,639
A-3
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Dreyfus Variable Investment Fund -- Appreciation
Portfolio -- Initial Shares (continued).................. 2002 0.958 0.792 54,702
2001 1.065 0.958 27,197
2000 1.081 1.065 24,552
1999 1.000 1.081 24,552
Franklin Templeton Variable Insurance Products Trust
Mutual Shares Securities Fund -- Class 2 Shares (5/03).... 2004 1.204 1.345 6,200
2003 1.000 1.204 6,200
Templeton Developing Markets Securities Fund -- Class 2
Shares (5/04)............................................ 2004 1.000 1.234 --
Templeton Foreign Securities Fund -- Class 2 Shares (5/04) 2004 1.000 1.156 19,656
Templeton Growth Securities Fund -- Class 2 Shares (5/04). 2004 1.000 1.126 38,090
Greenwich Street Series Fund
Appreciation Portfolio (5/01)............................ 2004 0.954 1.029 53,728
2003 0.772 0.954 45,111
2002 0.943 0.772 20,346
2001 1.000 0.943 3,353
Equity Index Portfolio -- Class II Shares (7/99).......... 2004 0.864 0.945 140,723
2003 0.682 0.864 126,629
2002 0.886 0.682 47,426
2001 1.019 0.886 23,609
2000 1.133 1.019 14,389
1999 1.000 1.133 13,350
Fundamental Value Portfolio (5/01)....................... 2004 0.992 1.065 157,189
2003 0.722 0.992 157,189
2002 0.924 0.722 30,684
2001 1.000 0.924 --
A-4
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Janus Aspen Series
Balanced Portfolio -- Service Shares (5/01)............... 2004 1.005 1.080 25,695
2003 0.891 1.005 25,695
2002 0.962 0.891 --
2001 1.000 0.962 --
Mid Cap Growth Portfolio -- Service Shares (5/01)......... 2004 0.736 0.880 64,111
2003 0.551 0.736 5,302
2002 0.772 0.551 33,784
2001 1.000 0.772 --
Worldwide Growth Portfolio -- Service Shares (5/00)....... 2004 0.556 0.577 5,661
2003 0.453 0.556 5,661
2002 0.615 0.453 5,661
2001 0.801 0.615 5,661
2000 1.000 0.801 --
Lazard Retirement Series, Inc.
Lazard Retirement Small Cap Portfolio (5/04)............. 2004 1.000 1.127 --
Lord Abbett Series Fund, Inc.
Growth and Income Portfolio (5/04)....................... 2004 1.000 1.111 --
Mid-Cap Value Portfolio (5/04)........................... 2004 1.000 1.165 --
Oppenheimer Variable Account Funds
Oppenheimer Main Street Fund/VA -- Service Shares (5/04).. 2004 1.000 1.078 --
PIMCO Variable Insurance Trust
Total Return Portfolio -- Administrative Class (5/01)..... 2004 1.192 1.240 152,147
2003 1.144 1.192 6,319
2002 1.057 1.144 7,538
2001 1.000 1.057 --
Putnam Variable Trust
Putnam VT Discovery Growth Fund -- Class IB Shares (5/01). 2004 0.739 0.789 --
2003 0.564 0.739 --
A-5
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Putnam VT Discovery Growth Fund -- Class IB Shares 2002 0.808 0.564 --
(continued)..............................................
2001 1.000 0.808 --
Putnam VT International Equity Fund -- Class IB
Shares (5/01)............................................ 2004 0.897 1.033 6,667
2003 0.703 0.897 6,667
2002 0.861 0.703 --
2001 1.000 0.861 --
Putnam VT Small Cap Value Fund -- Class IB Shares (5/01).. 2004 1.315 1.647 63,465
2003 0.886 1.315 43,406
2002 1.093 0.886 40,852
2001 1.000 1.093 --
Salomon Brothers Variable Series Funds Inc.
All Cap Fund -- Class I (4/00)............................ 2004 1.486 1.596 5,450
2003 1.077 1.486 3,532
2002 1.449 1.077 --
2001 1.433 1.449 --
2000 1.000 1.433 --
Investors Fund -- Class I (10/99)......................... 2004 1.185 1.298 6,680
2003 0.903 1.185 --
2002 1.183 0.903 6,424
2001 1.244 1.183 --
2000 1.088 1.244 --
1999 1.000 1.088 13,535
Small Cap Growth Fund -- Class I (5/01)................... 2004 0.932 1.064 --
2003 0.631 0.932 --
2002 0.974 0.631 --
2001 1.000 0.974 --
Total Return Fund -- Class I (9/00)....................... 2004 1.121 1.209 --
2003 0.975 1.121 --
2002 1.055 0.975 --
2001 1.072 1.055 --
2000 1.000 1.072 --
A-6
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Smith Barney Investment Series
Smith Barney Dividend Strategy Portfolio (5/01).......... 2004 0.807 0.828 6,455
2003 0.659 0.807 6,455
2002 0.897 0.659 --
2001 1.000 0.897 --
Smith Barney Premier Selections All Cap Growth
Portfolio (5/01)......................................... 2004 0.869 0.887 --
2003 0.652 0.869 --
2002 0.898 0.652 --
2001 1.000 0.898 --
Strong Variable Insurance Funds, Inc.
Strong Multi Cap Value Fund II (3/00).................... 2004 1.014 1.175 8,864
2003 0.739 1.014 8,864
2002 0.969 0.739 8,864
2001 0.938 0.969 --
2000 1.000 0.938 --
The Travelers Series Trust
Convertible Securities Portfolio (5/04).................. 2004 1.000 1.040 --
Disciplined Mid Cap Stock Portfolio (8/99)............... 2004 1.406 1.625 46,180
2003 1.060 1.406 38,942
2002 1.247 1.060 22,864
2001 1.310 1.247 4,950
2000 1.132 1.310 4,950
1999 1.000 1.132 4,950
Equity Income Portfolio (7/99)........................... 2004 1.137 1.240 294,106
2003 0.874 1.137 192,847
2002 1.024 0.874 151,978
2001 1.105 1.024 109,815
2000 1.021 1.105 12,381
1999 1.000 1.021 12,381
Federated Stock Portfolio (11/01)........................ 2004 1.015 1.113 4,216
2003 0.802 1.015 4,216
2002 1.002 0.802 4,216
2001 1.000 1.002 --
A-7
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Large Cap Portfolio (7/99)............................... 2004 0.807 0.852 111,168
2003 0.652 0.807 96,847
2002 0.851 0.652 96,847
2001 1.038 0.851 96,847
2000 1.224 1.038 52,127
1999 1.000 1.224 12,719
Lazard International Stock Portfolio (8/99).............. 2004 0.846 0.971 6,318
2003 0.663 0.846 6,318
2002 0.768 0.663 6,318
2001 1.049 0.768 4,591
2000 1.194 1.049 4,591
1999 1.000 1.194 4,591
Merrill Lynch Large Cap Core Portfolio (6/00)............ 2004 0.780 0.897 --
2003 0.649 0.780 --
2002 0.874 0.649 --
2001 1.136 0.874 --
2000 1.000 1.136 --
MFS Emerging Growth Portfolio (5/01)..................... 2004 0.681 0.761 --
2003 0.531 0.681 --
2002 0.814 0.531 --
2001 1.000 0.814 --
MFS Mid Cap Growth Portfolio (10/99)..................... 2004 0.909 1.029 59,981
2003 0.668 0.909 47,678
2002 1.317 0.668 45,675
2001 1.739 1.317 33,694
2000 1.603 1.739 30,494
1999 1.000 1.603 --
MFS Value Portfolio (5/04)............................... 2004 1.000 1.127 21,046
Pioneer Fund Portfolio (8/99)............................ 2004 0.768 0.847 18,862
2003 0.625 0.768 31,058
2002 0.903 0.625 24,128
2001 1.183 0.903 --
2000 0.959 1.183 --
1999 1.000 0.959 --
A-8
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Social Awareness Stock Portfolio (7/99).................. 2004 0.877 0.925 18,473
2003 0.686 0.877 18,473
2002 0.921 0.686 14,167
2001 1.100 0.921 14,167
2000 1.115 1.100 14,167
1999 1.000 1.115 14,167
Travelers Quality Bond Portfolio (8/99).................. 2004 1.259 1.290 40,044
2003 1.186 1.259 36,759
2002 1.130 1.186 19,941
2001 1.063 1.130 19,941
2000 1.002 1.063 19,941
1999 1.000 1.002 19,941
U.S. Government Securities Portfolio (8/99).............. 2004 1.326 1.396 357,708
2003 1.301 1.326 328,667
2002 1.154 1.301 366,169
2001 1.099 1.154 20,423
2000 0.968 1.099 20,423
1999 1.000 0.968 20,423
Travelers Series Fund Inc.
AIM Capital Appreciation Portfolio (5/01)................ 2004 0.840 0.887 6,755
2003 0.654 0.840 --
2002 0.867 0.654 --
2001 1.000 0.867 --
MFS Total Return Portfolio (7/99)........................ 2004 1.240 1.371 337,809
2003 1.073 1.240 153,776
2002 1.141 1.073 135,391
2001 1.150 1.141 53,295
2000 0.994 1.150 --
1999 1.000 0.994 --
Pioneer Strategic Income Portfolio (1/01)................ 2004 1.285 1.415 32,760
2003 1.084 1.285 32,760
2002 1.032 1.084 27,083
2001 1.000 1.032 --
A-9
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
SB Adjustable Rate Income Portfolio -- Class I 2004 1.001 1.005 1,000
Shares (9/03)............................................
2003 1.000 1.001 1,000
Smith Barney Aggressive Growth Portfolio (5/01).......... 2004 0.846 0.923 328,219
2003 0.634 0.846 251,625
2002 0.949 0.634 15,408
2001 1.000 0.949 2,646
Smith Barney High Income Portfolio (8/99)................ 2004 1.065 1.166 63,799
2003 0.842 1.065 22,349
2002 0.877 0.842 20,231
2001 0.918 0.877 20,231
2000 1.007 0.918 20,231
1999 1.000 1.007 20,231
Smith Barney International All Cap Growth
Portfolio (12/99)........................................ 2004 0.755 0.883 39,904
2003 0.597 0.755 3,291
2002 0.810 0.597 3,291
2001 1.186 0.810 3,291
2000 1.569 1.186 3,291
1999 1.000 1.569 --
Smith Barney Large Capitalization Growth
Portfolio (10/99)........................................ 2004 0.991 0.987 40,912
2003 0.677 0.991 5,766
2002 0.907 0.677 --
2001 1.045 0.907 --
2000 1.132 1.045 --
1999 1.000 1.132 --
Strategic Equity Portfolio (7/99)........................ 2004 0.787 0.861 81,278
2003 0.598 0.787 67,954
2002 0.908 0.598 67,954
2001 1.057 0.908 67,954
2000 1.303 1.057 56,806
1999 1.000 1.303 17,222
A-10
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Van Kampen Life Investment Trust
Comstock Portfolio -- Class II Shares (5/03).............. 2004 1.257 1.464 --
2003 1.000 1.257 --
Emerging Growth Portfolio -- Class II Shares (5/01)....... 2004 0.688 0.729 --
2003 0.546 0.688 --
2002 0.817 0.546 --
2001 1.000 0.817 --
Enterprise Portfolio -- Class II Shares (5/01)............ 2004 0.794 0.817 --
2003 0.637 0.794 --
2002 0.911 0.637 --
2001 1.000 0.911 --
Variable Annuity Portfolios
Smith Barney Small Cap Growth Opportunities
Portfolio (5/01)......................................... 2004 0.986 1.130 29,945
2003 0.700 0.986 --
2002 0.949 0.700 --
2001 1.000 0.949 --
Variable Insurance Products Fund II
Asset Manager Portfolio -- Service Class 2 (5/00)......... 2004 0.949 0.990 23,009
2003 0.813 0.949 23,009
2002 0.900 0.813 51,769
2001 0.949 0.900 --
2000 1.000 0.949 --
Contrafund(R) Portfolio -- Service Class 2 (5/01)...........2004 1.083 1.238 124,888
2003 0.852 1.083 75,992
2002 0.950 0.852 14,509
2001 1.000 0.950 --
Variable Insurance Products Fund III
Dynamic Capital Appreciation Portfolio -- Service
Class 2 (5/01)........................................... 2004 0.962 0.966 12,814
2003 0.776 0.962 12,814
2002 0.846 0.776 12,814
2001 1.000 0.846 2,853
A-11
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Mid Cap Portfolio -- Service Class 2 (5/01)............... 2004 1.264 1.563 92,254
2003 0.921 1.264 47,487
2002 1.032 0.921 9,533
2001 1.000 1.032 --
A-12
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 1.25%, PLUS 1.40% FLOOR BENEFIT
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Greenwich Street Series Fund
Equity Index Portfolio -- Class II Shares (7/99).......... 2004 0.791 0.850 --
2003 0.636 0.791 --
2002 0.841 0.636 --
2001 0.986 0.841 --
2000 1.117 0.986 --
1999 1.000 1.117 --
NOTES
Effective 11/01/2004 Smith Barney Investment Series: Smith Barney Large Cap Core
Portfolio changed its name to Smith Barney Investment Series: Smith Barney
Dividend Strategy Portfolio.
The date next to each funding option's name reflects the date money first came
into the funding option through the Separate Account.
Funding options not listed above had no amount allocated to them or were not
available as of December 31, 2004.
"Number of Units Outstanding at End of Year" may include units for Contracts
Owners in payout phase, where appropriate.
If an accumulation unit value has no assets and units across all sub-accounts
within the Separate Account, and has had no assets and units for the history
displayed on the Condensed Financial Information in the past, then it may not be
displayed.
AIM Variable Insurance Funds, Inc.: AIM Premier Equity Fund -- Series I is no
longer available to new contract owners.
Credit Suisse Trust: Emerging Markets Portfolio is no longer available to new
contract owners.
Variable Insurance Products Fund III: Dynamic Capital Appreciation Portfolio --
Service Class 2 -- is no longer available to new contract owners.
The Travelers Series Trust: Federated Stock Portfolio is no longer available to
new contract owners.
Janus Aspen Series: Balanced Portfolio -- Service Shares -- is no longer
available to new contract owners.
Janus Aspen Series: World Wide Growth Portfolio -- Service Shares is no longer
available to new contract holders.
Putnam Variable Trust: Putnam VT Discovery Growth Fund -- Class IB Share is no
longer available to new contract owners.
Putnam Variable Trust: Putnam VT International Equity Fund -- Class IB Shares is
no longer available to new contract holders.
A-13
NOTES (CONTINUED)
Salomon Brothers Variable Series Funds Inc.: Total Return Fund -- Class I is no
longer available to new contract holders.
Smith Barney Investment Series: Smith Barney Dividend Strategy Portfolio is no
longer available to new contract owners.
Greenwich Street Series Fund: Fundamental Value Portfolio is no longer available
to new contract holders.
Travelers Series Fund Inc.: Smith Barney International All Cap Growth Portfolio
is no longer available to new contract owners.
Strong Variable insurance Funds, Inc.: Strong Multi Cap Value Fund II is no
longer available to new contract owners.
Van Kampen Life Investment Trust: Enterprise Portfolio -- Class II Shares is no
longer available to new contract holders.
A-14
APPENDIX B -- CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS SEPARATE ACCOUNT SIX FOR VARIABLE ANNUITIES
ACCUMULATION UNIT VALUES (IN DOLLARS)
The following Accumulation Unit Value ("AUV") information should be read in
conjunction with the Separate Account's audited financial statement and notes,
which are included in the Statement of Additional Information ("SAI"). The first
table provides the AUV information for the MINIMUM Separate Account Charge
available under the contract. The second table provides the AUV information for
the MAXIMUM Separate Account Charge available under the contract. The Separate
Account Charges that fall in between this range are included in the SAI, which
is free of charge. You may request a copy of the SAI by calling the toll-free
number found on the first page of this prospectus or by mailing in the coupon
attached in Appendix E. Please refer to the Fee Table section of this prospectus
for more information on Separate Account Charges.
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Capital Appreciation Fund (5/00)......................... 2004 0.503 0.597 1,555,826
2003 0.406 0.503 1,630,081
2002 0.547 0.406 1,837,286
2001 0.745 0.547 1,046,590
2000 1.000 0.745 1,006,482
High Yield Bond Trust (5/99)............................. 2004 1.418 1.530 368,425
2003 1.107 1.418 381,556
2002 1.067 1.107 411,756
2001 0.982 1.067 314,101
2000 0.980 0.982 101,750
1999 1.000 0.980 92,789
Managed Assets Trust (3/99).............................. 2004 1.111 1.206 946,294
2003 0.918 1.111 968,180
2002 1.013 0.918 1,042,680
2001 1.076 1.013 1,174,637
2000 1.102 1.076 913,007
1999 1.000 1.102 232,345
Money Market Portfolio (4/99)............................ 2004 1.125 1.127 1,106,052
2003 1.125 1.125 1,753,058
2002 1.119 1.125 1,258,377
2001 1.087 1.119 990,283
2000 1.032 1.087 700,403
1999 1.000 1.032 239,890
B-1
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
AIM Variable Insurance Funds, Inc.
AIM V.I. Premier Equity Fund -- Series I (7/01)........... 2004 0.763 0.800 103,702
2003 0.615 0.763 103,682
2002 0.888 0.615 55,895
2001 1.000 0.888 --
American Funds Insurance Series
Global Growth Fund -- Class 2 Shares (5/04)............... 2004 1.010 1.109 31,153
Growth Fund -- Class 2 Shares (5/04)...................... 2004 0.970 1.091 16,521
Growth-Income Fund -- Class 2 Shares (5/04)............... 2004 0.979 1.082 104,915
CitiStreet Funds, Inc.
CitiStreet Diversified Bond Fund -- Class I (3/99)........ 2004 1.310 1.360 4,115,266
2003 1.251 1.310 3,142,575
2002 1.157 1.251 3,360,816
2001 1.092 1.157 2,080,975
2000 0.979 1.092 601,543
1999 1.000 0.979 139,623
CitiStreet International Stock Fund -- Class I (3/99)..... 2004 0.899 1.024 2,148,904
2003 0.697 0.899 2,010,293
2002 0.904 0.697 2,025,194
2001 1.160 0.904 1,238,125
2000 1.272 1.160 474,746
1999 1.000 1.272 90,221
CitiStreet Large Company Stock Fund -- Class I (3/99)..... 2004 0.683 0.746 4,498,084
2003 0.537 0.683 4,110,325
2002 0.702 0.537 3,575,681
2001 0.840 0.702 2,080,499
2000 0.995 0.840 959,029
1999 1.000 0.995 228,230
CitiStreet Small Company Stock Fund -- Class I (3/99)..... 2004 1.732 1.974 879,208
2003 1.220 1.732 844,568
2002 1.612 1.220 739,822
2001 1.600 1.612 542,731
B-2
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
CitiStreet Small Company Stock Fund -- Class I 2000 1.465 1.600 462,418
(continued)..............................................
1999 1.000 1.465 113,574
Credit Suisse Trust
Credit Suisse Trust Emerging Markets Portfolio (5/99).... 2004 1.140 1.412 44,528
2003 0.804 1.140 46,418
2002 0.916 0.804 45,812
2001 1.022 0.916 54,766
2000 1.506 1.022 71,391
1999 1.000 1.506 54,662
Delaware VIP Trust
Delaware VIP REIT Series -- Standard Class (7/99)......... 2004 1.816 2.368 330,738
2003 1.366 1.816 282,138
2002 1.318 1.366 242,450
2001 1.221 1.318 128,487
2000 0.937 1.221 102,023
1999 1.000 0.937 --
Delaware VIP Small Cap Value Series -- Standard
Class (4/99)............................................. 2004 1.701 2.050 203,692
2003 1.208 1.701 177,208
2002 1.289 1.208 139,177
2001 1.162 1.289 13,468
2000 0.991 1.162 5,110
1999 1.000 0.991 --
Dreyfus Variable Investment Fund
Dreyfus Variable Investment Fund -- Developing Leaders
Portfolio -- Initial Shares (4/99)........................ 2004 1.360 1.503 619,182
2003 1.041 1.360 589,418
2002 1.298 1.041 540,784
2001 1.394 1.298 388,047
2000 1.240 1.394 305,761
1999 1.000 1.240 45,091
B-3
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Dreyfus Variable Investment Fund -- Appreciation
Portfolio -- Initial Shares (3/99)........................ 2004 0.952 0.992 330,399
2003 0.792 0.952 331,736
2002 0.958 0.792 356,023
2001 1.065 0.958 396,091
2000 1.081 1.065 311,873
1999 1.000 1.081 244,529
Franklin Templeton Variable Insurance Products Trust
Mutual Shares Securities Fund -- Class 2 Shares (8/03).... 2004 1.204 1.345 23,498
2003 1.000 1.204 17,090
Templeton Developing Markets Securities Fund -- Class 2
Shares (6/04)............................................ 2004 0.972 1.234 --
Templeton Foreign Securities Fund -- Class 2 Shares (5/04) 2004 0.962 1.156 40,991
Templeton Growth Securities Fund -- Class 2 Shares (6/04). 2004 1.021 1.126 57,703
Greenwich Street Series Fund
Appreciation Portfolio (8/01)............................ 2004 0.954 1.029 162,864
2003 0.772 0.954 100,091
2002 0.943 0.772 82,395
2001 1.000 0.943 14,712
Equity Index Portfolio -- Class II Shares (3/99).......... 2004 0.864 0.945 1,899,361
2003 0.682 0.864 1,719,505
2002 0.886 0.682 1,579,821
2001 1.019 0.886 1,055,882
2000 1.133 1.019 842,129
1999 1.000 1.133 207,054
Fundamental Value Portfolio (5/01)....................... 2004 0.992 1.065 630,507
2003 0.722 0.992 637,061
2002 0.924 0.722 486,577
2001 1.000 0.924 106,535
B-4
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Janus Aspen Series
Balanced Portfolio -- Service Shares (5/01)............... 2004 1.005 1.080 157,215
2003 0.891 1.005 123,022
2002 0.962 0.891 83,565
2001 1.000 0.962 --
Mid Cap Growth Portfolio -- Service Shares (8/01)......... 2004 0.736 0.880 --
2003 0.551 0.736 --
2002 0.772 0.551 --
2001 1.000 0.772 --
Worldwide Growth Portfolio -- Service Shares (5/00)....... 2004 0.556 0.577 303,997
2003 0.453 0.556 319,311
2002 0.615 0.453 382,579
2001 0.801 0.615 441,531
2000 1.000 0.801 424,750
Lazard Retirement Series, Inc.
Lazard Retirement Small Cap Portfolio (5/04)............. 2004 1.009 1.127 --
Lord Abbett Series Fund, Inc.
Growth and Income Portfolio (5/04)....................... 2004 0.968 1.111 --
Mid-Cap Value Portfolio (7/04)........................... 2004 1.007 1.165 34,410
Oppenheimer Variable Account Funds
Oppenheimer Main Street Fund/VA -- Service Shares (5/04).. 2004 0.975 1.078 10,342
PIMCO Variable Insurance Trust
Total Return Portfolio -- Administrative Class (6/01)..... 2004 1.192 1.240 378,880
2003 1.144 1.192 385,107
2002 1.057 1.144 388,046
2001 1.000 1.057 42,621
Putnam Variable Trust
Putnam VT Discovery Growth Fund -- Class IB Shares (12/01) 2004 0.739 0.789 11,671
2003 0.564 0.739 11,671
B-5
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Putnam VT Discovery Growth Fund -- Class IB Shares
(continued).............................................. 2002 0.808 0.564 11,671
2001 1.000 0.808 --
Putnam VT International Equity Fund -- Class IB
Shares (5/01)............................................ 2004 0.897 1.033 85,063
2003 0.703 0.897 88,330
2002 0.861 0.703 89,130
2001 1.000 0.861 36,530
Putnam VT Small Cap Value Fund -- Class IB Shares (6/01).. 2004 1.315 1.647 205,632
2003 0.886 1.315 173,137
2002 1.093 0.886 235,414
2001 1.000 1.093 1,734
Salomon Brothers Variable Series Funds Inc.
All Cap Fund -- Class I (3/99)............................ 2004 1.486 1.596 344,257
2003 1.077 1.486 357,262
2002 1.449 1.077 340,827
2001 1.433 1.449 172,311
2000 1.222 1.433 70,934
1999 1.000 1.222 13,279
Investors Fund -- Class I (3/99).......................... 2004 1.185 1.298 149,763
2003 0.903 1.185 151,723
2002 1.183 0.903 140,603
2001 1.244 1.183 102,276
2000 1.088 1.244 20,655
1999 1.000 1.088 5,119
Small Cap Growth Fund -- Class I (6/01)................... 2004 0.932 1.064 --
2003 0.631 0.932 --
2002 0.974 0.631 --
2001 1.000 0.974 997
Total Return Fund -- Class I (3/99)....................... 2004 1.121 1.209 29,201
2003 0.975 1.121 13,990
2002 1.055 0.975 10,605
2001 1.072 1.055 7,423
B-6
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Total Return Fund -- Class I (continued)................. 2000 1.002 1.072 5,470
1999 1.000 1.002 --
Smith Barney Investment Series
Smith Barney Dividend Strategy Portfolio (5/01).......... 2004 0.807 0.828 23,093
2003 0.659 0.807 20,096
2002 0.897 0.659 20,096
2001 1.000 0.897 20,096
Smith Barney Premier Selections All Cap Growth
Portfolio (6/01)......................................... 2004 0.869 0.887 2,816
2003 0.652 0.869 --
2002 0.898 0.652 --
2001 1.000 0.898 --
Strong Variable Insurance Funds, Inc.
Strong Multi Cap Value Fund II (7/99).................... 2004 1.014 1.175 6,351
2003 0.739 1.014 9,511
2002 0.969 0.739 9,511
2001 0.938 0.969 6,351
2000 0.877 0.938 6,351
1999 1.000 0.877 6,351
The Travelers Series Trust
Convertible Securities Portfolio (5/04).................. 2004 0.990 1.040 --
Disciplined Mid Cap Stock Portfolio (6/99)............... 2004 1.406 1.625 300,148
2003 1.060 1.406 298,395
2002 1.247 1.060 244,570
2001 1.310 1.247 156,409
2000 1.132 1.310 87,378
1999 1.000 1.132 --
Equity Income Portfolio (3/99)........................... 2004 1.137 1.240 1,226,765
2003 0.874 1.137 1,133,992
2002 1.024 0.874 1,011,873
2001 1.105 1.024 343,935
2000 1.021 1.105 212,588
1999 1.000 1.021 216,322
B-7
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Federated Stock Portfolio (4/99)......................... 2004 1.015 1.113 60,043
2003 0.802 1.015 60,043
2002 1.002 0.802 52,941
2001 0.993 1.002 24,072
2000 0.965 0.993 4,126
1999 1.000 0.965 --
Large Cap Portfolio (3/99)............................... 2004 0.807 0.852 512,693
2003 0.652 0.807 524,562
2002 0.851 0.652 448,487
2001 1.038 0.851 409,069
2000 1.224 1.038 334,348
1999 1.000 1.224 247,021
Lazard International Stock Portfolio (4/99).............. 2004 0.846 0.971 81,385
2003 0.663 0.846 57,438
2002 0.768 0.663 39,307
2001 1.049 0.768 43,074
2000 1.194 1.049 43,159
1999 1.000 1.194 13,922
Merrill Lynch Large Cap Core Portfolio (3/99)............ 2004 0.780 0.897 15,265
2003 0.649 0.780 15,265
2002 0.874 0.649 16,447
2001 1.136 0.874 17,029
2000 1.213 1.136 80,150
1999 1.000 1.213 --
MFS Emerging Growth Portfolio (8/01)..................... 2004 0.681 0.761 --
2003 0.531 0.681 --
2002 0.814 0.531 --
2001 1.000 0.814 --
MFS Mid Cap Growth Portfolio (5/99)...................... 2004 0.909 1.029 247,955
2003 0.668 0.909 256,356
2002 1.317 0.668 249,539
2001 1.739 1.317 238,188
2000 1.603 1.739 201,277
1999 1.000 1.603 22,378
B-8
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
MFS Value Portfolio (5/04)............................... 2004 0.969 1.127 --
Pioneer Fund Portfolio (5/99)............................ 2004 0.768 0.847 128,011
2003 0.625 0.768 139,015
2002 0.903 0.625 177,705
2001 1.183 0.903 175,971
2000 0.959 1.183 136,065
1999 1.000 0.959 52,624
Social Awareness Stock Portfolio (3/99).................. 2004 0.877 0.925 210,284
2003 0.686 0.877 190,338
2002 0.921 0.686 205,434
2001 1.100 0.921 252,885
2000 1.115 1.100 338,770
1999 1.000 1.115 204,232
Travelers Quality Bond Portfolio (3/99).................. 2004 1.259 1.290 428,682
2003 1.186 1.259 336,903
2002 1.130 1.186 324,873
2001 1.063 1.130 229,303
2000 1.002 1.063 89,190
1999 1.000 1.002 30,445
U.S. Government Securities Portfolio (3/99).............. 2004 1.326 1.396 612,998
2003 1.301 1.326 641,656
2002 1.154 1.301 674,168
2001 1.099 1.154 329,688
2000 0.968 1.099 147,364
1999 1.000 0.968 81,239
Travelers Series Fund Inc.
AIM Capital Appreciation Portfolio (11/01)............... 2004 0.840 0.887 72,426
2003 0.654 0.840 35,106
2002 0.867 0.654 38,688
2001 1.000 0.867 --
MFS Total Return Portfolio (4/99)........................ 2004 1.240 1.371 1,303,774
2003 1.073 1.240 1,112,494
2002 1.141 1.073 994,730
2001 1.150 1.141 458,197
B-9
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
MFS Total Return Portfolio (continued).................. 2000 0.994 1.150 177,102
1999 1.000 0.994 56,338
Pioneer Strategic Income Portfolio (6/99)................ 2004 1.285 1.415 48,519
2003 1.084 1.285 37,669
2002 1.032 1.084 29,999
2001 0.998 1.032 17,469
2000 1.010 0.998 --
1999 1.000 1.010 --
SB Adjustable Rate Income Portfolio -- Class I
Shares (10/03)........................................... 2004 1.001 1.005 56,767
2003 1.000 1.001 12,265
Smith Barney Aggressive Growth Portfolio (5/01).......... 2004 0.846 0.923 947,296
2003 0.634 0.846 829,147
2002 0.949 0.634 372,023
2001 1.000 0.949 148,073
Smith Barney High Income Portfolio (5/99)................ 2004 1.065 1.166 12,147
2003 0.842 1.065 20,424
2002 0.877 0.842 17,421
2001 0.918 0.877 26,499
2000 1.007 0.918 12,407
1999 1.000 1.007 --
Smith Barney International All Cap Growth
Portfolio (3/99)......................................... 2004 0.755 0.883 176,162
2003 0.597 0.755 182,229
2002 0.810 0.597 184,371
2001 1.186 0.810 202,204
2000 1.569 1.186 76,324
1999 1.000 1.569 33,821
Smith Barney Large Capitalization Growth Portfolio (3/99) 2004 0.991 0.987 338,275
2003 0.677 0.991 414,434
2002 0.907 0.677 335,753
2001 1.045 0.907 323,325
B-10
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Smith Barney Large Capitalization Growth Portfolio
(continued).............................................. 2000 1.132 1.045 265,016
1999 1.000 1.132 100,647
Strategic Equity Portfolio (3/99)........................ 2004 0.787 0.861 781,329
2003 0.598 0.787 861,404
2002 0.908 0.598 907,697
2001 1.057 0.908 1,013,052
2000 1.303 1.057 787,876
1999 1.000 1.303 274,568
Van Kampen Life Investment Trust
Comstock Portfolio -- Class II Shares (8/03).............. 2004 1.257 1.464 35,463
2003 1.000 1.257 15,449
Emerging Growth Portfolio -- Class II Shares (1/02)....... 2004 0.688 0.729 --
2003 0.546 0.688 --
2002 0.817 0.546 --
2001 1.000 0.817 --
Enterprise Portfolio -- Class II Shares (10/01)........... 2004 0.794 0.817 --
2003 0.637 0.794 --
2002 0.911 0.637 --
2001 1.000 0.911 --
Variable Annuity Portfolios
Smith Barney Small Cap Growth Opportunities
Portfolio (5/01)......................................... 2004 0.986 1.130 2,533
2003 0.700 0.986 --
2002 0.949 0.700 --
2001 1.000 0.949 --
Variable Insurance Products Fund II
Asset Manager Portfolio -- Service Class 2 (6/00)......... 2004 0.949 0.990 291,168
2003 0.813 0.949 262,244
2002 0.900 0.813 227,798
2001 0.949 0.900 178,530
2000 1.000 0.949 133,640
B-11
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Contrafund(R) Portfolio -- Service Class 2 (9/01)........ 2004 1.083 1.238 274,073
2003 0.852 1.083 244,184
2002 0.950 0.852 208,513
2001 1.000 0.950 --
Variable Insurance Products Fund III
Dynamic Capital Appreciation Portfolio -- Service
Class 2 (5/01)........................................... 2004 0.962 0.966 16,820
2003 0.776 0.962 5,993
2002 0.846 0.776 5,993
2001 1.000 0.846 --
Mid Cap Portfolio -- Service Class 2 (7/01)............... 2004 1.264 1.563 181,421
2003 0.921 1.264 103,818
2002 1.032 0.921 100,887
2001 1.000 1.032 --
B-12
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 1.25% PLUS 1.40% FLOOR BENEFIT
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- ---------------- ------- ---------------- --------------- ---------------------
Greenwich Street Series Fund
Equity Index Portfolio -- Class II Shares (3/99).......... 2004 0.791 0.850 --
2003 0.636 0.791 --
2002 0.841 0.636 --
2001 0.986 0.841 --
2000 1.117 0.986 --
1999 1.000 1.117 --
NOTES
Effective 11/01/2004 Smith Barney Investment Series: Smith Barney Large Cap Core
Portfolio changed its name to Smith Barney Investment Series: Smith Barney
Dividend Strategy Portfolio.
The date next to each funding option's name reflects the date money first came
into the funding option through the Separate Account.
Funding options not listed above had no amount allocated to them or were not
available as of December 31, 2004.
"Number of Units Outstanding at End of Year" may include units for Contracts
Owners in payout phase, where appropriate.
If an accumulation unit value has no assets and units across all sub-accounts
within the Separate Account, and has had no assets and units for the history
displayed on the Condensed Financial Information in the past, then it may not be
displayed.
AIM Variable Insurance Funds, Inc.: AIM Premier Equity Fund -- Series I is no
longer available to new contract owners.
Credit Suisse Trust: Emerging Markets Portfolio is no longer available to new
contract owners.
Variable Insurance Products Fund III: Dynamic Capital Appreciation Portfolio --
Service Class 2 -- is no longer available to new contract owners.
The Travelers Series Trust: Federated Stock Portfolio is no longer available to
new contract owners.
Janus Aspen Series: Balanced Portfolio -- Service Shares -- is no longer
available to new contract owners.
Janus Aspen Series: World Wide Growth Portfolio -- Service Shares is no longer
available to new contract holders.
Putnam Variable Trust: Putnam VT Discovery Growth Fund -- Class IB Share is no
longer available to new contract owners.
Putnam Variable Trust: Putnam VT International Equity Fund -- Class IB Shares is
no longer available to new contract holders.
B-13
NOTES (CONTINUED)
Salomon Brothers Variable Series Funds Inc.: Total Return Fund -- Class I is no
longer available to new contract holders.
Smith Barney Investment Series: Smith Barney Dividend Strategy Portfolio is no
longer available to new contract owners.
Greenwich Street Series Fund: Fundamental Value Portfolio is no longer available
to new contract holders.
Travelers Series Fund Inc.: Smith Barney International All Cap Growth Portfolio
is no longer available to new contract owners
Strong Variable insurance Funds, Inc.: Strong Multi Cap Value Fund II is no
longer available to new contract owners.
Van Kampen Life Investment Trust: Enterprise Portfolio -- Class II Shares is no
longer available to new contract holders.
B-14
APPENDIX C
- --------------------------------------------------------------------------------
WAIVER OF WITHDRAWAL CHARGE FOR NURSING HOME CONFINEMENT
NOT AVAILABLE UNDER SECTION 457 PLANS
NOT AVAILABLE IF OWNER IS AGE 71 OR OLDER ON THE CONTRACT DATE.
PLEASE REFER TO YOUR CONTRACT FOR STATE VARIATIONS OF THIS WAIVER.
If, after the first Contract Year and before the Maturity Date, the Annuitant
begins confinement in an eligible nursing home, you may surrender or make
withdrawal, subject to the maximum withdrawal amount described below, without
incurring a withdrawal charge. In order for the Company to waive the withdrawal
charge, the withdrawal must be made during continued confinement in an eligible
nursing home after the qualifying period has been satisfied, or within sixty
(60) days after such confinement ends. The qualifying period is confinement in
an eligible nursing home for ninety (90) consecutive days. We will require proof
of confinement in a form satisfactory to us, which may include certification by
a licensed physician that such confinement is medically necessary.
An eligible nursing home is defined as an institution or special nursing unit of
a hospital which:
(a) is Medicare approved as a provider of skilled nursing care
services; and
(b) is not, other than in name only, an acute care hospital, a home for
the aged, a retirement home, a rest home, a community living
center, or a place mainly for the treatment of alcoholism, mental
illness or drug abuse.
OR
Meets all of the following standards:
(a) is licensed as a nursing care facility by the state in which it is
licensed;
(b) is either a freestanding facility or a distinct part of another
facility such as a ward, wing, unit or swing-bed of a hospital or
other facility;
(c) provides nursing care to individuals who are not able to care for
themselves and who require nursing care;
(d) provides, as a primary function, nursing care and room and board;
and charges for these services;
(e) provides care under the supervision of a licensed physician,
registered nurse (RN) or licensed practical nurse (LPN);
(f) may provide care by a licensed physical, respiratory, occupational
or speech therapist; and
(g) is not, other than in name only, an acute care hospital, a home for
the aged, a retirement home, a rest home, a community living
center, or a place mainly for the treatment of alcoholism, mental
illness or drug abuse.
FILING A CLAIM: You must provide the Company with written notice of a claim
during continued confinement after the 90-day qualifying period, or within sixty
days after such confinement ends.
The maximum withdrawal amount for which we will waive the withdrawal charge is
the Contract Value on the next Valuation Date following written proof of claim,
less any Purchase Payments made within a one-year period before confinement in
an eligible nursing home begins, less any Purchase Payments made on or after the
Annuitant's 71st birthday.
We will pay any withdrawal requested under the scope of this waiver as soon as
we receive proper written proof of your claim, and we will pay the withdrawal in
a lump sum. You should consult with your personal tax adviser regarding the tax
impact of any withdrawals taken from your Contract.
C-1
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APPENDIX D
- --------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENT
If you have selected any period certain option, you may elect to surrender a
payment equal to a portion of the present value of the remaining period certain
payments any time after the first Contract Year. There is a surrender charge of
5% of the amount withdrawn under this option.
For fixed Annuity Payments, we calculate the present value of the remaining
period certain payments using a current interest rate. The current interest rate
is the then current annual rate of return offered by Us on a new Fixed Annuity
Period Certain Only annuitizations for the amount of time remaining in the
certain period. If the period of time remaining is less that the minimum length
of time for which we offer a new Fixed Annuity Period Certain Only
annuitization, then the interest rate will be the rate of return for that
minimum length of time.
The formula for calculating the Present Value is as follows:
N
Present Value = Sigma [Payments X (1/1 + iC)(t/365)
s = 1
Where
- --------------------------------------------------------------------------------
iC = the interest rate described above
n = the number of payments remaining in the Contract Owner's certain period
at the time of request for this benefit
t = number of days remaining until that payment is made, adjusting for leap
years.
If you request a percentage of the total amount available, then the remaining
period certain payments will be reduced by that percentage for the remainder of
the certain period. After the certain period expires, any remaining payments, if
applicable, will increase to the level they would have been had no liquidation
taken place.
ILLUSTRATION:
Amount Annuitized $12,589.80
Annuity Option Life with 10 year certain period
Annuity Payments $1,000 Annually -- first payment immediately
For the purposes of illustration, assume after two years (immediately preceding
the third payment), you choose to receive full liquidity, and the current rate
of return that we are then crediting for 8 year fixed Period Certain Only
Annuitizations is 4.00%. The total amount available for liquidity is calculated
as follows:
1000 + (1000/1.04) + (1000/1.04)^2 + (1000/1.04)^3 + (1000/1.04)^4 + (1000/1.04)
^5 + (1000/1.04)^6 + (1000/1.04)^7 = $7002.06
The surrender penalty is calculated as 5% of $7,002.06, or $350.10.
The net result to you after subtraction of the surrender penalty of $350.10
would be $6,651.96.
You would receive no more payments for 8 years. After 8 years, if you are still
living, you will receive $1,000 annually until your death.
D-1
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APPENDIX E
- --------------------------------------------------------------------------------
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information and
financial statements relating to The Travelers Insurance Company or The
Travelers Life and Annuity Company. A list of the contents of the Statement of
Additional Information is set forth below:
The Insurance Company
Principal Underwriter
Distribution and Principal Underwriting Agreement
Valuation of Assets
Federal Tax Considerations
Independent Accountants
Condensed Financial Information
Financial Statements
- --------------------------------------------------------------------------------
Copies of the Statement of Additional Information dated May 2, 2005 are
available without charge. To request a copy, please clip this coupon on the line
above, enter your name and address in the spaces provided below, and mail to:
The Travelers Insurance Company, Annuity Investor Services, One Cityplace, 3 CP,
Hartford, Connecticut 06103-3415. The Travelers Insurance Company Statement of
Additional Information is printed on Form L-21256S, and The Travelers Life and
Annuity Statement of Additional Information is printed on Form L-21257S.
Name:
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Address:
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E-1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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