METLIFE INSURANCE COMPANY OF CONNECTICUT
----------------------------------------
(FORMERLY, THE TRAVELERS INSURANCE COMPANY)
METLIFE OF CT SEPARATE ACCOUNT QPN FOR VARIABLE ANNUITIES
SUPPLEMENT DATED NOVEMBER 13, 2006
TO THE
STATEMENT OF ADDITIONAL INFORMATION DATED AUGUST 2, 2006
THIS SUPPLEMENTS THE INFORMATION CONTAINED IN THE STATEMENT OF ADDITIONAL
INFORMATION FOR THE VARIABLE ANNUITY CONTRACTS IN THE INSURANCE COMPANY SEPARATE
ACCOUNT LISTED ABOVE.
FINANCIAL STATEMENTS
The attached financial statements of the Company replace, in their entirety, the
financial statements of the Company set forth in the Statement of Additional
Information. The financial statements of the Company should be considered only
as bearing upon its ability to meet its obligations under the Policies and
Contracts.
Book 94 and 95 November, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of
The Travelers Insurance Company:
We have audited the accompanying consolidated balance sheet of The
Travelers Insurance Company and subsidiaries (the "Company") as of December 31,
2005 (SUCCESSOR), and the related consolidated statements of income,
stockholder's equity, and cash flows for the six months ended December 31, 2005
(SUCCESSOR), and June 30, 2005 (PREDECESSOR). Our audit also included the
consolidated financial statement schedules as of December 31, 2005 (SUCCESSOR),
and the six months ended December 31, 2005 (SUCCESSOR), and June 30, 2005
(PREDECESSOR), listed in the accompanying index. These consolidated financial
statements and consolidated financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and consolidated financial statement schedules
based on our audit. The consolidated financial statements and consolidated
financial statement schedules of the Company as of December 31, 2004
(PREDECESSOR), and for the years ended December 31, 2004 (PREDECESSOR) and 2003
(PREDECESSOR), were audited by other auditors whose report, dated March 28,
2005, expressed an unqualified opinion on those statements and included an
explanatory paragraph regarding the Company's change of its accounting method
for certain non-traditional long duration contracts and separate accounts in
2004 and for variable interest entities in 2003.
We conducted our audit 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
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of The Travelers
Insurance Company and subsidiaries as of December 31, 2005 (SUCCESSOR), and the
results of their operations and their cash flows for the six months ended
December 31, 2005 (SUCCESSOR), and June 30, 2005 (PREDECESSOR), in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such consolidated 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 of December 31, 2005 (SUCCESSOR), and for the six months ended
December 31, 2005 (SUCCESSOR), and June 30, 2005 (PREDECESSOR).
As described in Note 1 to the consolidated financial statements, the
Company was acquired by MetLife, Inc. on July 1, 2005. As required by the U.S.
Securities and Exchange Commission Staff Accounting Bulletin Topic 5-J, Push
Down Basis of Accounting Required in Certain Limited Circumstances, the purchase
method of accounting was applied to the assets and liabilities of the Company,
and such assets and liabilities were measured at their fair values as of the
acquisition date in conformity with Statement of Financial Accounting Standards
No. 141, Business Combinations. The accompanying consolidated financial
statements for periods prior and subsequent to the acquisition date are labeled
"PREDECESSOR" and "SUCCESSOR," respectively.
/s/ DELOITTE & TOUCHE LLP
- --------------------------------------
DELOITTE & TOUCHE LLP
New York, New York
March 29, 2006
(September 19, 2006 as to Note 17)
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder
The Travelers Insurance Company:
We have audited the accompanying consolidated balance sheet of The
Travelers Insurance Company and subsidiaries as of December 31, 2004
(PREDECESSOR) and the related consolidated statements of income, stockholder's
equity, and cash flows for each of the years in the two-year period ended
December 31, 2004 (PREDECESSOR). 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 the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2 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 and
variable interest entities in 2003.
/s/ KPMG LLP
KPMG LLP
Hartford, Connecticut
March 28, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder
The Travelers Insurance Company:
Under date of March 28, 2005, we reported on the consolidated balance sheet
of The Travelers Insurance Company and subsidiaries as of December 31, 2004
(PREDECESSOR) and the related consolidated statements of income, stockholder's
equity and cash flows for each of the years in the two-year period ended
December 31, 2004 (PREDECESSOR), 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 2 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 and
variable interest entities in 2003.
/s/ KPMG LLP
KPMG LLP
Hartford, Connecticut
March 28, 2005
F-3
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------ ------------
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $48,848 and $40,466, respectively)..... $48,162 $ 42,621
Trading securities, at fair value (cost: $457 and $1,220,
respectively)........................................... 452 1,346
Equity securities available-for-sale, at fair value (cost:
$424 and $332, respectively)............................ 421 374
Mortgage and consumer loans............................... 2,094 2,124
Policy loans.............................................. 881 1,084
Real estate and real estate joint ventures
held-for-investment..................................... 96 112
Other limited partnership interests....................... 1,248 1,259
Short-term investments.................................... 1,486 3,502
Other invested assets..................................... 1,029 4,095
------- --------
Total investments....................................... 55,869 56,517
Cash and cash equivalents................................... 521 215
Accrued investment income................................... 549 548
Premiums and other receivables.............................. 5,299 4,479
Deferred policy acquisition costs and value of business
acquired.................................................. 3,701 2,862
Assets of subsidiaries transferred.......................... -- 10,019
Goodwill.................................................... 856 196
Current income tax recoverable.............................. 1 --
Deferred income tax asset................................... 1,283 --
Other assets................................................ 154 265
Separate account assets..................................... 31,238 30,742
------- --------
Total assets............................................ $99,471 $105,843
======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits.................................... $18,077 $ 12,682
Policyholder account balances............................. 32,986 33,755
Other policyholder funds.................................. 287 596
Liabilities of subsidiaries transferred................... -- 5,745
Current income tax payable................................ -- 305
Deferred income tax liability............................. -- 1,371
Payables for collateral under securities loaned and other
transactions............................................ 8,750 2,215
Other liabilities......................................... 1,477 4,127
Separate account liabilities.............................. 31,238 30,742
------- --------
Total liabilities....................................... 92,815 91,538
------- --------
Stockholder's Equity:
Common stock, par value $2.50 per share; 40,000,000 shares
authorized, issued and outstanding........................ 100 100
Additional paid-in capital.................................. 6,684 5,449
Retained earnings........................................... 241 7,159
Accumulated other comprehensive (loss) income............... (369) 1,597
------- --------
Total stockholder's equity.............................. 6,656 14,305
------- --------
Total liabilities and stockholder's equity.............. $99,471 $105,843
======= ========
</Table>
See accompanying notes to consolidated financial statements.
F-4
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 AND JUNE 30, 2005
AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(IN MILLIONS)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- ----------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- ---------------
2005 2005 2004 2003
---------------- ---------------- ------ ------
REVENUES
Premiums..................................... $ 222 $ 325 $ 911 $1,082
Universal life and investment-type product
policy fees................................ 442 406 690 531
Net investment income........................ 1,216 1,608 3,012 2,743
Other revenues............................... 57 113 207 143
Net investment gains (losses)................ (188) 26 9 32
------ ------ ------ ------
Total revenues........................ 1,749 2,478 4,829 4,531
------ ------ ------ ------
EXPENSES
Policyholder benefits and claims............. 523 599 1,411 1,568
Interest credited to policyholder account
balances................................... 504 698 1,305 1,248
Other expenses............................... 383 440 762 557
------ ------ ------ ------
Total expenses........................ 1,410 1,737 3,478 3,373
------ ------ ------ ------
Income from continuing operations before
provision for income taxes................. 339 741 1,351 1,158
Provision for income taxes................... 98 205 361 240
------ ------ ------ ------
Income from continuing operations............ 241 536 990 918
Income from discontinued operations, net of
income taxes............................... -- 240 491 440
------ ------ ------ ------
Net income................................... $ 241 $ 776 $1,481 $1,358
====== ====== ====== ======
</Table>
See accompanying notes to consolidated financial statements.
F-5
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 AND JUNE 30, 2005
AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(IN MILLIONS)
<Table>
<Caption>
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
----------------------------
FOREIGN
ADDITIONAL NET UNREALIZED CURRENCY
COMMON PAID-IN RETAINED INVESTMENT TRANSLATION
STOCK CAPITAL EARNINGS GAINS (LOSSES) ADJUSTMENT TOTAL
------ ---------- -------- -------------- ----------- -------
BALANCE AT JANUARY 1, 2003 (PREDECESSOR)................. $100 $ 5,443 $ 5,638 $ 454 $ -- $11,635
Stock option transactions, net........................... 3 3
Dividends on common stock................................ (545) (545)
Comprehensive income (loss):
Net income.............................................. 1,358 1,358
Other comprehensive income (loss):
Unrealized gains (losses) on derivative instruments,
net of income taxes................................. 85 85
Unrealized investment gains (losses), net of related
offsets and income taxes............................ 817 817
Foreign currency translation adjustments.............. 4 4
-------
Other comprehensive income (loss)..................... 906
-------
Comprehensive income (loss)............................. 2,264
---- ------- ------- ------- ------ -------
BALANCE AT DECEMBER 31, 2003 (PREDECESSOR)............... 100 5,446 6,451 1,356 4 13,357
Stock option transactions, net........................... 3 3
Dividends on common stock................................ (773) (773)
Comprehensive income (loss):
Net income.............................................. 1,481 1,481
Other comprehensive income (loss):
Unrealized gains (losses) on derivative instruments,
net of income taxes................................. 98 98
Unrealized investment gains (losses), net of related
offsets and income taxes............................ 138 138
Foreign currency translation adjustments.............. 1 1
-------
Other comprehensive income (loss)..................... 237
-------
Comprehensive income (loss)............................. 1,718
---- ------- ------- ------- ------ -------
BALANCE AT DECEMBER 31, 2004 (PREDECESSOR)............... 100 5,449 7,159 1,592 5 14,305
Stock option transactions, net........................... 3 3
Dividends on common stock................................ (675) (675)
Comprehensive income (loss):
Net income.............................................. 776 776
Other comprehensive income (loss):
Unrealized gains (losses) on derivative instruments,
net of income taxes................................. 57 57
Unrealized investment gains (losses), net of related
offsets and income taxes............................ (32) (32)
-------
Other comprehensive income (loss)..................... 25
-------
Comprehensive income (loss)............................. 801
Restructuring transactions, net (See Notes 10, 11, and
15)..................................................... (3,095) (2,966) (166) (6,227)
---- ------- ------- ------- ------ -------
BALANCE AT JUNE 30, 2005 (PREDECESSOR)................... 100 2,357 4,294 1,451 5 8,207
Effect of push down accounting of MetLife, Inc.'s
purchase price on The Travelers Insurance Company's net
assets acquired (See Note 1)............................ 4,547 (4,294) (1,451) (5) (1,203)
---- ------- ------- ------- ------ -------
BALANCE AT JULY 1, 2005 (SUCCESSOR)...................... 100 6,904 -- -- -- 7,004
Revisions of purchase price pushed down to The Travelers
Insurance Company's net assets acquired (See Note 1).... (220) (220)
Comprehensive income (loss):
Net income.............................................. 241 241
Other comprehensive income (loss):
Unrealized investment gains (losses), net of related
offsets and income taxes............................ (371) (371)
Foreign currency translation adjustments.............. 2 2
-------
Other comprehensive income (loss)..................... (369)
-------
Comprehensive income (loss)............................. (128)
---- ------- ------- ------- ------ -------
BALANCE AT DECEMBER 31, 2005 (SUCCESSOR)................. $100 $ 6,684 $ 241 $ (371) $ 2 $ 6,656
==== ======= ======= ======= ====== =======
</Table>
See accompanying notes to consolidated financial statements.
F-6
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 AND JUNE 30, 2005
AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(IN MILLIONS)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- --------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- -------------------
2005 2005 2004 2003
---------------- ---------------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................... $ 241 $ 776 $ 1,481 $ 1,358
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expenses............. 3 5 4 4
Amortization of premiums (accretion of discounts)
associated with investments, net................. 96 (31) (57) (62)
(Gains) losses from sales of investments, net...... 188 (41) (16) (37)
Change in undistributed income of real estate joint
ventures and other limited partnership
interests........................................ (19) (22) 107 1
Interest credited to other policyholder account
balances......................................... 504 698 1,305 1,248
Universal life and investment-type product policy
fees............................................. (442) (448) (781) (606)
Change in accrued investment income................ (55) 54 (39) (42)
Change in trading securities....................... 103 209 226 (232)
Change in premiums and other receivables........... 134 17 (8) 8
Change in DAC and VOBA, net........................ (76) (241) (540) (442)
Change in insurance-related liabilities............ 679 140 604 832
Change in current income taxes payable............. 54 167 340 15
Change in other assets............................. 494 (87) 73 (66)
Change in other liabilities........................ (971) (46) (613) (401)
Other, net......................................... 2 58 56 14
-------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. $ 935 $ 1,208 $ 2,142 $ 1,592
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities................................... $ 22,065 $ 7,437 $ 14,745 $ 22,016
Equity securities.................................. 221 108 182 150
Mortgage and consumer loans........................ 724 288 707 358
Real estate and real estate joint ventures......... 65 146 198 195
Other limited partnership interests................ 173 125 332 239
Purchases of:
Fixed maturities................................... (30,165) (6,902) (18,872) (26,563)
Equity securities.................................. -- (120) (157) (144)
Mortgage and consumer loans........................ (480) (452) (944) (317)
Real estate and real estate joint ventures......... (13) (11) (28) (30)
Other limited partnership interests................ (330) (136) (370) (437)
Policy loans......................................... 3 204 14 34
Net change in short-term investments................. 752 1,102 (116) 814
Net change in other invested assets.................. 252 (206) (152) 7
Other, net........................................... 3 -- 130 94
-------- -------- -------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES.... $ (6,730) $ 1,583 $ (4,331) $ (3,584)
-------- -------- -------- --------
</Table>
See accompanying notes to consolidated financial statements.
F-7
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 AND JUNE 30, 2005
AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(IN MILLIONS)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- --------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- -------------------
2005 2005 2004 2003
---------------- ---------------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits....................................... $ 7,441 $ 3,252 $ 9,619 $ 8,326
Withdrawals.................................... (8,971) (4,177) (6,649) (5,396)
Net change in payables for collateral under
securities loaned and other transactions....... 7,478 (943) 89 (430)
Dividends on common stock........................ -- (675) (773) (545)
Restructuring transactions....................... -- (259) -- --
Other, net....................................... (75) -- -- --
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... 5,873 (2,802) 2,286 1,955
-------- -------- -------- --------
Change in cash and cash equivalents................ 78 (11) 97 (37)
Cash and cash equivalents, beginning of period..... 443 246 149 186
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 521 $ 235 $ 246 $ 149
======== ======== ======== ========
Cash and cash equivalents, subsidiaries
transferred, beginning of period................. $ -- $ 31 $ 10 $ 18
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, SUBSIDIARIES
TRANSFERRED, END OF PERIOD....................... $ -- $ -- $ 31 $ 10
======== ======== ======== ========
Cash and cash equivalents, from continuing
operations, beginning of period.................. $ 443 $ 215 $ 139 $ 168
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, FROM CONTINUING
OPERATIONS, END OF PERIOD........................ $ 521 $ 235 $ 215 $ 139
======== ======== ======== ========
Supplemental disclosures of cash flow information:
Net cash paid during the period for income
taxes.......................................... $ 90 $ 406 $ 93 $ 309
======== ======== ======== ========
Net cash paid during the period for income taxes,
subsidiaries transferred....................... $ -- $ 99 $ 169 $ 147
======== ======== ======== ========
Non-cash transactions during the period:
Business Dispositions:
Assets of subsidiaries distributed to parent
in restructuring transactions............. $ -- $ 10,472 $ -- $ --
Liabilities of subsidiaries distributed to
parent in restructuring transactions...... -- 6,014 -- --
-------- -------- -------- --------
Net assets of subsidiaries distributed to
parent in restructuring transactions...... -- 4,458 $ -- $ --
Less: cash disposed.......................... -- 25 $ -- $ --
-------- -------- -------- --------
Business dispositions, net of cash
disposed.................................. $ -- $ 4,433 $ -- $ --
======== ======== ======== ========
Inclusion (reversal) of Travelers Property
Casualty minority interest in joint
ventures.................................. $ -- $ -- $ (58) $ 63
======== ======== ======== ========
Acquisition of real estate through
foreclosures of mortgage loans............ $ -- $ -- $ -- $ 53
======== ======== ======== ========
</Table>
- ---------------
See Note 1 for purchase accounting adjustments.
See Note 10, 11, and 15 for non-cash restructuring transactions.
See accompanying notes to consolidated financial statements.
F-8
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITION OF THE TRAVELERS INSURANCE COMPANY BY METLIFE, INC.
On July 1, 2005 (the "Acquisition Date"), The Travelers Insurance Company
("TIC," together with its subsidiaries, including The Travelers Life and Annuity
Company ("TLAC"), the "Company") and other affiliated entities, including
substantially all of Citigroup Inc.'s ("Citigroup") international insurance
businesses, and excluding Primerica Life Insurance Company and its subsidiaries
("Primerica") (collectively, "Travelers"), were acquired by MetLife, Inc.
("MetLife") from Citigroup (the "Acquisition") for $12.0 billion. MetLife is a
leading provider of insurance and other financial services to millions of
individual and institutional customers throughout the United States. Outside the
United States, the MetLife companies have direct insurance operations in Asia
Pacific, Latin America and Europe.
Consideration paid by MetLife for the purchase consisted of approximately
$10.9 billion in cash and 22,436,617 shares of MetLife's common stock with a
market value of approximately $1.0 billion to Citigroup and approximately $100
million in other transaction costs. Consideration paid to Citigroup will be
finalized subject to review of the June 30, 2005 financial statements of
Travelers by both MetLife and Citigroup and interpretation of the provisions of
the acquisition agreement, dated as of January 31, 2005 between MetLife and
Citigroup (the "Acquisition Agreement"), by both parties.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets , the Acquisition is being accounted for by MetLife using the purchase
method of accounting, which requires that the assets and liabilities of the
Company be identified and measured at their fair value as of the Acquisition
Date. As required by the U.S. Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin Topic 5-J., Push Down Basis of Accounting Required in
Certain Limited Circumstances, the purchase method of accounting applied by
MetLife to the acquired assets and liabilities associated with the Company has
been "pushed down" to the consolidated financial statements of the Company,
thereby establishing a new basis of accounting. This new basis of accounting is
referred to as the "successor basis," while the historical basis of accounting
is referred to as the "predecessor basis." Financial statements included herein
for periods prior and subsequent to the Acquisition Date are labeled
"predecessor" and "successor," respectively.
Purchase Price Allocation and Goodwill -- Preliminary
The purchase price has been allocated to the assets acquired and
liabilities assumed using management's best estimate of their fair values as of
the Acquisition Date. The computation of the purchase price and the allocation
of the purchase price to the net assets acquired based upon their respective
fair values as of July 1, 2005, and the resulting goodwill, as revised, are
presented below. During the fourth quarter of 2005, the Company revised the
purchase price allocation as a result of reviews of the Company's underwriting
criteria performed in order to refine the estimate of fair values of assumed
future policy benefit liabilities. As a result of these reviews and actuarial
analyses, and to be consistent with MetLife's reserving methodologies, the
Company increased its estimate of the fair value of liabilities relating to a
specific group of acquired life insurance policies. Consequently, the fair value
of future policy benefits assumed increased by $360 million, net of the related
deferred tax assets of $126 million, for a net change of $234 million. The
Company expects to complete its reviews and, if required, further refine its
estimate of the fair value of such liabilities by June 30, 2006. Additionally,
the Company received updated information regarding the fair values of certain
assets and liabilities such as its investments in other limited partnerships,
mortgage and consumer loans, other assets and other liabilities resulting in a
change in the fair value of assets and liabilities acquired, net of their
related deferred tax effects, of $28 million. These adjustments resulted in a
reduction of the total net fair value of the assets acquired and liabilities
assumed of $262 million from those initially estimated. Based upon MetLife's
method of attributing the purchase price to the entities acquired, the portion
of Travelers' purchase price attributed to the Company was decreased by $220
million resulting in an increase in goodwill of $42 million.
F-9
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of certain other assets acquired and liabilities assumed,
including goodwill, may be further adjusted during the allocation period due to
finalization of the purchase price to be paid to Citigroup as noted previously,
agreement between Citigroup and MetLife as to the tax basis purchase price to be
allocated to the acquired subsidiaries, and receipt of information regarding the
estimation of certain fair values. In no case will the adjustments extend beyond
one year from the Acquisition Date.
<Table>
<Caption>
SUCCESSOR
---------------------------------------
AS OF JULY 1, 2005
---------------------------------------
(IN MILLIONS)
TOTAL PURCHASE PRICE................................... $11,966
Purchase price attributed to other affiliates........ 5,182
-------
Purchase price attributed to the Company............. 6,784
NET ASSETS ACQUIRED PRIOR TO PURCHASE ACCOUNTING
ADJUSTMENTS.......................................... $ 8,207
ADJUSTMENTS TO REFLECT ASSETS ACQUIRED AT FAIR
VALUE:...............................................
Fixed maturities available-for-sale, at fair value... (26)
Mortgage loans on real estate........................ 72
Real estate and real estate joint ventures
held-for-investment............................... 39
Other limited partnership interests.................. 48
Other invested assets................................ (36)
Premiums and other receivables....................... 1,001
Elimination of historical deferred policy acquisition
costs............................................. (3,052)
Value of business acquired........................... 3,490
Value of distribution agreements and customer
relationships acquired............................ 73
Net deferred income tax asset........................ 1,747
Elimination of historical goodwill................... (196)
Other assets......................................... (11)
ADJUSTMENTS TO REFLECT LIABILITIES ASSUMED AT FAIR
VALUE:...............................................
Future policy benefits............................... (3,752)
Policyholder account balances........................ (1,869)
Other liabilities.................................... 193
-------
NET FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES
ASSUMED.............................................. 5,928
-------
GOODWILL RESULTING FROM THE ACQUISITION................ $ 856
=======
</Table>
Goodwill resulting from the Acquisition has been allocated to the Company's
segments, as well as Corporate & Other, that are expected to benefit from the
Acquisition as follows:
<Table>
<Caption>
SUCCESSOR
------------------
AS OF JULY 1, 2005
------------------
(IN MILLIONS)
Institutional............................................... $305
Individual.................................................. 159
Corporate & Other........................................... 392
----
TOTAL..................................................... $856
====
</Table>
The entire amount of goodwill is expected to be deductible for income tax
purposes.
F-10
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed Statement of Net Assets Acquired
The condensed statement of net assets acquired reflects the fair value of
the Company's net assets as of July 1, 2005 as follows:
<Table>
<Caption>
SUCCESSOR
------------------
AS OF JULY 1, 2005
------------------
(IN MILLIONS)
ASSETS:
Fixed maturities available-for-sale......................... $41,210
Trading securities.......................................... 555
Equity securities available-for-sale........................ 617
Mortgage loans on real estate............................... 2,363
Policy loans................................................ 884
Real estate and real estate joint ventures
held-for-investment....................................... 126
Other limited partnership interests......................... 1,120
Short-term investments...................................... 2,225
Other invested assets....................................... 1,205
-------
Total investments......................................... 50,305
Cash and cash equivalents................................... 443
Accrued investment income................................... 494
Premiums and other receivables.............................. 4,688
Value of business acquired.................................. 3,490
Goodwill.................................................... 856
Other intangible assets..................................... 73
Deferred tax asset.......................................... 1,174
Other assets................................................ 730
Separate account assets..................................... 30,427
-------
Total assets acquired..................................... 92,680
-------
LIABILITIES:
Future policy benefits...................................... 17,551
Policyholder account balances............................... 34,251
Other policyholder funds.................................... 114
Current income taxes payable................................ 36
Other liabilities........................................... 3,517
Separate account liabilities................................ 30,427
-------
Total liabilities assumed................................. 85,896
-------
Net assets acquired....................................... $ 6,784
=======
</Table>
Other Intangible Assets
Value of business acquired ("VOBA") reflects the estimated fair value of
in-force contracts acquired and represents the portion of the purchase price
that is allocated to the value of the right to receive future cash
F-11
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
flows from the life insurance and annuity contracts in-force at the Acquisition
Date. VOBA is based on actuarially determined projections, by each block of
business, of future policy and contract charges, premiums, mortality and
morbidity, separate account performance, surrenders, operating expenses,
investment returns and other factors. Actual experience on the purchased
business may vary from these projections. If estimated gross profits or premiums
differ from expectations, the amortization of VOBA is adjusted to reflect actual
experience.
The value of the other identifiable intangibles reflects the estimated fair
value of the Company's distribution agreements and customer relationships
acquired at July 1, 2005 and will be amortized in relation to the expected
economic benefits of the agreements. If actual experience under the distribution
agreements or with customer relationships differs from expectations, the
amortization of these intangibles will be adjusted to reflect actual experience.
The use of discount rates was necessary to establish the fair value of
VOBA, as well as the other identifiable intangible assets. In selecting the
appropriate discount rates, management considered the calculated weighted
average cost of capital, as well as the weighted average cost of capital
required by market participants. A discount rate of 11.5% was used to value
these intangible assets.
The fair value of business acquired, distribution agreements and customer
relationships acquired are as follows:
<Table>
<Caption>
SUCCESSOR
------------- WEIGHTED AVERAGE
JULY 1, 2005 AMORTIZATION PERIOD
------------- -------------------
(IN MILLIONS)
Value of business acquired............................... $3,490 16 years
Value of distribution agreements and customer
relationships acquired................................. 73 16 years
------
Total value of intangible assets acquired, excluding
goodwill............................................ $3,563 16 years
======
</Table>
The estimated future amortization of the value of business acquired,
distribution agreements and customer relationships acquired from 2006 to 2010 is
as follows:
<Table>
<Caption>
(IN MILLIONS)
2006........................................................ $322
2007........................................................ $316
2008........................................................ $300
2009........................................................ $282
2010........................................................ $262
</Table>
2. SUMMARY OF ACCOUNTING POLICIES
BUSINESS
TIC is a Connecticut corporation incorporated in 1863. As described more
fully in Note 1, on July 1, 2005, TIC became a wholly-owned subsidiary of
MetLife, a leading provider of insurance and other financial services to
millions of individual and institutional customers throughout the United States.
Outside the United States, the MetLife companies have direct insurance
operations in Asia Pacific, Latin America and Europe. The Company offers
individual annuities, individual life insurance, and institutional protection
and asset accumulation products. Prior to the Acquisition, TIC was a
wholly-owned subsidiary of Citigroup Insurance Holding Company ("CIHC").
Primerica was distributed via dividend from TIC to CIHC on June 30, 2005 in
F-12
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contemplation of the Acquisition. Primerica is reported in discontinued
operations for all periods presented. See Note 15.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
(i) the Company; (ii) partnerships and joint ventures in which the Company has
control; and (iii) variable interest entities ("VIEs") for which the Company is
deemed to be the primary beneficiary. Assets, liabilities, revenues and expenses
of the general account for 2005 and 2004 include amounts related to certain
separate accounts previously reported in separate account assets and
liabilities. See "-- Application of Recent Accounting Pronouncements."
Intercompany accounts and transactions have been eliminated.
Minority interest related to consolidated entities included in other
liabilities was $180 million and $216 million at December 31, 2005 and 2004,
respectively.
As described more fully in Note 1, the application of purchase accounting
resulted in the establishment of a new basis of accounting. Consequently, all
periods prior and subsequent to the Acquisition Date are labeled "predecessor"
and "successor," respectively. As such periods are not prepared on a consistent
basis, the six month period and the years prior to the Acquisition are presented
separately from the six month period subsequent to the Acquisition.
Certain amounts in the predecessor consolidated financial statements for
periods prior to July 1, 2005 have been reclassified to conform with the
presentation of the successor.
Significant reclassifications to the consolidated balance sheet as of
December 31, 2004 are as follows: (i) securities previously reported in other
invested assets are now reported in equity securities; (ii) real estate and real
estate joint ventures previously reported in other invested assets are now
reported in real estate and real estate joint ventures held-for-investment;
(iii) corporate joint ventures that were previously reported in other invested
assets are now reported in other limited partnership interests; (iv) positive
derivative revaluation previously reported in other assets are now reported in
other invested assets; (v) reinsurance recoverables are now reported in premiums
and other receivables; (vi) VOBA previously reported in other assets is now
reported in deferred policy acquisition costs ("DAC"); (vii) policy and contract
claim liabilities previously reported in contractholder funds are now reported
in other policyholder funds; (viii) balances on investment-type contracts
previously reported in contractholder funds are now reported in policyholder
account balances; (ix) deferred sales inducements previously reported as part of
DAC, are now reported in other assets; (x) trading securities sold and not yet
purchased are now reported in other liabilities; and (xi) deferred profits
previously reported as other liabilities are now reported in other policyholder
funds.
Reclassifications to the consolidated statements of income for the years
ended December 31, 2004 and 2003, were primarily related to certain reinsurance
and other revenues previously reported in general and administrative expenses
which are now reported in other revenues. In addition, amortization of DAC is
now reported in other expenses.
The consolidated statements of cash flows for the years ended December 31,
2004 and 2003 have been presented using the indirect method. Reclassifications
made to the consolidated statements of cash flows for the years ended December
31, 2004 and 2003 primarily related to investment-type policy activity
previously reported as cash flows from operating activities which are now
reported as cash flows from financing activities. In addition, net changes in
payables for securities loaned transactions were reclassified from cash flows
from investing activities to cash flows from financing activities and accrued
withdrawn benefits were reclassified from cash flows from financing activities
to cash flows from operating activities. Additionally, the statement of cash
flows for the six months ended June 30, 2005 has been restated to include the
cash flows of discontinued operations, which were previously excluded from that
statement.
F-13
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the consolidated financial statements. The most
critical estimates include those used in determining: (i) investment
impairments; (ii) the fair value of investments in the absence of quoted market
values; (iii) application of the consolidation rules to certain investments;
(iv) the fair value of and accounting for derivatives; (v) the capitalization
and amortization of DAC and the establishment and amortization of VOBA; (vi) the
measurement of goodwill and related impairment, if any; (vii) the liability for
future policyholder benefits; (viii) accounting for reinsurance transactions;
and (ix) the liability for litigation and regulatory matters. The application of
purchase accounting requires the use of estimation techniques in determining the
fair value of the assets acquired and liabilities assumed -- the most
significant of which relate to the aforementioned critical estimates. In
applying these policies, management makes subjective and complex judgments that
frequently require estimates about matters that are inherently uncertain. Many
of these policies, estimates and related judgments are common in the insurance
and financial services industries; others are specific to the Company's
businesses and operations. Actual results could differ from these estimates.
Investments
The Company's principal investments are in fixed maturities, trading
securities, mortgage and consumer loans, other limited partnerships and real
estate joint ventures, all of which are exposed to three primary sources of
investment risk: credit, interest rate and market valuation. The financial
statement risks are those associated with the recognition of impairments and
income, as well as the determination of fair values. The assessment of whether
impairments have occurred is based on management's case-by-case evaluation of
the underlying reasons for the decline in fair value. Management considers a
wide range of factors about the security issuer and uses its best judgment in
evaluating the cause of the decline in the estimated fair value of the security
and in assessing the prospects for near-term recovery. Inherent in management's
evaluation of the security are assumptions and estimates about the operations of
the issuer and its future earnings potential. Considerations used by the Company
in the impairment evaluation process include, but are not limited to: (i) the
length of time and the extent to which the market value has been below cost or
amortized cost; (ii) the potential for impairments of securities when the issuer
is experiencing significant financial difficulties; (iii) the potential for
impairments in an entire industry sector or sub-sector; (iv) the potential for
impairments in certain economically depressed geographic locations; (v) the
potential for impairments of securities where the issuer, series of issuers or
industry has suffered a catastrophic type of loss or has exhausted natural
resources; (vi) the Company's ability and intent to hold the security for a
period of time sufficient to allow for the recovery of its value to an amount
equal to or greater than cost or amortized cost; (vii) unfavorable changes in
forecasted cash flows on asset-backed securities; and (viii) other subjective
factors, including concentrations and information obtained from regulators and
rating agencies. In addition, the earnings on certain investments are dependent
upon market conditions, which could result in prepayments and changes in amounts
to be earned due to changing interest rates or equity markets. The determination
of fair values in the absence of quoted market values is based on: (i) valuation
methodologies; (ii) securities the Company deems to be comparable; and (iii)
assumptions deemed appropriate given the circumstances. The use of different
methodologies and assumptions may have a material effect on the estimated fair
value amounts. In addition, the Company enters into certain structured
investment transactions, real estate joint ventures and limited partnerships for
which the Company may be deemed to be the primary beneficiary and, therefore,
may be required to consolidate such investments. The accounting rules for the
determination of the primary beneficiary are complex and require evaluation of
the contractual rights and obligations associated with each
F-14
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
party involved in the entity, an estimate of the entity's expected losses and
expected residual returns and the allocation of such estimates to each party.
Derivatives
The Company enters into freestanding derivative transactions primarily to
manage the risk associated with variability in cash flows or changes in fair
values related to the Company's financial assets and liabilities. The Company
also uses derivative instruments to hedge its currency exposure associated with
net investments in certain foreign operations. The Company also purchases
investment securities, issues certain insurance policies and engages in certain
reinsurance contracts that have embedded derivatives. The associated financial
statement risk is the volatility in net income which can result from (i) changes
in fair value of derivatives not qualifying as accounting hedges; (ii)
ineffectiveness of designated hedges; and (iii) counterparty default. In
addition, there is a risk that embedded derivatives requiring bifurcation are
not identified and reported at fair value in the consolidated financial
statements. Accounting for derivatives is complex, as evidenced by significant
authoritative interpretations of the primary accounting standards which continue
to evolve, as well as the significant judgments and estimates involved in
determining fair value in the absence of quoted market values. These estimates
are based on valuation methodologies and assumptions deemed appropriate under
the circumstances. Such assumptions include estimated volatility and interest
rates used in the determination of fair value where quoted market values are not
available. The use of different assumptions may have a material effect on the
estimated fair value amounts.
Deferred Policy Acquisition Costs and Value of Business Acquired
The Company incurs significant costs in connection with acquiring new and
renewal insurance business. These costs, which vary with and are primarily
related to the production of that business, are deferred. The recovery of DAC
and VOBA is dependent upon the future profitability of the related business. The
amount of future profit is dependent principally on investment returns in excess
of the amounts credited to policyholders, mortality, morbidity, persistency,
interest crediting rates, expenses to administer the business, creditworthiness
of reinsurance counterparties and certain economic variables, such as inflation.
Of these factors, the Company anticipates that investment returns are most
likely to impact the rate of amortization of such costs. The aforementioned
factors enter into management's estimates of gross profits, which generally are
used to amortize such costs. VOBA reflects the estimated fair value of in-force
contracts in a life insurance company acquisition and represents the portion of
the purchase price that is allocated to the value of the right to receive future
cash flows from the insurance and annuity contracts in-force at the acquisition
date. VOBA is based on actuarially determined projections, by each block of
business, of future policy and contract charges, premiums, mortality and
morbidity, separate account performance, surrenders, operating expenses,
investment returns and other factors. Actual experience on the purchased
business may vary from these projections. Revisions to estimates result in
changes to the amounts expensed in the reporting period in which the revisions
are made and could result in the impairment of the asset and a charge to income
if estimated future gross profits are less than amounts deferred. In addition,
the Company utilizes the reversion to the mean assumption, a common industry
practice, in its determination of the amortization of DAC and VOBA. This
practice assumes that the expectation for long-term appreciation in equity
markets is not changed by minor short-term market fluctuations, but that it does
change when large interim deviations have occurred.
Goodwill
Goodwill is the excess of cost over the fair value of net assets acquired.
The Company tests goodwill for impairment at least annually or more frequently
if events or circumstances, such as adverse changes in the business climate,
indicate that there may be justification for conducting an interim test.
Impairment testing is performed using the fair value approach, which requires
the use of estimates and judgment, at the "reporting
F-15
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unit" level. A reporting unit is the operating segment, or a business that is
one level below the operating segment if discrete financial information is
prepared and regularly reviewed by management at that level. For purposes of
goodwill impairment testing, goodwill within Corporate & Other is allocated to
reporting units within the Company's business segments. If the carrying value of
a reporting unit's goodwill exceeds its fair value, the excess is recognized as
an impairment and recorded as a charge against net income. The fair values of
the reporting units are determined using a market multiple or discounted cash
flow model. The critical estimates necessary in determining fair value are
projected earnings, comparative market multiples and the discount rate.
Liability for Future Policy Benefits
The Company establishes liabilities for amounts payable under insurance
policies, including traditional life insurance, traditional annuities and
non-medical health insurance. Generally, amounts are payable over an extended
period of time and liabilities are established based on methods and underlying
assumptions in accordance with GAAP and applicable actuarial standards.
Principal assumptions used in the establishment of liabilities for future policy
benefits are mortality, morbidity, expenses, persistency, investment returns and
inflation. Utilizing these assumptions, liabilities are established on a block
of business basis.
Differences between actual experience and the assumptions used in pricing
these policies and in the establishment of liabilities result in variances in
profit and could result in losses. The effects of changes in such estimated
liabilities are included in the results of operations in the period in which the
changes occur.
Reinsurance
The Company enters into reinsurance transactions as a purchaser of
reinsurance. Accounting for reinsurance requires extensive use of assumptions
and estimates, particularly related to the future performance of the underlying
business and the potential impact of counterparty credit risks. The Company
periodically reviews actual and anticipated experience compared to the
aforementioned assumptions used to establish assets and liabilities relating to
ceded reinsurance and evaluates the financial strength of counterparties to its
reinsurance agreements using criteria similar to that evaluated in the security
impairment process discussed previously. Additionally, for each of its
reinsurance contracts, the Company must determine if the contract provides
indemnification against loss or liability relating to insurance risk, in
accordance with applicable accounting standards. The Company must review all
contractual features, particularly those that may limit the amount of insurance
risk to which the reinsurer is subject or features that delay the timely
reimbursement of claims. If the Company determines that a reinsurance contract
does not expose the reinsurer to a reasonable possibility of a significant loss
from insurance risk, the Company records the contract using the deposit method
of accounting.
Litigation
The Company is a party to a number of legal actions and regulatory
investigations. Given the inherent unpredictability of these matters, it is
difficult to estimate the impact on the Company's consolidated financial
position. On a quarterly and annual basis, the Company reviews relevant
information with respect to liabilities for litigation, regulatory
investigations and litigation-related contingencies to be reflected in the
Company's consolidated financial statements. The review includes senior legal
and financial personnel. Estimates of possible additional losses or ranges of
loss for particular matters cannot in the ordinary course be made with a
reasonable degree of certainty. The limitations of available data and
uncertainty regarding numerous variables make it difficult to estimate
liabilities. Liabilities are established when it is probable that a loss has
been incurred and the amount of the loss can be reasonably estimated. It is
possible that some of the matters could require the Company to pay damages or
make other expenditures or establish accruals in amounts that could
F-16
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not be estimated as of December 31, 2005. Furthermore, it is possible that an
adverse outcome in certain of the Company's litigation and regulatory
investigations, or the use of different assumptions in the determination of
amounts recorded could have a material effect upon the Company's consolidated
net income or cash flows in particular quarterly or annual periods.
SIGNIFICANT ACCOUNTING POLICIES
Investments
The Company's fixed maturity and equity securities are classified as
available-for-sale and are reported at their estimated fair value. Unrealized
investment gains and losses on securities are recorded as a separate component
of other comprehensive income or loss, net of policyholder related amounts and
deferred income taxes. The cost of fixed maturity and equity securities is
adjusted for impairments in value deemed to be other-than-temporary in the
period in which the determination is made. These adjustments are recorded as
investment losses. The assessment of whether such impairment has occurred is
based on management's case-by-case evaluation of the underlying reasons for the
decline in fair value. Management considers a wide range of factors, as
described in "--Summary of Critical Accounting Estimates--Investments," about
the security issuer and uses its best judgment in evaluating the cause of the
decline in the estimated fair value of the security and in assessing the
prospects for near-term recovery. Inherent in management's evaluation of the
security are assumptions and estimates about the operations of the issuer and
its future earnings potential.
The Company's review of its fixed maturities and equity securities for
impairments also includes an analysis of the total gross unrealized losses by
three categories of securities: (i) securities where the estimated fair value
had declined and remained below cost or amortized cost by less than 20%; (ii)
securities where the estimated fair value had declined and remained below cost
or amortized cost by 20% or more for less than six months; and (iii) securities
where the estimated fair value had declined and remained below cost or amortized
cost by 20% or more for six months or greater.
Investment gains and losses on sales of securities are determined on a
specific identification basis. All security transactions are recorded on a trade
date basis. Amortization of premium and accretion of discount on fixed maturity
securities is recorded using the effective interest method.
Mortgage and consumer loans are stated at amortized cost, net of valuation
allowances. Loans are considered to be impaired when it is probable that, based
upon current information and events, the Company will be unable to collect all
amounts due under the contractual terms of the loan agreement. Valuation
allowances are established for the excess carrying value of the loan over the
present value of expected future cash flows discounted at the loan's original
effective interest rate, the value of the loan's collateral or the loan's market
value if the loan is being sold. The Company also establishes allowances for
loan loss when a loss contingency exists for pools of loans with similar
characteristics, for example, mortgage loans based on similar property types and
loan to value risk factors. A loss contingency exists when the likelihood that a
future event will occur is probable based on past events. Changes in valuation
allowances are included in net investment gains and losses. Interest income
earned on impaired loans is accrued on the principal amount of the loan based on
the loan's contractual interest rate. However, interest ceases to be accrued for
loans on which interest is generally more than 60 days past due and/or where the
collection of interest is not considered probable. Cash receipts on impaired
loans are recorded as a reduction of the recorded investment.
Real estate held-for-investment, including related improvements, is stated
at cost less accumulated depreciation. Depreciation is provided on a
straight-line basis over the estimated useful life of the asset (typically 20 to
55 years). Once the Company identifies a property that is expected to be sold
within one year and commences a firm plan for marketing the property, the
Company, if applicable, classifies the property as held-for-sale and reports the
related net investment income and any resulting investment gains and losses as
F-17
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discontinued operations. Real estate held-for-sale is stated at the lower of
depreciated cost or fair value less expected disposition costs. Real estate is
not depreciated while it is classified as held-for-sale. Cost of real estate
held-for-investment is adjusted for impairment whenever events or changes in
circumstances indicate the carrying amount of the asset may not be recoverable.
Impaired real estate is written down to estimated fair value with the impairment
loss being included in net investment gains and losses. Impairment losses are
based upon the estimated fair value of real estate, which is generally computed
using the present value of expected future cash flows from the real estate
discounted at a rate commensurate with the underlying risks. Real estate
acquired upon foreclosure of commercial and agricultural mortgage and consumer
loans is recorded at the lower of estimated fair value or the carrying value of
the mortgage loan at the date of foreclosure.
Policy loans are stated at unpaid principal balances.
Short-term investments are stated at amortized cost, which approximates
fair value.
Other invested assets consist primarily of the fair value of the Company's
freestanding derivative instruments. In 2004, other invested assets also
included the Company's investment in the preferred stock of Citigroup. See Note
10.
Prior to the Acquisition, the Company used the equity method of accounting
for all real estate joint ventures and other limited partnership interests in
which it had an ownership interest but did not control, including those in which
it had a minor equity investment or virtually no influence over operations.
Subsequent to the Acquisition, the Company uses the equity method of
accounting for investments in real estate joint ventures and other limited
partnership interests in which it has more than a minor ownership interest or
more than minor influence over operations, but does not have a controlling
interest and is not the primary beneficiary. The Company uses the cost method of
accounting for real estate joint ventures and other limited partnership
interests in which it has a minor ownership investment and virtually no
influence over operations.
Trading Securities
Trading securities are recorded at fair value with subsequent changes in
fair value recognized in net investment income.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from
interest rates, foreign exchange rates, or other financial indices. Derivatives
may be exchange traded or contracted in the over-the-counter market. The Company
uses a variety of derivatives, including swaps, forwards, futures and option
contracts, to manage its various risks. Additionally, the Company enters into
income generation and replication derivatives as permitted by its Derivatives
Use Plans approved by the applicable state insurance departments. Freestanding
derivatives are carried on the Company's consolidated balance sheet either as
assets within other invested assets or as liabilities within other liabilities
at fair value as determined by quoted market prices or through the use of
pricing models. Values can be affected by changes in interest rates, foreign
exchange rates, financial indices, credit spreads, market volatility and
liquidity. Values can also be affected by changes in estimates and assumptions
used in pricing models. If a derivative is not designated as an accounting hedge
or its use in managing risk does not qualify for hedge accounting pursuant to
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), as amended, changes in the fair value of the derivative are
reported in net investment gains (losses).
To qualify for hedge accounting, at the inception of the hedging
relationship, the Company formally documents its risk management objective and
strategy for undertaking the hedging transaction, as well as its
F-18
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
designation of the hedge as either (i) a hedge of the fair value of a recognized
asset or liability or an unrecognized firm commitment ("fair value hedge"); (ii)
a hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability ("cash flow hedge");
or (iii) a hedge of a net investment in a foreign operation. In this
documentation, the Company sets forth how the hedging instrument is expected to
hedge the designated risks related to the hedged item and sets forth the method
that will be used to retrospectively and prospectively assess the hedging
instrument's effectiveness and the method which will be used to measure
ineffectiveness. A derivative designated as a hedging instrument must be
assessed as being highly effective in offsetting the designated risk of the
hedged item. Hedge effectiveness is formally assessed at inception and
periodically throughout the life of the designated hedging relationship.
Under a fair value hedge, changes in the fair value of the hedging
derivative, including amounts measured as ineffectiveness, and changes in the
fair value of the hedged item related to the designated risk being hedged, are
reported within net investment gains (losses). The fair values of the hedging
derivatives are exclusive of any accruals that are separately reported in the
consolidated statements of income within interest income or interest expense to
match the location of the hedged item.
Under a cash flow hedge, changes in the fair value of the hedging
derivative measured as effective are reported within other comprehensive income
(loss), a separate component of stockholder's equity, and the deferred gains or
losses on the derivative are reclassified into the consolidated statement of
income when the Company's earnings are affected by the variability in cash flows
of the hedged item. Changes in the fair value of the hedging instrument measured
as ineffectiveness are reported within net investment gains (losses). The fair
values of the hedging derivatives are exclusive of any accruals that are
separately reported in the consolidated statement of income within interest
income or interest expense to match the location of the hedged item.
In a hedge of a net investment in a foreign operation, changes in the fair
value of the hedging derivative that are measured as effective are reported
within other comprehensive income (loss) consistent with the translation
adjustment for the hedged net investment in the foreign operation. Changes in
the fair value of the hedging instrument measured as ineffectiveness are
reported within net investment gains (losses).
The Company discontinues hedge accounting prospectively when: (i) it is
determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item; (ii) the derivative
expires, is sold, terminated, or exercised; (iii) it is no longer probable that
the hedged forecasted transaction will occur; (iv) a hedged firm commitment no
longer meets the definition of a firm commitment; or (v) the derivative is
de-designated as a hedging instrument.
When hedge accounting is discontinued because it is determined that the
derivative is not highly effective in offsetting changes in the fair value or
cash flows of a hedged item, the derivative continues to be carried on the
consolidated balance sheet at its fair value, with changes in fair value
recognized currently in net investment gains (losses). The carrying value of the
hedged recognized asset or liability under a fair value hedge is no longer
adjusted for changes in its fair value due to the hedged risk, and the
cumulative adjustment to its carrying value is amortized into income over the
remaining life of the hedged item. Provided the hedged forecasted transaction is
still probable of occurrence, the changes in fair value of derivatives recorded
in other comprehensive income (loss) related to discontinued cash flow hedges
are released into the consolidated statement of income when the Company's
earnings are affected by the variability in cash flows of the hedged item.
When hedge accounting is discontinued because it is no longer probable that
the forecasted transactions will occur by the end of the specified time period
or the hedged item no longer meets the definition of a firm commitment, the
derivative continues to be carried on the consolidated balance sheet at its fair
value, with changes in fair value recognized currently in net investment gains
(losses). Any asset or liability associated
F-19
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with a recognized firm commitment is derecognized from the consolidated balance
sheet, and recorded currently in net investment gains (losses). Deferred gains
and losses of a derivative recorded in other comprehensive income (loss)
pursuant to the cash flow hedge of a forecasted transaction are recognized
immediately in net investment gains (losses).
In all other situations in which hedge accounting is discontinued, the
derivative is carried at its fair value on the consolidated balance sheet, with
changes in its fair value recognized in the current period as net investment
gains (losses).
The Company is also a party to financial instruments that contain terms
which are deemed to be embedded derivatives. The Company assesses each
identified embedded derivative to determine whether it is required to be
bifurcated under SFAS 133. If the instrument would not be accounted for in its
entirety at fair value and it is determined that the terms of the embedded
derivative are not clearly and closely related to the economic characteristics
of the host contract, and that a separate instrument with the same terms would
qualify as a derivative instrument, the embedded derivative is bifurcated from
the host contract and accounted for as a freestanding derivative. Such embedded
derivatives are carried on the consolidated balance sheet at fair value with the
host contract and changes in their fair value are reported currently in net
investment gains (losses). If the Company is unable to properly identify and
measure an embedded derivative for separation from its host contract, the entire
contract is carried on the consolidated balance sheet at fair value, with
changes in fair value recognized in the current period in net investment gains
(losses).
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original or remaining maturity of three months or less at the date of purchase
to be cash equivalents. Certain securities of $208 million were reclassified to
cash equivalents from short-term investments due to the revised term to maturity
at the Acquisition Date.
Deferred Policy Acquisition Costs and Value of Business Acquired
DAC represents the costs of acquiring new and renewal insurance business
that vary with, and are primarily related to, the production of that business
are deferred. Such costs consist principally of commissions and agency and
policy issue expenses. VOBA represents the present value of estimated future
profits to be generated from existing insurance contracts in-force at the
Acquisition Date.
Generally, DAC and VOBA are amortized in proportion to the present value of
estimated gross profits from investment, mortality, expense margins and
surrender charges. Interest rates used to compute the present value of estimated
gross profits are based on rates in effect at the inception or acquisition of
the contracts.
Actual gross profits can vary from management's estimates resulting in
increases or decreases in the rate of amortization. Management utilizes the
reversion to the mean assumption, a common industry practice, in its
determination of the amortization of DAC. This practice assumes that the
expectation for long-term equity investment appreciation is not changed by minor
short-term market fluctuations, but that it does change when large interim
deviations have occurred. Management periodically updates these estimates and
evaluates the recoverability of DAC. When appropriate, management revises its
assumptions of the estimated gross margins or profits of these contracts, and
the cumulative amortization is re-estimated and adjusted by a cumulative charge
or credit to current operations.
DAC and VOBA for non-participating traditional life, non-medical health and
annuity policies with life contingencies are amortized in proportion to
anticipated premiums. Assumptions as to anticipated premiums are made at the
date of policy issuance or acquisition and are consistently applied during the
lives of the contracts. Deviations from estimated experience are included in
operations when they occur. For these contracts, the amortization period is
typically the estimated life of the policy.
F-20
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to the Acquisition, the Company amortized its deferred and payout
annuity contracts employing a level effective yield methodology, whereas
subsequent to the Acquisition, the Company amortizes DAC for deferred annuity
contracts in proportion to anticipated gross profits and payout annuity
contracts in proportion to anticipated premiums.
Policy acquisition costs related to internally replaced contracts are
expensed at the date of replacement.
Sales Inducements
The Company has two different types of sales inducements which are included
in other assets: (i) the policyholder receives a bonus whereby the
policyholder's initial account balance is increased by an amount equal to a
specified percentage of the customer's deposit; and (ii) the policyholder
receives a higher interest rate using a dollar cost averaging method than would
have been received based on the normal general account interest rate credited.
The Company defers sales inducements and amortizes them over the life of the
policy using the same methodology and assumptions used to amortize DAC.
Goodwill
Goodwill is the excess of cost over the fair value of net assets acquired
and is as follows:
<Table>
<Caption>
SUCCESSOR
-----------------
DECEMBER 31, 2005
-----------------
(IN MILLIONS)
BALANCE, END OF PREVIOUS PERIOD............................. $196
Elimination of historical goodwill.......................... (196)
Effect of push down accounting of MetLife's purchase price
on TIC's net assets acquired (See Note 1)................. 856
----
BALANCE, BEGINNING AND END OF PERIOD........................ $856
====
</Table>
Goodwill is not amortized but is tested for impairment at least annually or
more frequently if events or circumstances, such as adverse changes in the
business climate, indicate that there may be justification for conducting an
interim test. Impairment testing is performed using the fair value approach,
which requires the use of estimates and judgment, at the "reporting unit" level.
A reporting unit is the operating segment, or a business one level below that
operating segment if discrete financial information is prepared and regularly
reviewed by management at that level. For purposes of goodwill impairment
testing, goodwill within Corporate & Other is allocated to reporting units
within the Company's business segments. If the carrying value of a reporting
unit's goodwill exceeds its fair value, the excess is recognized as an
impairment and recorded as a charge against net income. The fair values of the
reporting units are determined using a market multiple or a discounted cash flow
model.
Liability for Future Policy Benefits and Policyholder Account Balances
Overview
Future policy benefit liabilities for non-participating traditional life
insurance policies are equal to the aggregate of the present value of future
benefit payments and related expenses less the present value of future net
premiums. Assumptions as to mortality and persistency are based upon the
Company's experience when the basis of the liability is established. For
contracts in-force at the time of the Acquisition, the Company revalued the
liabilities using updated assumptions as to interest rates, mortality,
persistency and provisions for adverse deviation which were current as of the
time of the Acquisition. The interest rate for future policy benefit liabilities
on non-participating traditional life insurance on the successor basis is
approximately 4% at
F-21
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005. Interest rates for the future policy benefit liabilities on
the predecessor basis ranged from 3% to 7% at December 31, 2004.
Future policy benefit liabilities for individual and group traditional
fixed annuities after annuitization are equal to the present value of expected
future payments. The interest rates used in establishing such liabilities on the
successor basis range from 4% to 6% at December 31, 2005. The interest rates for
such liabilities on the predecessor basis ranged from 2% to 9% at December 31,
2004.
Future policy benefit liabilities for non-medical health insurance are
calculated using the net level premium method and assumptions as to future
morbidity, withdrawals and interest, which provide a margin for adverse
deviation. The interest rate used in establishing such liabilities on the
successor basis is approximately 4% at December 31, 2005. The interest rates for
such liabilities on the predecessor basis ranged from 7% to 8% at December 31,
2004.
Future policy benefit liabilities for disabled lives are estimated using
the present value of benefits method and experience assumptions as to claim
terminations, expenses and interest. The interest rate used in establishing such
liabilities on the successor basis is approximately 4% at December 31, 2005. The
interest rates for such liabilities on the predecessor basis ranged from 7% to
8% at December 31, 2004.
Liabilities for unpaid claim expenses for the Company's workers'
compensation business are included in future policyholder benefits and are
estimated based upon the Company's historical experience and other actuarial
assumptions that consider the effects of current developments, anticipated
trends and risk management programs, reduced for anticipated subrogation. The
effects of changes in such estimated liabilities are included in the results of
operations in the period in which the changes occur.
Policyholder account balances relate to investment-type contracts and
universal life-type policies. Investment-type contracts principally include
traditional individual fixed annuities in the accumulation phase and
non-variable group annuity contracts. Policyholder account balances are equal to
(i) policy account values, which consist of an accumulation of gross premium
payments; (ii) credited interest, ranging from 0.3% to 13% on the successor
basis at December 31, 2005 and 1% to 8% on the predecessor basis at December 31,
2004, less expenses, mortality charges, and withdrawals; and (iii) fair value
purchase accounting adjustments relating to the Acquisition.
Product Liability Classification Changes Resulting from the Acquisition
Prior to the Acquisition, the Company determined the classification of its
single premium immediate annuities and structured settlements as investment or
insurance contracts at the contract level. As such, single premium immediate
annuities and structured settlements with life contingent payments were
classified and accounted for as "limited pay" long-duration insurance contracts
due to their significant mortality risk. The liability associated with these
contracts was reported in future policyholder benefits on the Company's
consolidated balance sheet. Contracts without life contingencies were classified
as investment contracts and were reported in policyholder account balances.
Subsequent to the Acquisition, the Company classifies single premium
immediate annuities and structured settlements at the block of business level
which combines those contracts with life contingencies and those contracts
without life contingencies. In the aggregate, both the single premium immediate
annuities and structured settlements contain significant mortality risk.
Therefore, the Company accounts for all single premium immediate annuities and
structured settlements as long-duration insurance contracts and reports them as
future policyholder benefits.
With respect to immediate participation guarantee contracts, contracts may
have funds associated with future life contingent payments on behalf of specific
lives, as well as unallocated funds not yet associated with
F-22
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
specific lives or future payments. Prior to the Acquisition, the Company
classified and reported funds within a contract that were associated with life
contingent payments in future policyholder benefits on the Company's
consolidated balance sheet. All other funds held with respect to those contracts
were reported in policyholder account balances on the Company's consolidated
balance sheet.
Subsequent to the Acquisition, the Company evaluates the immediate
participation guarantee contracts at the aggregate level. Based upon the
Company's current evaluation, all immediate participation guarantee contracts
are accounted for as universal life contracts and are being reported in
policyholder account balances on the Company's consolidated balance sheet.
Prior to the Acquisition, the Company recorded its deferred annuity
contracts, including the guaranteed minimum death benefit ("GMDB") features, as
investment contracts. Subsequent to the Acquisition, the Company records such
contracts as insurance products. As a result, the Company has established a
future policyholder benefit liability for GMDBs in accordance with Statement of
Position ("SOP") 03-1, Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts ("SOP
03-1").
Guarantees
The Company establishes future policy benefit liabilities for minimum death
and income benefit guarantees relating to certain annuity contracts and
secondary and paid up guarantees relating to certain life policies as follows:
- Annuity guaranteed death benefit liabilities are determined by estimating
the expected value of death benefits in excess of the projected account
balance and recognizing the excess ratably over the accumulation period
based on total expected assessments. The Company regularly evaluates
estimates used and adjusts the additional liability balance, with a
related charge or credit to benefit expense, if actual experience or
other evidence suggests that earlier assumptions should be revised. The
assumptions used in estimating the liabilities are consistent with those
used for amortizing DAC, including the mean reversion assumption. The
assumptions of investment performance and volatility are consistent with
the historical experience of the capital markets. The benefits used in
calculating the liabilities are based on the average benefits payable
over a range of scenarios.
- Liabilities for universal and variable life secondary guarantees and
paid-up guarantees are determined by estimating the expected value of
death benefits payable when the account balance is projected to be zero
and recognizing those benefits ratably over the accumulation period based
on total expected assessments. The Company regularly evaluates estimates
used and adjusts the additional liability balances, with a related charge
or credit to benefit expense, if actual experience or other evidence
suggests that earlier assumptions should be revised. The assumptions used
in estimating the secondary and paid up guarantee liabilities are
consistent with those used for amortizing DAC. The assumptions of
investment performance and volatility for variable products are
consistent with the historical experience of the capital markets. The
benefits used in calculating the liabilities are based on the average
benefits payable over a range of scenarios.
The Company offers certain variable annuity products with guaranteed
minimum benefit riders as follows:
- Guaranteed minimum withdrawal benefit riders ("GMWB"s) guarantee a
policyholder return of the purchase payment plus a bonus amount via
partial withdrawals, even if the account value is reduced to zero,
provided that the policyholder's cumulative withdrawals in a contract
year do not exceed a certain limit. The initial guaranteed withdrawal
amount is equal to the initial benefit base as defined in the contract.
When an additional purchase payment is made, the guaranteed withdrawal
amount is set
F-23
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equal to the greater of (i) the guaranteed withdrawal amount before the
purchase payment; or (ii) the benefit base after the purchase payment.
The benefit base increases by additional purchase payments plus a bonus
amount and decreases by benefits paid and/or withdrawal amounts. After a
specified period of time, the benefit base may also change as a result of
an optional reset as defined in the contract. The benefit base can be
reset to the account balance on the date of the reset if greater than the
benefit base before the reset. The GMWB is an embedded derivative, which
is measured at fair value separately from the host variable annuity
product.
- Guaranteed minimum accumulation benefit riders ("GMAB"s) provide the
contractholder with a minimum accumulation of their purchase payments
deposited within a specific time period, adjusted proportionately for
withdrawals, after a specified period of time determined at the time of
issuance of the variable annuity contract. The GMAB is also an embedded
derivative, which is measured at fair value separately from the host
variable annuity product.
The fair value of the GMWBs and GMABs is calculated based on actuarial and
capital market assumptions related to the projected cash flows, including
benefits and related contract charges, over the lives of the contracts,
incorporating expectations concerning policyholder behavior. In measuring the
fair value of GMWBs and GMABs, the Company attributes a portion of the fees
collected from the policyholder equal to the present value of expected future
guaranteed minimum withdrawal and accumulation benefits. GMWBs and GMABs are
reported in policyholder account balances and the changes in fair value are
reported in net investment gains (losses). Any additional fees represent
"excess" fees and are reported in universal life and investment-type product
policy fees.
Other Policyholder Funds
Other policyholder funds includes policy and contract claims and unearned
policy and contract fees.
Recognition of Insurance Revenue and Related Benefits
Premiums related to traditional life and annuity policies with life
contingencies are recognized as revenues when due. Benefits and expenses are
provided against such revenues to recognize profits over the estimated lives of
the policies. When premiums are due over a significantly shorter period than the
period over which benefits are provided, any excess profit is deferred and
recognized into operations in a constant relationship to insurance in-force or,
for annuities, the amount of expected future policy benefit payments.
Premiums related to non-medical health and disability contracts are
recognized on a pro rata basis over the applicable contract term. Prior to the
Acquisition, deferred revenues on life and annuity policies with life
contingencies were reported in other liabilities, whereas subsequent to the
Acquisition, these amounts are included in other policyholder funds on the
accompanying consolidated balance sheet.
Deposits related to universal life-type and investment-type products are
credited to policyholder account balances. Revenues from such contracts consist
of amounts assessed against policyholder account balances for mortality, policy
administration and surrender charges and are recorded in universal life and
investment-type product policy fees in the period in which services are
provided. Amounts that are charged to operations include interest credited and
benefit claims incurred in excess of related policyholder account balances.
Other Revenues
Other revenues include fees and broker-dealer commissions. Such fees and
commissions are recognized in the period in which services are performed. Other
revenues also include changes in account value relating to corporate-owned life
insurance ("COLI"). Under certain COLI contracts, if the Company reports certain
unlikely adverse results in its consolidated financial statements, withdrawals
would not be immediately
F-24
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
available and would be subject to market value adjustment, which could result in
a reduction of the account value.
Federal Income Taxes
The future tax consequences of temporary differences between financial
reporting and tax bases of assets and liabilities are measured at the balance
sheet dates and are recorded as deferred income tax assets and liabilities.
Valuation allowances are established when management assesses, based on
available information, that it is more likely than not that deferred income tax
assets will not be realized.
For federal income tax purposes, an election under Internal Revenue Code
Section 338 was made by the Company's parent, MetLife. As a result of this
election, the income tax bases in the acquired assets and liabilities were
adjusted as of the Acquisition Date resulting in a change to the related
deferred income taxes. See Notes 1 and 7.
Reinsurance
The Company has reinsured certain of its life insurance contracts with
other insurance companies under various agreements. For reinsurance contracts
that transfer sufficient underwriting risk, reinsurance premiums, commissions,
expense reimbursements, benefits and liabilities related to reinsured
long-duration contracts are accounted for over the life of the underlying
reinsured contracts using assumptions consistent with those used to account for
the underlying contracts. The cost of reinsurance related to short-duration
contracts is accounted for over the reinsurance contract period. Amounts due
from reinsurers, for both short- and long-duration arrangements, are estimated
based upon assumptions consistent with those used in establishing the
liabilities related to the underlying reinsured contracts. Policy and contract
liabilities are reported gross of reinsurance credits. DAC and VOBA are reduced
by amounts recovered under reinsurance contracts. Amounts received from
reinsurers for policy administration are reported in other revenues.
Separate Accounts
Separate accounts are established in conformity with insurance laws and are
generally not chargeable with liabilities that arise from any other business of
the Company. Separate account assets are subject to general account claims only
to the extent the value of such assets exceeds the separate account liabilities.
Effective with the adoption of SOP 03-1 on January 1, 2004, the Company reports
separately, as assets and liabilities, investments held in separate accounts and
liabilities of the separate accounts if (i) such separate accounts are legally
recognized; (ii) assets supporting the contract liabilities are legally
insulated from the Company's general account liabilities; (iii) investments are
directed by the contractholder; and (iv) all investment performance, net of
contract fees and assessments, is passed through to the contractholder. The
Company reports separate account assets meeting such criteria at their fair
value. Investment performance (including investment income, net investment gains
(losses) and changes in unrealized gains (losses)) and the corresponding amounts
credited to contractholders of such separate accounts are offset within the same
line in the consolidated statements of income. In connection with the adoption
of SOP 03-1, separate account assets with a fair value of $500 million were
reclassified to general account investments with a corresponding transfer of
separate account liabilities to future policy benefits and policyholder account
balances. See "-- Application of Recent Accounting Pronouncements."
The Company's revenues reflect fees charged to the separate accounts,
including mortality charges, risk charges, policy administration fees,
investment management fees and surrender charges. Separate accounts
F-25
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not meeting the above criteria are combined on a line-by-line basis with the
Company's general account assets, liabilities, revenues and expenses.
Discontinued Operations
The results of operations of a component of the Company that either has
been disposed of or is classified as held-for-sale are reported in discontinued
operations if the operations and cash flows of the component have been or will
be eliminated from the ongoing operations of the Company as a result of the
disposal transaction and the Company will not have any significant continuing
involvement in the operations of the component after the disposal transaction.
APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 155, Accounting for Certain Hybrid Instruments ("SFAS 155"). SFAS 155
amends SFAS 133 and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("SFAS 140"). SFAS 155
allows financial instruments that have embedded derivatives to be accounted for
as a whole, eliminating the need to bifurcate the derivative from its host, if
the holder elects to account for the whole instrument on a fair value basis. In
addition, among other changes, SFAS 155 (i) clarifies which interest-only strips
and principal-only strips are not subject to the requirements of SFAS 133; (ii)
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation;
(iii) clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives; and (iv) eliminates the prohibition on a
qualifying special-purpose entity ("QSPE") from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial interest. SFAS 155 will be applied prospectively and is effective for
all financial instruments acquired or issued for fiscal years beginning after
September 15, 2006. SFAS 155 is not expected to have a material impact on the
Company's consolidated financial statements. The FASB has issued additional
guidance relating to derivative financial instruments as follows:
- In June 2005, the FASB cleared SFAS 133 Implementation Issue No. B38,
Embedded Derivatives: Evaluation of Net Settlement with Respect to the
Settlement of a Debt Instrument through Exercise of an Embedded Put
Option or Call Option ("Issue B38") and SFAS 133 Implementation Issue No.
B39, Embedded Derivatives: Application of Paragraph 13(b) to Call Options
That Are Exercisable Only by the Debtor ("Issue B39"). Issue B38
clarified that the potential settlement of a debtor's obligation to a
creditor occurring upon exercise of a put or call option meets the net
settlement criteria of SFAS No. 133. Issue B39 clarified that an embedded
call option, in which the underlying is an interest rate or interest rate
index, that can accelerate the settlement of a debt host financial
instrument should not be bifurcated and fair valued if the right to
accelerate the settlement can be exercised only by the debtor
(issuer/borrower) and the investor will recover substantially all of its
initial net investment. Issues B38 and B39, which must be adopted as of
the first day of the first fiscal quarter beginning after December 15,
2005, did not have a material impact on the Company's consolidated
financial statements.
- Effective July 1, 2003, the Company adopted SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities ("SFAS
149"). SFAS 149 amended and clarified the accounting and reporting for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. Except for certain
previously issued and effective guidance, SFAS 149 was effective for
contracts entered into or modified after June 30, 2003. The
F-26
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's adoption of SFAS 149 did not have a significant impact on its
consolidated financial statements.
Effective November 9, 2005, the Company prospectively adopted the guidance
in FASB Staff Position ("FSP") 140-2, Clarification of the Application of
Paragraphs 40(b) and 40(c) of FAS 140 ("FSP 140-2"). FSP 140-2 clarified certain
criteria relating to derivatives and beneficial interests when considering
whether an entity qualifies as a QSPE. Under FSP 140-2, the criteria must only
be met at the date the QSPE issues beneficial interests or when a derivative
financial instrument needs to be replaced upon the occurrence of a specified
event outside the control of the transferor. FSP 140-2 did not have a material
impact on the Company's consolidated financial statements.
In September 2005, the American Institute of Certified Public Accountants
("AICPA") issued SOP 05-1, Accounting by Insurance Enterprises for Deferred
Acquisition Costs in Connection with Modifications or Exchanges of Insurance
Contracts ("SOP 05-1"). SOP 05-1 provides guidance on accounting by insurance
enterprises for deferred acquisition costs on internal replacements of insurance
and investment contracts other than those specifically described in 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. SOP
05-1 defines an internal replacement as a modification in product benefits,
features, rights, or coverages that occurs by the exchange of a contract for a
new contract, or by amendment, endorsement, or rider to a contract, or by the
election of a feature or coverage within a contract. Under SOP 05-1,
modifications that result in a substantially unchanged contract will be
accounted for as a continuation of the replaced contract. A replacement contract
that is substantially changed will be accounted for as an extinguishment of the
replaced contract resulting in a release of unamortized deferred acquisition
costs, unearned revenue and deferred sales inducements associated with the
replaced contract. The guidance in SOP 05-1 will be applied prospectively and is
effective for internal replacements occurring in fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact of SOP 05-1
and does not expect that the pronouncement will have a material impact on the
Company's consolidated financial statements.
Effective July 1, 2005, the Company adopted SFAS No. 153, Exchanges of
Nonmonetary Assets, an amendment of Accounting Principles Board ("APB") Opinion
No. 29 ("SFAS 153"). SFAS 153 amended prior guidance to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaced it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS 153 were required to be applied
prospectively for fiscal periods beginning after June 15, 2005. The adoption of
SFAS 153 did not have a material impact on the Company's consolidated financial
statements.
In June 2005, the FASB completed its review of Emerging Issues Task Force
("EITF") Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments ("EITF 03-1"). EITF 03-1 provides accounting
guidance regarding the determination of when an impairment of debt and
marketable equity securities and investments accounted for under the cost method
should be considered other-than-temporary and recognized in income. EITF 03-1
also requires certain quantitative and qualitative disclosures for debt and
marketable equity securities classified as available-for-sale or held-to-
maturity under SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS 115"), that are impaired at the balance sheet date but
for which an other-than-temporary impairment has not been recognized. The FASB
decided not to provide additional guidance on the meaning of other-than-
temporary impairment but has issued FSP 115-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments ("FSP
115-1"), which nullifies the accounting guidance on the determination of whether
an investment is other-than-temporarily impaired as set forth in EITF 03-1. As
required by
F-27
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FSP 115-1, the Company adopted this guidance on a prospective basis, which had
no material impact on the Company's consolidated financial statements and has
provided the required disclosures.
In June 2005, the EITF reached consensus on Issue No. 04-5, Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights ("EITF 04-5"). EITF 04-5 provides a framework for determining whether a
general partner controls and should consolidate a limited partnership or a
similar entity in light of certain rights held by the limited partners. The
consensus also provides additional guidance on substantive rights. EITF 04-5 was
effective after June 29, 2005 for all newly formed partnerships and for any
pre-existing limited partnerships that modified their partnership agreements
after that date. The adoption of this provision of EITF 04-5 did not have a
material impact on the Company's consolidated financial statements. EITF 04-5
must be adopted by January 1, 2006 for all other limited partnerships through a
cumulative effect of a change in accounting principle recorded in opening equity
or it may be applied retrospectively by adjusting prior period financial
statements. The adoption of this provision of EITF 04-5 did not have a material
impact on the Company's consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS
154"). The statement requires retrospective application to prior periods'
financial statements for a voluntary change in accounting principle unless it is
deemed impracticable. It also requires that a change in the method of
depreciation, amortization, or depletion for long-lived, non-financial assets be
accounted for as a change in accounting estimate rather than a change in
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS 154 did not have a material impact on the Company's
consolidated financial statements.
Effective July 1, 2004, the Company adopted EITF Issue No. 03-16,
Accounting for Investments in Limited Liability Companies ("EITF 03-16"). EITF
03-16 provides guidance regarding whether a limited liability company should be
viewed as similar to a corporation or similar to a partnership for purposes of
determining whether a noncontrolling investment should be accounted for using
the cost method or the equity method of accounting. EITF 03-16 did not have a
material impact on the Company's consolidated financial statements.
Effective January 1, 2004, the Company adopted SOP 03-1 as interpreted by a
Technical Practice Aid issued by the AICPA. SOP 03-1 provides guidance on (i)
the classification and valuation of long-duration contract liabilities; (ii) the
accounting for sales inducements; and (iii) separate account presentation and
valuation. The following summarizes the more significant aspects of the
Company's adoption of SOP 03-1 prior to the Acquisition, effective January 1,
2004:
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 entity's general
account.
The Company's adoption of SOP 03-1 resulted in the consolidation on
the Company's balance sheet at January 1, 2004 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. 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 liability for insurance contracts, and provides
that the reporting entity does not hold liabilities for investment
contracts (i.e., there is no significant mortality risk).
F-28
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Liabilities for Universal Life and Variable Universal Life
Contracts. SOP 03-1 requires that a liability, in addition to the account
balance, be established for certain insurance benefit features provided
under universal life and variable universal life 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 universal life and variable universal life products were
reviewed to determine whether an additional liability is required under SOP
03-1. The Company determined that SOP 03-1 applied to some of its universal
life and variable universal life contracts with these features and
established an additional liability of approximately $1 million.
Sales Inducements to Contractholders. In accordance with SOP 03-1,
the Company defers sales inducements and amortizes them over the life of
the policy using the same methodology and assumptions used to amortize DAC.
These inducements relate to bonuses on certain products offered by the
Company.
Effective the third quarter of 2003, the Company adopted FASB
Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities -- An
Interpretation of Accounting Research Bulletin No. 51 and its December 2003
revision ("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, including securitization entities, should be consolidated in the
Company's financial statements. An entity is subject to FIN 46 and FIN 46(r) and
is called a VIE if it has (i) equity that is insufficient to permit the entity
to finance its activities without additional subordinated financial support from
other parties; or (ii) 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 SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries. 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.
The adoption of the provisions of FIN 46(r) during the third quarter of
2003 did not require the Company to consolidate any additional VIEs that were
not previously consolidated.
Effective 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 a cost associated with an exit or disposal
activity be recorded and measured initially at fair value only when the
liability is incurred rather than at the date of an entity's commitment to an
exit plan as required by EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity Including
Certain Costs Incurred in a Restructuring ("EITF 94-3"). As required by SFAS
146, the Company adopted this guidance on a prospective basis which had no
material impact on the Company's consolidated financial statements.
F-29
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS
FIXED MATURITIES BY SECTOR AND EQUITY SECURITIES AVAILABLE-FOR-SALE
The following tables set forth the cost or amortized cost, gross unrealized
gain and loss, and estimated fair value of the Company's fixed maturities by
sector and equity securities, the percentage of the total fixed maturities
holdings that each sector represents and the percentage of the total equity
securities at:
<Table>
<Caption>
SUCCESSOR
--------------------------------------------
DECEMBER 31, 2005
--------------------------------------------
GROSS
COST OR UNREALIZED
AMORTIZED ----------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ---- ---- ---------- -----
(DOLLARS IN MILLIONS)
U.S. corporate securities.................. $16,788 $ 45 $393 $16,440 34.1%
Residential mortgage-backed securities..... 11,304 14 121 11,197 23.2
U.S. Treasury/agency securities............ 6,153 20 61 6,112 12.7
Foreign corporate securities............... 5,323 30 139 5,214 10.8
Commercial mortgage-backed securities...... 4,545 10 75 4,480 9.3
Asset-backed securities.................... 3,594 9 14 3,589 7.5
State and political subdivision
securities............................... 632 -- 25 607 1.3
Foreign government securities.............. 472 17 2 487 1.0
------- ---- ---- ------- -----
Total bonds.............................. 48,811 145 830 48,126 99.9
Redeemable preferred stocks................ 37 1 2 36 0.1
------- ---- ---- ------- -----
Total fixed maturities................... $48,848 $146 $832 $48,162 100.0%
======= ==== ==== ======= =====
Non-redeemable preferred stocks............ $ 327 $ 1 $ 5 $ 323 76.7%
Common stocks.............................. 97 4 3 98 23.3
------- ---- ---- ------- -----
Total equity securities.................. $ 424 $ 5 $ 8 $ 421 100.0%
======= ==== ==== ======= =====
</Table>
F-30
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PREDECESSOR
----------------------------------------------
DECEMBER 31, 2004
----------------------------------------------
GROSS
COST OR UNREALIZED
AMORTIZED ------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ------ ---- ---------- -----
(DOLLARS IN MILLIONS)
U.S. corporate securities................. $21,956 $1,337 $33 $23,260 54.6%
Residential mortgage-backed securities.... 4,636 122 4 4,754 11.2
U.S. Treasury/agency securities........... 1,818 99 -- 1,917 4.5
Foreign corporate securities.............. 6,855 384 12 7,227 16.9
Commercial mortgage-backed securities..... 2,249 113 3 2,359 5.5
Asset-backed securities................... 1,861 17 3 1,875 4.4
State and political subdivision
securities.............................. 360 41 1 400 0.9
Foreign government securities............. 576 59 -- 635 1.5
------- ------ --- ------- -----
Total bonds............................. 40,311 2,172 56 42,427 99.5
Redeemable preferred stocks............... 155 40 1 194 0.5
------- ------ --- ------- -----
Total fixed maturities.................. $40,466 $2,212 $57 $42,621 100.0%
======= ====== === ======= =====
Non-redeemable preferred stocks........... $ 124 $ 3 $ 1 $ 126 33.7%
Common stocks............................. 208 41 1 248 66.3
------- ------ --- ------- -----
Total equity securities................. $ 332 $ 44 $ 2 $ 374 100.0%
======= ====== === ======= =====
</Table>
F-31
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is not exposed to any significant concentration of credit risk
in its U.S. and foreign corporate fixed maturities portfolio, other than those
disclosed below:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------------- -----------------
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
(IN MILLIONS)
Communications(1).................................... $2,753 $3,933
Banking.............................................. $2,193 $2,728
Electric Utilities................................... $2,042 $2,965
Finance Companies.................................... $1,777 $3,344
Capital Goods(2)..................................... $1,223 $1,652
Real Estate Investment Trust......................... $1,125 $1,983
Energy............................................... $ 991 $1,557
Basic Industry(3).................................... $ 936 $1,537
Insurance............................................ $ 883 $1,769
Food and Beverage.................................... $ 772 $ 905
Natural Gas Utilities................................ $ 737 $ 911
Brokerage............................................ $ 670 $ 726
Industrial Other..................................... $ 650 $ 629
Transportation(4).................................... $ 608 $ 683
</Table>
- ---------------
(1) Communications includes telecommunications, media cable and media non-cable.
(2) Capital goods includes aerospace, building materials, conglomerates,
construction machine, containers, defense, packaging and environmental.
(3) Basic industry includes chemicals, metals, and paper.
(4) Transportation includes airlines, railroad and transportation services.
The Company held fixed maturities at estimated fair values that were below
investment grade or not rated by an independent rating agency that totaled
$3,080 million and $4,955 million at December 31, 2005 and 2004, respectively.
These securities had a net unrealized gain (loss) of ($40) million and $392
million at December 31, 2005 and 2004, respectively. The Company held non-income
producing fixed maturities at estimated fair values of $3 million and $47
million at December 31, 2005 and 2004, respectively. Unrealized gains (losses)
associated with non-income producing fixed maturities were ($5) million and $18
million at December 31, 2005 and 2004, respectively.
F-32
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cost or amortized cost and estimated fair value of bonds at December
31, 2005 and 2004, by contractual maturity date (excluding scheduled sinking
funds), are shown below:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------------- ----------------------
DECEMBER 31, 2005 DECEMBER 31, 2004
---------------------- ----------------------
COST OR COST OR
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(IN MILLIONS)
Due in one year or less..................... $ 1,336 $ 1,330 $ 2,087 $ 2,127
Due after one year through five years....... 9,730 9,623 11,394 11,849
Due after five years through ten years...... 8,922 8,734 11,573 12,264
Due after ten years......................... 9,380 9,173 6,511 7,199
------- ------- ------- -------
Subtotal.................................. 29,368 28,860 31,565 33,439
Mortgage-backed, commercial mortgage-backed
and other asset-backed securities......... 19,443 19,266 8,746 8,988
------- ------- ------- -------
Subtotal.................................. 48,811 48,126 40,311 42,427
Redeemable preferred stocks................. 37 36 155 194
------- ------- ------- -------
Total fixed maturities................. $48,848 $48,162 $40,466 $42,621
======= ======= ======= =======
</Table>
Bonds not due at a single maturity date have been included in the above
table in the year of final contractual maturity. Actual maturities may differ
from contractual maturities due to the exercise of prepayment options.
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, 2005 and 2004, the Company held CMOs classified as
available-for-sale with a fair value of $7,224 million and $2,395 million,
respectively. Approximately 55% and 54% of the Company's CMO holdings were fully
collateralized by the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC") securities at December 31, 2005 and 2004, respectively. In
addition, the Company held $3,973 million and $2,359 million of GNMA, FNMA or
FHLMC mortgage-backed pass-through securities at December 31, 2005 and 2004,
respectively. All of these securities are rated AAA by the major rating
agencies.
Sales or disposals of fixed maturities and equity securities classified as
available-for-sale were as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- -----------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- ----------------
2005 2005 2004 2003
---------------- ---------------- ------ -------
(IN MILLIONS)
Proceeds........................... $20,368 $2,971 $6,957 $13,101
Gross investment gains............. $ 41 $ 152 $ 257 $ 449
Gross investment losses............ $ (318) $ (96) $ (219) $ (364)
</Table>
F-33
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There were no gross investment losses above that exclude writedowns
recorded during the six months ended December 31, 2005. Gross investment losses
exclude writedowns recorded during the six months ended June 30, 2005, and the
years ended December 31, 2004 and 2003 for other-than-temporarily impaired
available-for-sale fixed maturities and equity securities of $4 million, $42
million and $109 million, respectively.
The Company periodically disposes of fixed maturity and equity securities
at a loss. Generally, such losses are insignificant in amount or in relation to
the cost basis of the investment or are attributable to declines in fair value
occurring in the period of disposition.
UNREALIZED LOSSES FOR FIXED MATURITIES AND EQUITY SECURITIES
AVAILABLE-FOR-SALE
The following tables show the estimated fair values and gross unrealized
losses of the Company's fixed maturities (aggregated by sector) and equity
securities in an unrealized loss position, aggregated by length of time that the
securities have been in a continuous unrealized loss position at December 31,
2005 and 2004:
<Table>
<Caption>
SUCCESSOR
---------------------------------------------------------------------------
DECEMBER 31, 2005
---------------------------------------------------------------------------
EQUAL TO OR GREATER
LESS THAN 12 MONTHS THAN 12 MONTHS TOTAL
----------------------- ----------------------- -----------------------
GROSS GROSS GROSS
ESTIMATED UNREALIZED ESTIMATED UNREALIZED ESTIMATED UNREALIZED
FAIR VALUE LOSS FAIR VALUE LOSS FAIR VALUE LOSS
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
U.S. corporate securities............ $13,605 $393 $ -- $ -- $13,605 $393
Residential mortgage-backed
securities......................... 8,490 121 -- -- 8,490 121
U.S. Treasury/agency securities...... 4,148 61 -- -- 4,148 61
Foreign corporate securities......... 4,284 139 -- -- 4,284 139
Commercial mortgage-backed
securities......................... 3,654 75 -- -- 3,654 75
Asset-backed securities.............. 1,741 14 -- -- 1,741 14
State and political subdivision
securities......................... 549 25 -- -- 549 25
Foreign government securities........ 147 2 -- -- 147 2
------- ---- ----- ----- ------- ----
Total bonds........................ 36,618 830 -- -- 36,618 830
Redeemable preferred stocks.......... 28 2 -- -- 28 2
------- ---- ----- ----- ------- ----
Total fixed maturities............. $36,646 $832 $ -- $ -- $36,646 $832
======= ==== ===== ===== ======= ====
Equity securities.................... $ 214 $ 8 $ -- $ -- $ 214 $ 8
======= ==== ===== ===== ======= ====
Total number of securities in an
unrealized loss position........... 4,711 -- 4,711
======= ===== =======
</Table>
F-34
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PREDECESSOR
---------------------------------------------------------------------------
DECEMBER 31, 2004
---------------------------------------------------------------------------
EQUAL TO OR GREATER
LESS THAN 12 MONTHS THAN 12 MONTHS TOTAL
----------------------- ----------------------- -----------------------
GROSS GROSS GROSS
ESTIMATED UNREALIZED ESTIMATED UNREALIZED ESTIMATED UNREALIZED
FAIR VALUE LOSS FAIR VALUE LOSS FAIR VALUE LOSS
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
U.S. corporate securities............. $2,943 $26 $192 $ 7 $3,135 $33
Residential mortgage-backed
securities.......................... 551 3 53 1 604 4
U.S. Treasury/agency securities....... 60 -- -- -- 60 --
Foreign corporate securities.......... 944 8 178 4 1,122 12
Commercial mortgage-backed
securities.......................... 250 3 7 -- 257 3
Asset-backed securities............... 294 2 45 1 339 3
State and political subdivision
securities.......................... 4 -- 11 1 15 1
Foreign government securities......... 19 -- -- -- 19 --
------ --- ---- --- ------ ---
Total bonds......................... 5,065 42 486 14 5,551 56
Redeemable preferred stocks........... 13 -- 7 1 20 1
------ --- ---- --- ------ ---
Total fixed maturities.............. $5,078 $42 $493 $15 $5,571 $57
====== === ==== === ====== ===
Equity securities..................... $ 31 $ 2 $ 9 $-- $ 40 $ 2
====== === ==== === ====== ===
Total number of securities in an
unrealized loss position............ 681 89 770
====== ==== ======
</Table>
AGING OF GROSS UNREALIZED LOSSES FOR FIXED MATURITIES AND EQUITY SECURITIES
AVAILABLE-FOR-SALE
The following tables present the cost or amortized cost, gross unrealized
losses and number of securities for fixed maturities and equity securities at
December 31, 2005 and 2004 where the estimated fair value had declined and
remained below cost or amortized cost by less than 20%, or 20% or more for:
<Table>
<Caption>
SUCCESSOR
---------------------------------------------------------------------------------------
DECEMBER 31, 2005
---------------------------------------------------------------------------------------
COST OR AMORTIZED COST GROSS UNREALIZED LOSSES NUMBER OF SECURITIES
--------------------------- --------------------------- ---------------------------
LESS THAN 20% 20% OR MORE LESS THAN 20% 20% OR MORE LESS THAN 20% 20% OR MORE
------------- ----------- ------------- ----------- ------------- -----------
(DOLLARS IN MILLIONS)
Less than six
months............. $37,631 $69 $814 $26 4,663 48
------- --- ---- --- ----- --
Total.............. $37,631 $69 $814 $26 4,663 48
======= === ==== === ===== ==
</Table>
F-35
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PREDECESSOR
------------------------------------------------------------
DECEMBER 31, 2004
------------------------------------------------------------
COST OR GROSS NUMBER
AMORTIZED COST UNREALIZED LOSSES OF SECURITIES
------------------ ------------------ ------------------
LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR
20% MORE 20% MORE 20% MORE
--------- ------ --------- ------ --------- ------
(DOLLARS IN MILLIONS)
Less than six months.................... $4,115 $ 1 $29 $ -- 499 5
Six months or greater but less than nine
months................................ 890 -- 13 -- 155 --
Nine months or greater but less than
twelve months......................... 147 -- 3 -- 27 --
Twelve months or greater................ 517 -- 14 -- 84 --
------ ---- --- ----- --- --
Total................................. $5,669 $ 1 $59 $ -- 765 5
====== ==== === ===== === ==
</Table>
As of December 31, 2005, $814 million of unrealized losses related to
securities with an unrealized loss position less than 20% of cost or amortized
cost, which represented 2% of the cost or amortized cost of such securities. As
of December 31, 2004, $59 million of unrealized losses related to securities
with an unrealized loss position less than 20% of cost or amortized cost, which
represented 1% of the cost or amortized cost of such securities.
As of December 31, 2005, $26 million of unrealized losses related to
securities with an unrealized loss position greater than 20% of cost or
amortized cost, which represented 38% of the cost or amortized cost of such
securities. Of such unrealized losses, all have been in an unrealized loss
position for a period of less than six months. As of December 31, 2004, there
were no unrealized losses related to securities with an unrealized loss position
greater than 20% of cost or amortized cost.
As described more fully in Note 2, the Company performs a regular
evaluation, on a security-by-security basis, of its investment holdings in
accordance with its impairment policy in order to evaluate whether such
securities are other-than-temporarily impaired. In connection with the
Acquisition, the Company's investment portfolio was revalued in accordance with
purchase accounting as of July 1, 2005. The increase in the unrealized losses
during 2005 is principally driven by an increase in interest rates since the
portfolio revaluation at the Acquisition Date. Based upon the Company's
evaluation of the securities in accordance with its impairment policy, the cause
of the decline being principally attributable to the general rise in rates
during the year, and the Company's intent and ability to hold the fixed income
and equity securities with unrealized losses for a period of time sufficient for
them to recover, the Company has concluded that the aforementioned securities
are not other-than-temporarily impaired.
SECURITIES LENDING PROGRAM
The Company participates in a securities lending program whereby blocks of
securities, which are included in fixed maturity securities, are loaned to third
parties, primarily major brokerage firms. The Company requires a minimum of 102%
of the fair value of the loaned securities to be separately maintained as
collateral for the loans. Securities with a cost or amortized cost of $8,478
million and $2,106 million and an estimated fair value of $8,372 million and
$1,918 million were on loan under the program at December 31, 2005 and 2004,
respectively. Securities loaned under such transactions may be sold or repledged
by the transferee. The Company was liable for cash collateral under its control
of $8,622 million and $1,986 million at December 31, 2005 and 2004,
respectively. Securities loaned transactions are accounted for as financing
arrangements on the Company's consolidated balance sheets and consolidated
statements of cash flows and the income and expenses associated with the program
are reported in net investment income as investment
F-36
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income and investment expenses, respectively. Security collateral of $174
million and $341 million at December 31, 2005 and December 31, 2004,
respectively, was on deposit from customers in connection with the securities
lending transactions. Security collateral may not be sold or repledged and is
not reflected in the consolidated financial statements.
ASSETS ON DEPOSIT AND HELD IN TRUST
The Company had investment assets on deposit with regulatory agencies with
a fair market value of $20 million and $21 million at December 31, 2005 and
2004, respectively, consisting primarily of fixed maturity securities. The
Company had no securities held in trust to satisfy collateral requirements at
December 31, 2005. Company securities held in trust to satisfy collateral
requirements, consisting primarily of fixed maturity securities, had an
amortized cost of $15 million at December 31, 2004.
MORTGAGE AND CONSUMER LOANS
At December 31, 2005 and 2004, the Company's mortgage and consumer loans
consisted of the following:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------------- -----------------
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
(IN MILLIONS)
Current mortgage and consumer loans................. $2,081 $2,070
Underperforming mortgage and consumer loans......... 13 54
------ ------
Total mortgage and consumer loans................. $2,094 $2,124
====== ======
</Table>
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.
Mortgage loans are collaterized by properties located in the United States.
At December 31, 2005, approximately 37%, 12%, and 5% of the properties were
located in California, New York, and New Jersey, respectively. Generally, the
Company, as a lender, only loans up to 75% of the purchase price on the
underlying real estate.
F-37
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INVESTMENT INCOME
The components of net investment income were as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- ------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- -----------------
2005 2005 2004 2003
---------------- ---------------- ------ ------
(IN MILLIONS)
Fixed maturities.......................... $1,169 $1,173 $2,336 $2,330
Equity securities......................... 3 22 9 (21)
Mortgage and consumer loans............... 85 82 184 158
Real estate and real estate joint
ventures................................ 2 19 29 20
Policy loans.............................. 23 29 70 76
Other limited partnership interests....... 33 217 262 32
Cash, cash equivalents and short-term
investments............................. 61 24 31 49
Preferred stock of Citigroup.............. -- 73 182 182
Other..................................... (6) 3 1 34
------ ------ ------ ------
Total................................... 1,370 1,642 3,104 2,860
Less: Investment expenses................. 154 34 92 117
------ ------ ------ ------
Net investment income................... $1,216 $1,608 $3,012 $2,743
====== ====== ====== ======
</Table>
NET INVESTMENT GAINS (LOSSES)
Net investment gains (losses) were as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- ------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- -----------------
2005 2005 2004 2003
---------------- ---------------- ------ ------
(IN MILLIONS)
Fixed maturities(1)....................... $ (278) $ 17 $ (21) $ (33)
Equity securities......................... 1 35 17 9
Mortgage and consumer loans............... (8) 1 1 (14)
Real estate and real estate joint
ventures................................ 7 7 1 6
Other limited partnership interests....... (1) 2 1 44
Sales of businesses....................... 2 -- -- --
Derivatives............................... (11) (402) 122 507
Other..................................... 100 366 (112) (487)
------ ------ ------ ------
Net investment gains (losses)........... $ (188) $ 26 $ 9 $ 32
====== ====== ====== ======
</Table>
- ---------------
(1) Subsequent to the Acquisition, the Company's investment portfolio was
repositioned, resulting in significant net investment losses during the six
months ended December 31, 2005. Such losses resulted from the sale of
securities during a period of rising interest rates.
F-38
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET UNREALIZED INVESTMENT GAINS (LOSSES)
The components of net unrealized investment gains (losses), included in
accumulated other comprehensive income (loss), were as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- ----------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- ---------------
2005 2005 2004 2003
---------------- ---------------- ------ ------
(IN MILLIONS)
Fixed maturities............................. $(686) $2,124 $2,155 $1,966
Equity securities............................ (3) 21 42 33
Derivatives.................................. 1 83 (6) (159)
Other........................................ (18) 4 1 16
Discontinued operations...................... -- -- 256 225
----- ------ ------ ------
Total...................................... (706) 2,232 2,448 2,081
Amounts allocated from DAC and VOBA.......... 135 -- -- --
Deferred income taxes........................ 200 (781) (856) (725)
----- ------ ------ ------
Net unrealized investment gains
(losses).............................. $(371) $1,451 $1,592 $1,356
===== ====== ====== ======
</Table>
The changes in net unrealized investment gains (losses) were as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- ----------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- ---------------
2005 2005 2004 2003
---------------- ---------------- ------ ------
(IN MILLIONS)
BALANCE, END OF PREVIOUS PERIOD.............. $ 1,451 $1,592 $1,356 $ 454
Effect of purchase accounting push down (See
Note 1).................................... (1,451) -- -- --
------- ------ ------ ------
BALANCE, BEGINNING OF PERIOD................. -- 1,592 1,356 454
Unrealized investment gains (losses) during
the period................................. (706) 43 367 1,368
Unrealized investment gains (losses) relating
to:
DAC and VOBA............................... 135 -- -- --
Deferred income taxes...................... 200 (18) (131) (466)
Restructuring transaction.................... -- (166) -- --
------- ------ ------ ------
BALANCE, END OF PERIOD....................... $ (371) $1,451 $1,592 $1,356
======= ====== ====== ======
Net change in unrealized investment gains
(losses)................................... $ (371) $ (141) $ 236 $ 902
======= ====== ====== ======
</Table>
TRADING SECURITIES
Net investment income for the six months ended December 31, 2005 and June
30, 2005 and the years ended December 31, 2004 and 2003 includes $6 million,
($35) million, $44 million and $190 million, respectively, of gains (losses) on
securities classified as trading. Of these amounts, ($3) million, $20 million,
$78 million and $92 million relate to net gains (losses) recognized on trading
securities sold during the six months ended December 31, 2005 and June 30, 2005
and the years ended December 31, 2004 and 2003,
F-39
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. The remaining $9 million, ($55) million, ($34) million and $98
million for the six months ended December 31, 2005 and June 30, 2005, and the
years ended December 31, 2004 and 2003, respectively, relate to changes in fair
value on trading securities held at December 31, 2005, June 30, 2005, December
31, 2004 and December 31, 2003, respectively.
VARIABLE INTEREST ENTITIES
As of December 31, 2004, a collateralized debt obligation and a real estate
joint venture were consolidated as VIEs. The collateralized debt obligation was
sold subsequent to June 30, 2005. The real estate joint venture experienced a
reconsideration event that changed the Company's status so that it is no longer
the primary beneficiary. The following table presents the total assets of and
maximum exposure to loss relating to VIEs for which the Company has concluded
that it holds significant variable interests but it is not the primary
beneficiary and which have not been consolidated:
<Table>
<Caption>
DECEMBER 31, 2005
------------------------
NOT PRIMARY BENEFICIARY
------------------------
MAXIMUM
TOTAL EXPOSURE TO
ASSETS (1) LOSS (2)
---------- -----------
(IN MILLIONS)
Asset-backed securitizations................................ $1,281 $ 69
Real estate joint ventures(3)............................... 97 18
Other limited partnerships(4)............................... 4,055 285
Other investments(5)........................................ 200 15
------ ----
Total..................................................... $5,633 $387
====== ====
</Table>
- ---------------
(1) The assets of the asset-backed securitizations are reflected at fair value
at December 31, 2005. The assets of the real estate joint ventures, other
limited partnerships and other investments are reflected at the carrying
amounts at which such assets would have been reflected on the Company's
consolidated balance sheet had the Company consolidated the VIE from the
date of its initial investment in the entity.
(2) The maximum exposure to loss of the asset-backed securitizations is equal to
the carrying amounts of participation. The maximum exposure to loss relating
to real estate joint ventures, other limited partnerships and other
investments is equal to the carrying amounts plus any unfunded commitments,
reduced by amounts guaranteed by other partners.
(3) Real estate joint ventures include partnerships and other ventures which
engage in the acquisition, development, management and disposal of real
estate investments.
(4) Other limited partnerships include partnerships established for the purpose
of investing in public and private debt and equity securities.
(5) Other investments include securities that are not asset-backed
securitizations.
4. DERIVATIVE FINANCIAL INSTRUMENTS
TYPES OF DERIVATIVE INSTRUMENTS
On the Acquisition Date, derivative revaluation gains were reclassified
from other assets to other invested assets to conform with MetLife's
presentation.
At the Acquisition Date, the Company's derivative positions which
previously qualified for hedge accounting were dedesignated in accordance with
SFAS 133. Such derivative positions were not redesignated
F-40
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in hedging relationships. Accordingly, all changes in such derivative fair
values for the six months ended December 31, 2005 are recorded in net investment
gains (losses).
The following table provides a summary of the notional amounts and current
market or fair value of derivative financial instruments held at:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------------- -------------------------------
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------------------- -------------------------------
CURRENT MARKET OR CURRENT MARKET OR
FAIR VALUE FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Interest rate swaps........... $ 6,540 $356 $ 49 $ 5,702 $ 59 $109
Interest rate caps............ 2,020 16 -- 118 3 --
Financial futures............. 81 2 1 1,339 -- --
Foreign currency swaps........ 3,084 429 72 3,219 850 45
Foreign currency forwards..... 488 18 2 431 -- 8
Options....................... -- 165 3 -- 189 --
Financial forwards............ -- -- 2 -- 2 2
Credit default swaps.......... 957 2 2 415 4 3
------- ---- ---- ------- ------ ----
Total....................... $13,170 $988 $131 $11,224 $1,107 $167
======= ==== ==== ======= ====== ====
</Table>
The above table does not include notional values for equity futures, equity
financial forwards, and equity options. At December 31, 2005 and 2004, the
Company owned 587 and 217 equity futures contracts, respectively. Equity futures
market values are included in financial futures in the preceding table. At
December 31, 2005 and 2004, the Company owned 73,500 and 115,400 equity
financial forwards, respectively. Equity financial forwards market values are
included in financial forwards in the preceding table. At December 31, 2005 and
2004, the Company owned 1,420,650 and 1,144,700 equity options, respectively.
Equity options market values are included in options in the preceding table. The
notional amount related to equity options for 2004 has been removed from the
above table to conform to 2005 presentation.
The following table provides a summary of the notional amounts of
derivative financial instruments by maturity at December 31, 2005:
<Table>
<Caption>
SUCCESSOR
------------------------------------------------------------------------
REMAINING LIFE
------------------------------------------------------------------------
AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR THROUGH THROUGH
OR LESS FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL
-------- -------------- ---------------- --------------- -------
(IN MILLIONS)
Interest rate swaps......... $ 942 $2,929 $2,519 $150 $ 6,540
Interest rate caps.......... 2,000 20 -- -- 2,020
Financial futures........... 81 -- -- -- 81
Foreign currency swaps...... 535 869 1,616 64 3,084
Foreign currency forwards... 488 -- -- -- 488
Credit default swaps........ 95 836 26 -- 957
------ ------ ------ ---- -------
Total..................... $4,141 $4,654 $4,161 $214 $13,170
====== ====== ====== ==== =======
</Table>
F-41
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rate swaps are used by the Company primarily to reduce market
risks from changes in interest rates and to alter interest rate exposure arising
from mismatches between assets and liabilities (duration mismatches). In an
interest rate swap, the Company agrees with another party to exchange, at
specified intervals, the difference between fixed rate and floating rate
interest amounts as calculated by reference to an agreed notional principal
amount. These transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by the counterparty at each due
date.
The Company also enters into basis swaps to better match the cash flows
from assets and related liabilities. In a basis swap, 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. Basis swaps are included in interest rate swaps in the preceding table.
Interest rate caps are used by the Company primarily to protect its
floating rate liabilities against rises in interest rates above a specified
level and against interest rate exposure arising from mismatches between assets
and liabilities (duration mismatches).
In exchange-traded interest rate (Treasury and swap) and equity futures
transactions, the Company agrees to purchase or sell a specified number of
contracts, the value of which is determined by the different classes of interest
rate and equity securities, and to post variation margin on a daily basis in an
amount equal to the difference in the daily market values of those contracts.
The Company enters into exchange-traded futures with regulated futures
commission merchants that are members of the exchange.
Exchange-traded interest rate (Treasury and swap) futures are used
primarily to hedge mismatches between the duration of assets in a portfolio and
the duration of liabilities supported by those assets, to hedge against changes
in value of securities the Company owns or anticipates acquiring and to hedge
against changes in interest rates on anticipated liability issuances by
replicating Treasury or swap curve performance. The value of interest rate
futures is substantially impacted by changes in interest rates and they can be
used to modify or hedge existing interest rate risk.
Exchange-traded equity futures are used primarily to hedge liabilities
embedded in certain variable annuity products offered by the Company.
Foreign currency derivatives, including foreign currency swaps, foreign
currency forwards and currency option contracts, are used by the Company to
reduce the risk from fluctuations in foreign currency exchange rates associated
with its assets and liabilities denominated in foreign currencies. The Company
also uses foreign currency forwards to hedge the foreign currency risk
associated with certain of its net investments in foreign operations.
In a foreign currency swap transaction, the Company agrees with another
party to exchange, at specified intervals, the difference between one currency
and another at a forward exchange rate calculated by reference to an agreed upon
principal amount. The principal amount of each currency is exchanged at the
inception and termination of the currency swap by each party.
In a foreign currency forward transaction, the Company agrees with another
party to deliver a specified amount of an identified currency at a specified
future date. The price is agreed upon at the time of the contract and payment
for such a contract is made in a different currency at the specified future
date.
The Company enters into currency option contracts that give it the right,
but not the obligation, to sell the foreign currency amount in exchange for a
functional currency amount within a limited time at a contracted price. The
contracts may also be net settled in cash, based on differentials in the foreign
exchange rate and the strike price. Currency option contracts are included in
options in the preceding table.
F-42
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equity index options are used by the Company primarily to hedge minimum
guarantees embedded in certain variable annuity products offered by the Company.
To hedge against adverse changes in equity indices, the Company enters into
contracts to sell the equity index within a limited time at a contracted price.
The contracts will be net settled in cash based on differentials in the indices
at time of exercise and the strike price. Equity index options are included in
options in the preceding table.
Equity variance swaps are used by the Company primarily to hedge minimum
guarantees embedded in certain variable annuity products offered by the Company.
In an equity variance swap, the Company agrees with another party to exchange
amounts in the future, based on changes in equity volatility over a defined
period. Equity variance swaps are included in financial forwards in the
preceding table.
Certain credit default swaps are used by the Company to hedge against
credit-related changes in the value of its investments and to diversify its
credit risk exposure in certain portfolios. In a credit default swap
transaction, the Company agrees with another party, at specified intervals, to
pay a premium to insure credit risk. If a credit event, as defined by the
contract, occurs, generally the contract will require the swap to be settled
gross by the delivery of par quantities of the referenced investment equal to
the specified swap notional in exchange for the payment of cash amounts by the
counterparty equal to the par value of the investment surrendered.
Credit default swaps are used in replication synthetic asset transactions
("RSATs") to synthetically create investments that are either more expensive to
acquire or otherwise unavailable in the cash markets. RSATs are a combination of
a derivative and usually a U.S. Treasury or Agency security. RSATs that involve
the use of credit default swaps are included in such classification in the
preceding table.
HEDGING
The table below provides a summary of the notional amount and fair value of
derivatives by type of hedge designation at:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------------------------------- -----------------------------------
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------------------------- -----------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL ------------------------ NOTIONAL ------------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ---------- ----------- -------- ---------- -----------
(IN MILLIONS)
Fair value............... $ 66 $ -- $ -- $ 1,506 $ -- $ 14
Cash flow................ 430 2 -- 7,560 897 142
Foreign operations....... -- -- -- 25 -- --
Non-qualifying........... 12,674 986 131 2,133 210 11
------- ---- ---- ------- ------ ----
Total............... $13,170 $988 $131 $11,224 $1,107 $167
======= ==== ==== ======= ====== ====
</Table>
FAIR VALUE HEDGES
The Company designates and accounts for the following as fair value hedges
when they have met the requirements of SFAS 133: (i) interest rate swaps to
convert fixed rate investments to floating rate investments; (ii) foreign
currency swaps to hedge the foreign currency fair value exposure of foreign
currency denominated investments and liabilities; and (iii) interest rate
futures to hedge against changes in value of fixed rate investments.
F-43
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recognized net investment gains (losses) representing the
ineffective portion of all fair value hedges as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- --------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- -------------
2005 2005 2004 2003
---------------- ---------------- ----- -----
(IN MILLIONS)
Changes in the fair value of
derivatives............................. $-- $(16) $(21) $ 1
Changes in the fair value of the items
hedged.................................. -- 5 (12) (24)
--- ---- ---- ----
Net ineffectiveness of fair value hedging
activities.............................. $-- $(11) $(33) $(23)
=== ==== ==== ====
</Table>
All components of each derivative's gain or loss were included in the
assessment of hedge ineffectiveness, except for financial futures where the time
value component of the derivative has been excluded from the assessment of
ineffectiveness. For the six months ended June 30, 2005 and the years ended
December 31, 2004 and 2003, the cost of carry for financial futures was ($8)
million, ($29) million and ($23) million, respectively.
There were no instances in which the Company discontinued fair value hedge
accounting due to a hedged firm commitment no longer qualifying as a fair value
hedge.
CASH FLOW HEDGES
The Company designates and accounts for the following as cash flow hedges,
when they have met the requirements of SFAS 133: (i) interest rate swaps to
convert floating rate investments to fixed rate investments; (ii) interest rate
swaps to convert floating rate liabilities into fixed rate liabilities; (iii)
foreign currency swaps to hedge the foreign currency cash flow exposure of
foreign currency denominated investments and liabilities; (iv) interest rate
futures to hedge against changes in value of securities to be acquired; and (v)
interest rate futures to hedge against changes in interest rates on liabilities
to be issued.
For the six months ended December 31, 2005, the Company did not recognize
any net investment gains (losses) related to the assessment of hedge
ineffectiveness. For the six months ended June 30, 2005, and the years ended
December 31, 2004 and 2003, the Company recognized net investment gains (losses)
of ($5) million, $6 million and ($3) million, respectively, which represented
the ineffective portion of all cash flow hedges. All components of each
derivative's gain or loss were included in the assessment of hedge
ineffectiveness. For the six months ended December 31, 2005 and June 30, 2005
and for the years ended December 31, 2004 and 2003, there were no instances in
which the Company discontinued cash flow hedge accounting because the forecasted
transactions did not occur on the anticipated date or in the additional time
period permitted by SFAS 133. There were no hedged forecasted transactions,
other than the receipt or payment of variable interest payments.
F-44
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Presented below is a rollforward of the components of other comprehensive
income (loss), before income taxes, related to cash flow hedges:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- --------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- -------------
2005 2005 2004 2003
---------------- ---------------- ----- -----
(IN MILLIONS)
BALANCE, END OF PREVIOUS PERIOD............... $ 83 $(6) $(159) $(286)
Effect of purchase accounting push down (See
Note 1)..................................... (83) -- -- --
---- --- ----- -----
BALANCE, BEGINNING OF PERIOD.................. - (6) (159) (286)
Gains (losses) deferred in other comprehensive
income (loss) on the effective portion of
cash flow hedges............................ 1 85 140 112
Amounts reclassified to net investment
income...................................... -- 4 13 15
---- --- ----- -----
BALANCE, END OF THE PERIOD.................... $ 1 $83 $ (6) $(159)
==== === ===== =====
</Table>
At December 31, 2005, approximately ($5) million of the deferred net loss
on derivatives accumulated in other comprehensive income (loss) are expected to
be reclassified to earnings during the year ending December 31, 2006.
HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS
The Company uses forward exchange contracts, foreign currency swaps and
options to hedge portions of its net investment in foreign operations against
adverse movements in exchange rates. The Company measures ineffectiveness on the
forward exchange contracts based upon the change in forward rates. There was no
ineffectiveness recorded in 2005, 2004 or 2003.
The Company's consolidated statements of stockholder's equity for the six
months ended December 31, 2005 did not include any gains (losses) related to
foreign currency contracts used to hedge its net investments in foreign
operations. The Company's consolidated statements of stockholder's equity for
the six months ended June 30, 2005, and the years ended December 31, 2004 and
2003, included gains (losses) of $3 million, $1 million and ($6) million,
respectively, related to foreign currency contracts used to hedge its net
investments in foreign operations. When substantially all of the net investments
in foreign operations are sold or liquidated, the amounts in accumulated other
comprehensive income ("AOCI") are reclassified to the consolidated statements of
income, while a pro rata portion is reclassified upon partial sale of the net
investments in foreign operations.
NON-QUALIFYING DERIVATIVES AND DERIVATIVES FOR PURPOSES OTHER THAN HEDGING
The Company enters into the following derivatives that do not qualify for
hedge accounting under SFAS 133 or for purposes other than hedging: (i) interest
rate swaps, purchased caps, and interest rate futures to minimize its exposure
to interest rate volatility; (ii) foreign currency forwards, swaps and option
contracts to minimize its exposure to adverse movements in exchange rates; (iii)
credit default swaps to minimize its exposure to adverse movements in credit;
(iv) equity futures, equity index options and equity variance swaps to
economically hedge liabilities embedded in certain variable annuity products;
(v) RSATs to synthetically create investments; and (vi) basis swaps to better
match the cash flows from assets and related liabilities.
Effective at the Acquisition Date, the Company's derivative positions which
previously qualified for hedge accounting were dedesignated in accordance with
SFAS 133. Such derivative positions were not
F-45
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
redesignated and were included with the Company's other non-qualifying
derivative positions from the Acquisition Date through December 31, 2005. For
the six months ended December 31, 2005 and June 30, 2005, and the years ended
December 31, 2004 and 2003, the Company recognized as net investment gains
(losses) changes in fair value of ($1) million, ($10) million, ($33) million and
($96) million, respectively, related to derivatives that do not qualify for
hedge accounting.
EMBEDDED DERIVATIVES
The Company has certain embedded derivatives that are required to be
separated from their host contracts and accounted for as derivatives. These host
contracts include guaranteed minimum accumulation and withdrawal benefits. The
fair value of the Company's embedded derivative liabilities was $40 million and
$181 million at December 31, 2005 and 2004, respectively. The amounts recorded
in net investment gains (losses) for the six months ended December 31, 2005 and
June 30, 2005 and during the year ended December 31, 2004 were gains (losses) of
$39 million, ($3) million and $30 million, respectively. There were no
investment gains (losses) associated with embedded derivatives during the year
ended December 31, 2003.
CREDIT RISK
The Company may be exposed to credit related losses in the event of
nonperformance by counterparties to derivative financial instruments. Generally,
the current credit exposure of the Company's derivative contracts is limited to
the fair value at the reporting date. The credit exposure of the Company's
derivative transactions is represented by the fair value of contracts with a net
positive fair value at the reporting date.
As noted above, the Company manages its credit risk related to
over-the-counter derivatives by entering into transactions with creditworthy
counterparties, maintaining collateral arrangements and through the use of
master agreements that provide for a single net payment to be made by one
counterparty to another at each due date and upon termination. Because exchange
traded futures are effected through regulated exchanges, and positions are
marked to market on a daily basis, the Company has minimal exposure to credit
related losses in the event of nonperformance by counterparties to such
derivative instruments.
The Company enters into various collateral arrangements, which require both
the pledging and accepting of collateral in connection with its derivative
instruments. As of December 31, 2005 and 2004, the Company was obligated to
return cash collateral under its control of $128 million and $229 million,
respectively. This unrestricted cash collateral is included in cash and cash
equivalents and the obligation to return it is included in payables for
collateral under securities loaned and other transactions in the consolidated
balance sheet. As of December 31, 2005 and 2004, the Company had also accepted
collateral consisting of various securities with a fair market value of $427
million and $584 million, respectively, which is held in separate custodial
accounts. The Company is permitted by contract to sell or repledge this
collateral, but as of December 31, 2005 and 2004, none of the collateral had
been sold or repledged. As of December 31, 2005, the Company had not pledged any
collateral related to derivative instruments.
F-46
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INSURANCE
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
Information regarding DAC and VOBA for the years ended December 31, 2003
and 2004, and the six months ended June 30, 2005 and December 31, 2005, is as
follows:
<Table>
<Caption>
DAC VOBA TOTAL
------ ------- -------
(IN MILLIONS)
BALANCE AT JANUARY 1, 2003 (PREDECESSOR).................... $2,044 $ 115 $ 2,159
Capitalization............................................ 583 -- 583
Less: amortization........................................ 266 14 280
------ ------- -------
BALANCE AT DECEMBER 31, 2003 (PREDECESSOR).................. 2,361 101 2,462
Capitalization............................................ 810 -- 810
Less: amortization........................................ 399 11 410
------ ------- -------
BALANCE AT DECEMBER 31, 2004 (PREDECESSOR).................. 2,772 90 2,862
Capitalization............................................ 426 -- 426
Less: amortization........................................ 230 6 236
------ ------- -------
BALANCE AT JUNE 30, 2005 (PREDECESSOR)...................... 2,968 84 3,052
Effect of purchase accounting push down (See Note 1)........ (2,968) 3,406 438
------ ------- -------
BALANCE AT JULY 1, 2005 (SUCCESSOR)......................... -- 3,490 3,490
------ ------- -------
Capitalization............................................ 262 -- 262
------ ------- -------
Less: amortization related to:
Net investment gains (losses).......................... (4) (25) (29)
Unrealized investment gains (losses)................... (32) (103) (135)
Other expenses......................................... 17 198 215
------ ------- -------
Total amortization................................... (19) 70 51
------ ------- -------
BALANCE AT DECEMBER 31, 2005 (SUCCESSOR).................... $ 281 $ 3,420 $ 3,701
====== ======= =======
</Table>
The estimated future amortization expense for the next five years allocated
to other expenses for VOBA is $320 million in 2006, $313 million in 2007, $296
million in 2008, $278 million in 2009 and $257 million in 2010.
Amortization of VOBA and DAC is related to (i) investment gains and losses
and the impact of such gains and losses on the amount of the amortization; (ii)
unrealized investment gains and losses to provide information regarding the
amount that would have been amortized if such gains and losses had been
recognized; and (iii) other expenses to provide amounts related to the gross
profits originating from transactions other than investment gains and losses.
F-47
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
VALUE OF DISTRIBUTION AGREEMENTS AND CUSTOMER RELATIONSHIPS ACQUIRED
Changes in value of distribution agreements ("VODA") and value of customer
relationships acquired ("VOCRA"), which are reported within other assets in the
consolidated balance sheet, are as follows:
<Table>
<Caption>
(IN MILLIONS)
BALANCE AT DECEMBER 31, 2004 (PREDECESSOR).................. $--
Effect of purchase accounting push down (See Note 1)........ 73
Amortization................................................ --
---
BALANCE AT JULY 1, 2005 (SUCCESSOR)......................... 73
Capitalization.............................................. --
Amortization................................................ (1)
---
BALANCE AT DECEMBER 31, 2005 (SUCCESSOR).................... $72
===
</Table>
The estimated future amortization expense for the next five years of the
value of distribution agreements and customer relationships acquired is $2
million in 2006, $3 million in 2007, $4 million in 2008, $4 million in 2009 and
$5 million in 2010.
SALES INDUCEMENTS
Changes in deferred sales inducements are as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- -------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- ------------
2005 2005 2004
---------------- ---------------- ------------
(IN MILLIONS)
BALANCE, END OF PREVIOUS PERIOD......... $ 81 $50 $--
Effect of purchase accounting push down
(See Note 1).......................... (81) -- --
---- --- ---
Balance, beginning of period............ -- 50 --
Capitalization.......................... 23 33 51
Amortization............................ -- (2) (1)
---- --- ---
BALANCE, END OF PERIOD.................. $ 23 $81 $50
==== === ===
</Table>
F-48
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LIABILITIES FOR UNPAID CLAIMS AND CLAIM EXPENSES
The following table provides an analysis of the activity in the liability
for unpaid claims and claim expenses relating to group accident and non-medical
health policies and contracts:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- --------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- -------------
2005 2005 2004 2003
---------------- ---------------- ----- -----
(IN MILLIONS)
BALANCE, BEGINNING OF PERIOD........... $ 511 $489 $434 $368
Less: reinsurance recoverables.... (367) (347) (294) (240)
----- ---- ---- ----
Net balance at beginning of period... 144 142 140 128
----- ---- ---- ----
Effect of purchase accounting
pushdown.......................... (7) -- -- --
Incurred related to:
Current period.................... 19 17 22 32
Prior period...................... (3) (3) 4 5
----- ---- ---- ----
Total incurred.................. 16 14 26 37
----- ---- ---- ----
Paid related to:
Current period.................... (1) (1) (1) (1)
Prior period...................... (13) (11) (23) (24)
----- ---- ---- ----
Total paid...................... (14) (12) (24) (25)
----- ---- ---- ----
Net balance at end of period......... 139 144 142 140
Add: reinsurance recoverables..... 373 367 347 294
----- ---- ---- ----
BALANCE, END OF PERIOD................. $ 512 $511 $489 $434
===== ==== ==== ====
</Table>
Claims and claim adjustment expenses associated with prior periods
decreased by $3 million for both the six months ended December 31, 2005 and the
six months ended June 30, 2005. Claims and claim adjustment expenses associated
with prior periods increased by $4 million and $5 million for the years ended
December 31, 2004 and 2003, respectively. In all periods presented, the change
was due to differences between actual benefit periods and expected benefit
periods for long-term care and disability contracts.
GUARANTEES
The Company issues annuity contracts which may include contractual
guarantees to the contractholder for the highest contract value on a specified
anniversary date minus any withdrawals following the contract anniversary, or
total deposits made to the contract less any partial withdrawals plus a minimum
return ("anniversary contract value" or "minimum return"). These guarantees
include benefits that are payable in the event of death.
The Company also issues universal and variable life contracts where the
Company contractually guarantees to the contractholder a secondary guarantee.
F-49
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had the following types of guarantees relating to annuity and
universal and variable life contracts at:
ANNUITY CONTRACTS
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------------ ------------------------------
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------------------ ------------------------------
IN THE AT IN THE AT
EVENT OF DEATH ANNUITIZATION EVENT OF DEATH ANNUITIZATION
-------------- ------------- -------------- -------------
(DOLLARS IN MILLIONS)
ANNIVERSARY CONTRACT VALUE OR MINIMUM
RETURN
Account value (general and separate
account)............................ $ 32,772 N/A $ 30,833 N/A
Net amount at risk..................... $ 852(1) N/A(2) $ 1,255(1) N/A(2)
Average attained age of
contractholders..................... 60 years N/A 59 years N/A
</Table>
- ---------------
(1) The net amount at risk for guarantees of amounts in the event of death is
defined as the current guaranteed minimum death benefit in excess of the
current account balance at the balance sheet date.
(2) The net amount at risk for guarantees of amounts at annuitization is defined
as the present value of the minimum guaranteed annuity payments available to
the contractholder determined in accordance with the terms of the contract
in excess of the current account balance.
UNIVERSAL AND VARIABLE LIFE CONTRACTS
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------- -------------------------
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------------- -------------------------
SECONDARY PAID UP SECONDARY PAID UP
GUARANTEES GUARANTEES GUARANTEES GUARANTEES
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Account value (general and separate
account).................................. $ 1,944 N/A $ 1,239 N/A
Net amount at risk.......................... $ 25,795(1) N/A(1) $ 15,182(1) N/A(1)
Average attained age of policyholders....... 57 years N/A 57 years N/A
</Table>
- ---------------
(1) The net amount at risk for guarantees of amounts in the event of death is
defined as the current guaranteed minimum death benefit in excess of the
current account balance at the balance sheet date.
The net amount at risk is based on the direct amount at risk (excluding
reinsurance).
The Company's annuity and life contracts with guarantees may offer more
than one type of guarantee in each contract. Therefore, the amounts listed above
may not be mutually exclusive.
Liabilities incurred, relating to annuity contracts, for guaranteed death
benefits were $3 million for the six months ended December 31, 2005. There were
no guaranteed death benefits incurred for the six months ended June 30, 2005 or
the years ended December 31, 2004 and 2003. Liabilities incurred, relating to
universal and variable life contracts, for secondary guarantees were $6 million,
$5 million and $2 million for the six months ended December 31, 2005 and June
30, 2005, and the years ended December 31, 2004 and 2003, respectively.
F-50
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Account balances of contracts with insurance guarantees are invested in
separate account asset classes as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------------- -----------------
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
Mutual Fund Groupings (IN MILLIONS)
Equity.............................................. $19,969 $17,611
Bond................................................ 2,434 2,183
Balanced............................................ 2,899 3,250
Money Market........................................ 654 681
Specialty........................................... 621 649
------- -------
TOTAL............................................. $26,577 $24,374
======= =======
</Table>
SEPARATE ACCOUNTS
Separate account assets and liabilities include pass-through separate
accounts totaling $30,295 million and $28,703 million at December 31, 2005 and
2004, respectively, for which the policyholder assumes all investment risk, and
separate accounts with a minimum return or account value for which the Company
contractually guarantees either a minimum return or account value to the
policyholder which totaled $943 million and $2,039 million at December 31, 2005
and 2004, respectively. The average interest rates credited on these contracts
were 4.5% and 4% at December 31, 2005 and 2004, respectively.
Fees charged to the separate accounts by the Company (including mortality
charges, policy administration fees and surrender charges) are reflected in the
Company's revenues as universal life and investment-type product policy fees and
totaled $232 million, $203 million, $375 million and $300 million for the six
months ended December 31, 2005 and June 30, 2005 and the years ended December
31, 2004 and 2003, respectively.
The Company did not have any proportional interest in separate accounts for
fixed maturities, equity securities, and cash and cash equivalents reported on
the consolidated balance sheet at December 31, 2005.
For the six months ended December 31, 2005 and June 30, 2005 and the year
ended December 31, 2004, there were no investment gains (losses) on transfers of
assets from the general account to the separate accounts.
6. REINSURANCE
Since 1997, the majority of the Company's universal life business has been
reinsured under an 80% ceded/20% retained yearly renewable term ("YRT") quota
share reinsurance program, and its 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 have reverted to YRT for new business.
Effective May 1, 2005, the Company's quota share program for YRT and coinsurance
changed to 70%/30%. Within its normal course of business, the Company may retain
up to $5 million per life and reinsures 100% of amounts in excess of the
Company's retention limits. 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 million for term
insurance. Under certain circumstances, the Company may elect to retain up to
$25 million per life. 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
F-51
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
limits vary with age and underwriting classification. Total in-force business
ceded under reinsurance contracts is $78 billion and $74 billion at December 31,
2005 and 2004, respectively. The Company evaluates its reinsurance programs
routinely and may increase or decrease its retention at any time. Placement of
reinsurance is done primarily on an automatic basis and also on a facultative
basis for risks of specific characteristics.
In addition to reinsuring mortality risk, the Company reinsures other risks
and specific coverages. The Company routinely reinsures certain classes of risks
to limit its exposure to particular travel, avocation and lifestyle hazards. The
Company uses excess of loss and quota share reinsurance arrangements to limit
its maximum loss, provide greater diversification of risk and minimize exposure
to larger risks.
The Company reinsures its business through a diversified group of
reinsurers. No single unaffiliated reinsurer has a material obligation to the
Company nor is the Company's business substantially dependent upon any
reinsurance contracts. The Company is contingently liable with respect to ceded
reinsurance should any reinsurer be unable to meet its obligations under these
agreements.
Prior to April 1, 2001, the Company reinsured the GMDB rider exposure on
its variable annuity products. Total variable annuity account balances with GMDB
riders were $32.8 billion, of which $12.0 billion, or 36%, was reinsured, and
$26.7 billion, of which $12.0 billion, or 45%, was reinsured at December 31,
2005 and 2004, respectively. GMDBs are payable upon the death of the
contractholder. When the benefits payable are greater than the account value of
the variable annuity, the difference is called the net amount at risk ("NAR").
NAR totaled $0.9 billion, of which $0.8 billion, or 89%, is reinsured and $1.3
billion, of which $1.1 billion, or 85%, is reinsured at December 31, 2005 and
2004, respectively.
TIC's workers' compensation business is reinsured through a 100%
quota-share agreement with The Travelers Indemnity Company, an insurance
subsidiary of St. Paul Travelers.
Effective July 1, 2000, the Company reinsured 90% of its individual
long-term care insurance business with General Electric Capital Assurance
Company ("GECAC") and its subsidiary in the form of indemnity reinsurance
agreements. Written premiums ceded per these agreements were $122 million and
$111 million for the six months ended December 31, 2005 and June 30, 2005,
respectively. Earned premiums ceded were $119 million and $112 million for the
six months ended December 31, and June 30, 2005, respectively. Total written
premiums ceded were $224 million and $227 million for the years ending December
31, 2004 and 2003, respectively.
In accordance with the terms of the reinsurance agreement, GECAC will
effect assumption and novation of the reinsured contracts, to the extent
permitted by law, no later than July 1, 2008. Effective June 30, 2005, TIC
entered into an agreement with CIHC to effectively transfer the remaining
results from the long-term care block of business from TIC to CIHC. Under the
terms of this agreement, any gains or losses remaining after the terms of the
indemnity reinsurance agreement are satisfied, are reimbursable from CIHC for
losses, or payable to CIHC for gains. TIC does however retain limited investment
exposure related to the reinsured contracts. Citigroup unconditionally
guarantees the performance of its subsidiary, CIHC.
In 2004, The Travelers Life and Annuity Reinsurance Company ("TLARC") was
formed by TIC as a pure captive insurer in order to permit TIC and TLAC to cede
100% of its risk associated with the secondary death benefit guarantee rider on
certain universal life contracts. TIC dividended TLARC's stock to CIHC in late
2004. As part of the Acquisition, TLARC became a direct subsidiary of MetLife.
See Notes 11 and 16.
F-52
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amounts in the consolidated statements of income are presented net of
reinsurance ceded. The effects of reinsurance were as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------------- ----------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
----------------- ---------------- ---------------
2005 2005 2004 2003
----------------- ---------------- ------ ------
(IN MILLIONS)
Direct premiums earned.............. $ 381 $ 466 $1,191 $1,376
Reinsurance ceded................... (159) (141) (280) (294)
----- ----- ------ ------
Net premiums earned................. $ 222 $ 325 $ 911 $1,082
===== ===== ====== ======
Reinsurance recoverables netted
against policyholder benefits..... $ 521 $ 264 $ 475 $ 416
===== ===== ====== ======
</Table>
Written premiums are not materially different than earned premiums
presented in the preceding table.
Reinsurance recoverables, included in premiums and other receivables, were
$4,283 million and $3,884 million at December 31, 2005 and 2004, respectively,
including $2,772 million and $1,904 million at December 31, 2005 and 2004,
respectively, relating to runoff of long-term care business and $1,356 million
and $1,489 million at December 31, 2005 and 2004, respectively, relating to
reinsurance on the runoff of workers compensation business. Reinsurance premiums
and ceded commissions payable included in other liabilities were $49 million and
$48 million at December 31, 2005 and 2004, respectively.
7. INCOME TAXES
The provision for income taxes for continuing operations was as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- --------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- -------------
2005 2005 2004 2003
---------------- ---------------- ----- -----
(IN MILLIONS)
Current:
Federal.............................. $58 $197 $368 $179
Foreign.............................. -- 1 1 3
--- ---- ---- ----
58 198 369 182
--- ---- ---- ----
Deferred:
Federal.............................. 40 7 (8) 58
--- ---- ---- ----
Provision for income taxes............. $98 $205 $361 $240
=== ==== ==== ====
</Table>
F-53
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations of the income tax provision at the U.S. statutory rate to
the provision for income taxes as reported for continuing operations were as
follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- --------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- -------------
2005 2005 2004 2003
---------------- ---------------- ----- -----
(IN MILLIONS)
Tax provision at U.S. statutory rate... $119 $259 $473 $405
Tax effect of:
Tax exempt investment income......... (20) (46) (86) (84)
Tax reserve release.................. -- -- (23) (79)
Other, net........................... (1) (8) (3) (2)
---- ---- ---- ----
Provision for income taxes............. $ 98 $205 $361 $240
==== ==== ==== ====
</Table>
Deferred income taxes represent the tax effect of the differences between
the book and tax bases of assets and liabilities. Net deferred income tax assets
and liabilities consisted of the following:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------------- -----------------
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
(IN MILLIONS)
Deferred income tax assets:
Benefit, reinsurance and other policyholder
liabilities.................................... $2,141 $ 756
Operating lease reserves.......................... 13 47
Employee benefits................................. 3 169
Net unrealized investment losses.................. 200 --
Capital loss carryforwards........................ 92 --
Other............................................. 20 114
------ -------
Total............................................. 2,469 1,086
------ -------
Deferred income tax liabilities:
DAC and VOBA...................................... (1,174) (785)
Net unrealized investment gains................... -- (763)
Investments, net.................................. (12) (832)
Other............................................. -- (77)
------ -------
Total............................................. (1,186) (2,457)
------ -------
Net deferred income tax asset (liability)........... $1,283 $(1,371)
====== =======
</Table>
At December 31, 2005, the Company has a net deferred tax asset. If the
Company determines that any of its deferred tax assets will not result in future
tax benefits, a valuation allowance must be established for the portion of these
assets that are not expected to be realized. Based predominantly upon a review
of the Company's anticipated future taxable income, but also including all other
available evidence, both positive and negative, the Company's management
concluded that it is "more likely than not" that the net deferred tax asset will
be realized.
Capital loss carryforwards amount to $263 million at December 31, 2005 and
will expire in 2010.
F-54
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to the Acquisition, the Company will file a consolidated tax
return with its subsidiary, TLAC. The companies will execute a Tax Sharing
Agreement (the "Tax Agreement") prior to the filing of the 2005 consolidated tax
return. Under the Tax Agreement, the federal income taxes will be allocated
between the companies on a separate return basis and adjusted for credits and
other amounts required by the Tax Agreement.
For the periods prior to the Acquisition, the Company and its subsidiaries
filed a consolidated federal income tax return with Citigroup and were part of a
Tax Sharing Agreement with Citigroup (the "Citigroup Tax Agreement"). Under the
Citigroup Tax Agreement, the federal income taxes are allocated to each member
of the consolidated group on a separate return basis adjusted for credits and
other amounts required by the Citigroup Tax Agreement. TIC had $305 million
payable to Citigroup at December 31, 2004 related to the Citigroup Tax
Agreement.
Under the Life Insurance Company Tax Act of 1959, stock life insurance
companies were required to maintain a policyholders' surplus account containing
the accumulated portion of current income which had not been subject to income
tax in the year earned. The Deficit Reduction Act of 1984 required that no
future amounts be added after 1983 to the policyholders' surplus account and
that any future distributions to shareholders from the account would become
subject to income at the general corporate income tax rate then in effect.
During 2004, the American Jobs Creation Act of 2004 ("AJCA") was enacted. The
AJCA provides, in part, that distributions from policyholders' surplus accounts
during 2005 and 2006 will not be taxed. The amount of policyholders' surplus
account at December 31, 2004 was approximately $932 million. If the entire
policyholders' surplus account were deemed to be distributed in 2004, there
would have been a tax liability of approximately $326 million. No current or
deferred taxes have been provided on these amounts in the past because
management considered the conditions under which these taxes would be paid
remote. For federal income tax purposes, an election under Internal Revenue Code
Section 338 was made by MetLife upon Acquisition. The Section 338 election
results in a deemed distribution of the Company's policyholders' surplus account
in 2005. However, due to the provision of the AJCA, no tax liability will be
incurred as a result of this deemed distribution of policyholders' surplus in
2005.
8. CONTINGENCIES, COMMITMENTS AND GUARANTEES
CONTINGENCIES
LITIGATION
The Company is a defendant in a number of litigation matters. In some of
the matters, indeterminate amounts, including punitive and treble damages, are
sought. Modern pleading practice in the United States permits considerable
variation in the assertion of monetary damages or other relief. Jurisdictions
may permit claimants not to specify the monetary damages sought or may permit
claimants to state only that the amount sought is sufficient to invoke the
jurisdiction of the trial court. In addition, jurisdictions may permit
plaintiffs to allege monetary damages in amounts well exceeding reasonably
possible verdicts in the jurisdiction for similar matters. This variability in
pleadings, together with the actual experience of the Company in litigating or
resolving through settlement numerous claims over an extended period of time,
demonstrate to management that the monetary relief which may be specified in a
lawsuit or claim bears little relevance to its merits or disposition value.
Thus, unless stated below, the specific monetary relief sought is not noted.
Due to the vagaries of litigation, the outcome of a litigation matter and
the amount or range of potential loss at particular points in time may normally
be inherently impossible to ascertain with any degree of certainty. Inherent
uncertainties can include how fact finders will view individually and in their
totality documentary evidence, the credibility and effectiveness of witnesses'
testimony, and how trial and appellate courts will apply the law in the context
of the pleadings or evidence presented, whether by motion practice, or
F-55
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at trial or on appeal. Disposition valuations are also subject to the
uncertainty of how opposing parties and their counsel will themselves view the
relevant evidence and applicable law.
The Company is a party to a number of legal actions and regulatory
investigations. Given the inherent unpredictability of these matters, it is
difficult to estimate the impact on the Company's consolidated financial
position. On a quarterly and annual basis, the Company reviews relevant
information with respect to liabilities for litigation, regulatory
investigations and litigation-related contingencies to be reflected in the
Company's consolidated financial statements. The review includes senior legal
and financial personnel. Unless stated below, estimates of possible additional
losses or ranges of loss for particular matters cannot in the ordinary course be
made with a reasonable degree of certainty. The limitations of available data
and uncertainty regarding numerous variables make it difficult to estimate
liabilities. Liabilities are established when it is probable that a loss has
been incurred and the amount of the loss can be reasonably estimated. It is
possible that some of the matters could require the Company to pay damages or
make other expenditures or establish accruals in amounts that could not be
estimated as of December 31, 2005. Furthermore, it is possible that an adverse
outcome in certain of the Company's litigation and regulatory investigations, or
the use of different assumptions in the determination of amounts recorded, could
have a material effect upon the Company's consolidated net income or cash flows
in particular quarterly or annual periods.
In August 1999, an amended putative class action complaint was filed in
Connecticut state court against TLAC, Travelers Equity Sales, Inc. and certain
former affiliates. The amended complaint alleges Travelers Property Casualty
Corporation, a former TLAC affiliate, purchased structured settlement annuities
from TLAC and spent less on the purchase of those structured settlement
annuities than agreed with claimants, and that commissions paid to brokers for
the structured settlement annuities, including an affiliate of TLAC, were paid
in part to Travelers Property Casualty Corporation. On May 26, 2004, the
Connecticut Superior Court certified a nationwide class action involving the
following claims against TLAC: (i) violation of the Connecticut Unfair Trade
Practice Statute; (ii) unjust enrichment; and (iii) civil conspiracy. On June
15, 2004, the defendants appealed the class certification order. The Company has
recently learned that the Connecticut Supreme Court has reversed the trial
court's certification of a class. Plaintiff may file a motion with respect to
the order and may seek upon remand to the trial court to file another motion for
class certification. TLAC and Travelers Equity Sales, Inc. intend to continue to
vigorously defend the matter.
A former registered representative of Tower Square Securities, Inc. ("Tower
Square"), a broker-dealer subsidiary of TIC, is alleged to have defrauded
individuals by diverting funds for his personal use. In June 2005, the SEC
issued a formal order of investigation with respect to Tower Square and served
Tower Square with a subpoena. The Securities and Business Investments Division
of the Connecticut Department of Banking and the NASD are also reviewing this
matter. Tower Square intends to fully cooperate with the SEC, the NASD and the
Connecticut Department of Banking. In the context of the above, two arbitration
matters were commenced in 2005 against Tower Square. In one of the matters,
defendants include other unaffiliated broker-dealers with whom the registered
representative was formerly registered. It is reasonably possible that other
actions will be brought regarding this matter. Tower Square intends to defend
itself vigorously in all such cases.
Regulatory bodies have contacted the Company and have requested information
relating to market timing and late trading of mutual funds and variable
insurance products and, generally, the marketing of such products. The Company
believes that many of these inquiries are similar to those made to many
financial services companies as part of industry-wide investigations by various
regulatory agencies. 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
fully cooperating with regard to these information requests and investigations.
The Company at the present time is
F-56
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not aware of any systemic problems with respect to such matters that may have a
material adverse effect on the Company's consolidated financial position.
In addition, the Company is a defendant or co-defendant in various other
litigation matters in the normal course of business. These may 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. Further, state insurance regulatory authorities and
other federal and state authorities may make inquiries and conduct
investigations concerning the Company's compliance with applicable insurance and
other laws and regulations.
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.
INSOLVENCY ASSESSMENTS
Most of the jurisdictions in which the Company is admitted to transact
business require life insurers doing business within the jurisdiction to
participate in guaranty associations, which are organized to pay contractual
benefits owed pursuant to insurance policies issued by impaired, insolvent or
failed life insurers. These associations levy assessments, up to prescribed
limits, on all member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers in the lines of
business in which the impaired, insolvent or failed insurer engaged. Some states
permit member insurers to recover assessments paid through full or partial
premium tax offsets. Assessments levied against the Company from January 1, 2003
through December 31, 2005 aggregated less than $1 million. The Company
maintained a liability of $16 million, and a related asset for premium tax
offsets of $9 million, at December 31, 2005, for future assessments in respect
of currently impaired, insolvent or failed insurers.
In the past five years, none of the aggregate assessments levied against
the Company have been material. The Company has established liabilities for
guaranty fund assessments that it considers adequate for assessments with
respect to insurers that are currently subject to insolvency proceedings.
COMMITMENTS
LEASES
The Company, as lessee, has entered into various lease and sublease
agreements for office space. Future sublease income is projected to be
insignificant. Future minimum gross rental payments are as follows:
<Table>
<Caption>
GROSS
RENTAL PAYMENTS
---------------
(IN MILLIONS)
2006........................................................ $17
2007........................................................ $17
2008........................................................ $16
2009........................................................ $10
2010........................................................ $ 8
Thereafter.................................................. $ 8
</Table>
F-57
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS
The Company makes commitments to fund partnership investments in the normal
course of business. The amounts of these unfunded commitments were $715 million
and $389 million at December 31, 2005 and 2004, respectively. The Company
anticipates that these amounts will be invested in partnerships over the next
five years. There are no other obligations or liabilities arising from such
arrangements that are reasonably likely to become material.
MORTGAGE LOAN COMMITMENTS
The Company commits to lend funds under mortgage loan commitments. The
amounts of these mortgage loan commitments were $339 million and $213 million at
December 31, 2005 and 2004, respectively. There are no other obligations or
liabilities arising from such arrangements that are reasonably likely to become
material.
OTHER COMMITMENTS
TIC is a member of the Federal Home Loan Bank of Boston (the "FHLB of
Boston") and holds $70 million of common stock of the FHLB of Boston, which is
included in equity securities on the Company's balance sheets. TIC has also
entered into several funding agreements with the FHLB of Boston whereby TIC has
issued such funding agreements in exchange for cash and for which the FHLB of
Boston has been granted a blanket lien on TIC's residential mortgages and
mortgage-backed securities to collateralize TIC's obligations under the funding
agreements. TIC maintains control over these pledged 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 funding agreements and the related
security agreement represented by this blanket lien, provide that upon any event
of default by TIC, the FHLB of Boston's recovery is limited to the amount of
TIC's liability under the outstanding funding agreements. The amount of the
Company's liability for funding agreements with the FHLB of Boston as of
December 31, 2005 is $1.1 billion, which is included in policyholder account
balances.
GUARANTEES
In the normal course of its business, the Company has provided certain
indemnities, guarantees and commitments to third parties pursuant to which it
may be required to make payments now or in the future. In the context of
acquisition, disposition, investment and other transactions, the Company has
provided indemnities and guarantees, including those related to tax,
environmental and other specific liabilities, and other indemnities and
guarantees that are triggered by, among other things, breaches of
representations, warranties or covenants provided by the Company. In addition,
in the normal course of business, the Company provides indemnifications to
counterparties in contracts with triggers similar to the foregoing, as well as
for certain other liabilities, such as third party lawsuits. These obligations
are often subject to time limitations that vary in duration, including
contractual limitations and those that arise by operation of law, such as
applicable statutes of limitation. In some cases, the maximum potential
obligation under the indemnities and guarantees is subject to a contractual
limitation, such as in the case of MetLife International Insurance Company, Ltd.
("MLII") (formerly Citicorp International Life Insurance Company, Ltd.), an
affiliate, discussed below, while in other cases such limitations are not
specified or applicable. Since certain of these obligations are not subject to
limitations, the Company does not believe that it is possible to determine the
maximum potential amount due under these guarantees in the future.
The Company has provided a guarantee on behalf of MLII. This guarantee is
triggered if MLII cannot pay claims because of insolvency, liquidation or
rehabilitation. The agreement was terminated as of December 31, 2004, but
termination does not affect policies previously guaranteed. Life insurance
coverage
F-58
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in-force under this guarantee at December 31, 2005 is $447 million. The Company
does not hold any collateral related to this guarantee.
In addition, the Company indemnifies its directors and officers as provided
in its charters and by-laws. Also, the Company indemnifies other of its agents
for liabilities incurred as a result of their representation of the Company's
interests. Since these indemnities are generally not subject to limitation with
respect to duration or amount, the Company does not believe that it is possible
to determine the maximum potential amount due under these indemnities in the
future.
In connection with RSATs, the Company writes credit default swap
obligations requiring payment of principal due in exchange for the reference
credit obligation, depending on the nature or occurrence of specified credit
events for the referenced entities. In the event of a specified credit event,
the Company's maximum amount at risk, assuming the value of the referenced
credits becomes worthless, is $149 million at December 31, 2005. The credit
default swaps expire at various times during the next three years.
9. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Subsequent to the Acquisition, the Company became a participating employer
in qualified and non-qualified, noncontributory defined benefit pension plans
sponsored by MetLife. Employees were credited with prior service recognized by
Citigroup, solely for the purpose of determining eligibility and vesting under
the Metropolitan Life Retirement Plan for United States Employees (the "Plan"),
a noncontributory qualified defined benefit pension plan, with respect to
benefits earned under the Plan subsequent to the closing date of the
Acquisition. Net periodic expense related to these plans is based on the
employee population as of the valuation date at the beginning of the year;
accordingly, no expense related to the MetLife plans was allocated to the
Company for the six months ended December 31, 2005.
Prior to the Acquisition, the Company participated in qualified and
non-qualified, noncontributory defined benefit pension plans and certain other
postretirement plans sponsored by Citigroup. The Company's share of expense for
these plans was $14 million, $28 million and $28 million for the six months
ended June 30, 2005 and the years ended December 31, 2004 and 2003,
respectively. The obligation for benefits earned under these plans was retained
by Citigroup.
10. RESTRUCTURING TRANSACTIONS
As described in Note 1, on July 1, 2005, MetLife acquired the Company from
Citigroup. Prior to the Acquisition, certain restructuring transactions were
required pursuant to the Acquisition Agreement. All restructuring transactions
have been recorded at their historical basis. The following transfers to CIHC
occurred on June 30, 2005:
1. All TIC's membership in Keeper Holdings LLC, which holds an
interest in CitiStreet LLC;
2. All TIC's shares of Citigroup Series YYY and YY preferred stock,
and all dividends with respect thereto;
3. All TIC's shares of American Financial Life Insurance Company
stock;
4. All TIC's shares of Primerica stock (See Note 14);
5. All TIC's obligations in the amount of $105 million, the related
deferred income tax assets of $37 million and cash in the amount of
$68 million associated with the Connecticut River Plaza lease;
F-59
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. All owned intellectual property and all trademarks used in
connection with products offered only by or through the Company.
This includes, but is not limited to, the "umbrella" trademark and
umbrella design trademark, and any trademarks which include the
terms "citi," "Citi," the arc design and the blue wave design;
7. All TIC's net obligations in the amount of $443 million related to
non-qualified employee benefit plans (including retiree welfare,
pension, long-term disability, workers compensation and deferred
compensation obligations) and associated assets consisting of $191
million in cash, and other assets, including a deferred income tax
asset, totaling $252 million;
8. All TIC's obligations and rights related to future gains and losses
under all policies providing long-term care benefits;
9. All tax liabilities for potential audit liabilities for federal and
state income taxes and other taxes of approximately $78 million
with respect to pre-Acquisition tax periods as the Acquisition
Agreement provides for an indemnification by Citigroup to MetLife
for specified tax liabilities incurred prior to the closing date.
The Connecticut Insurance Department (the "Department") approved the
special dividend of all TIC's ownership interests and obligations as included in
items 1 through 6, 8 and 9 as set forth above. Restructuring transaction item 7,
as set forth above, was accounted for as an asset/liability transfer, and did
not require approval from the Department. The consolidated financial statements
of the Company include the results of operations related to the aforementioned
restructuring transactions through the date of distribution, other than
Primerica which has been reported as discontinued operations.
11. EQUITY
DIVIDEND RESTRICTIONS
Under Connecticut State Insurance Law, TIC and TLAC are each permitted,
without prior insurance regulatory clearance, to pay shareholder dividends to
its parent as long as the amount of such dividend, when aggregated with all
other dividends in the preceding twelve months, does not exceed the greater of
(i) 10% of its surplus to policyholders as of the immediately preceding calendar
year; or (ii) its statutory net gain from operations for the immediately
preceding calendar year. TIC and TLAC will each be permitted to pay a cash
dividend in excess of the greater of such two amounts only if it files notice of
its declaration of such a dividend and the amount thereof with the Connecticut
Commissioner of Insurance ("Commissioner") and the Commissioner does not
disapprove the payment within 30 days after notice or until the Commissioner has
approved the dividend, whichever is sooner. In addition, any dividend that
exceeds earned surplus (unassigned funds, reduced by 25% of unrealized
appreciation in value or revaluation of assets or unrealized profits on
investments) as of the last filed annual statutory statement requires insurance
regulatory approval. Under Connecticut State Insurance Law, the Commissioner has
broad discretion in determining whether the financial condition of a stock life
insurance company would support the payment of such dividends to its
shareholders. TIC paid cash dividends to its former parent, CIHC, of $675
million in 2005, $773 million in 2004 and $545 million in 2003. A portion of the
cash dividend paid in 2005 was considered an extraordinary dividend and was
approved by the Department. The Connecticut State Insurance Law requires prior
approval for any dividends for a period of two years following a change in
control. As a result of the Acquisition, under Connecticut State Insurance Law
all dividend payments by TIC and TLAC through June 30, 2007 require prior
approval of the Commissioner. TIC and TLAC have not paid any dividends since the
Acquisition Date.
On December 15, 2004, the Company dividended all of the issued and
outstanding shares of TLARC to CIHC. TLARC was valued at $250,000 and was
considered to be an ordinary dividend. At Acquisition, TLARC was sold by
Citigroup to MetLife.
F-60
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed in Note 1, in connection with the Acquisition Agreement,
several restructuring transactions requiring regulatory approval were completed
prior to the sale. TIC received regulatory approval from the Commissioner to
complete the restructuring transactions via dividend, and to pay its dividends.
In connection with the restructuring transactions as discussed in Note 10,
the Company's additional paid-in capital ("APIC"), retained earnings and
accumulated other comprehensive income were impacted as follows:
<Table>
<Caption>
PREDECESSOR
--------------------------
JUNE 30, 2005
--------------------------
RETAINED
APIC EARNINGS AOCI
------- -------- -----
(IN MILLIONS)
RESTRUCTURING TRANSACTIONS
Keeper Holdings LLC....................................... $ (8) $ (26) $ --
Citigroup Series YYY preferred stock...................... (2,225) -- --
Citigroup Series YY preferred stock....................... (596) -- --
Stock of American Financial Life Insurance Company........ (218) 210 --
Stock of Primerica Life Insurance Company................. (1,100) (3,150) (166)
Deferred tax liabilities YYY and YY preferred stock....... 974 -- --
Tax Liabilities........................................... 78 -- --
------- ------- -----
Total impact............................................ $(3,095) $(2,966) $(166)
======= ======= =====
</Table>
STATUTORY EQUITY AND INCOME
The Department imposes minimum risk-based capital ("RBC") requirements that
were developed by the National Association of Insurance Commissioners ("NAIC").
The formulas for determining the amount of RBC specify various weighting factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio of
total adjusted capital, as defined by the NAIC, to authorized control level RBC,
as defined by the NAIC. Companies below specific trigger points or ratios are
classified within certain levels, each of which requires specified corrective
action. TIC and TLAC exceeded the minimum RBC requirements for all periods
presented herein.
The NAIC adopted the Codification of Statutory Accounting Principles
("Codification") in 2001. Codification was intended to standardize regulatory
accounting and reporting to state insurance departments. However, statutory
accounting principles ("SAP") continue to be established by individual state
laws and permitted practices. The Department has adopted Codification, with
certain modifications, for the preparation of statutory financial statements of
insurance companies domiciled in Connecticut. Modifications by the Department
may impact the effect of Codification on the statutory capital and surplus of
TIC and TLAC.
SAP differs from GAAP primarily by: (i) charging policy acquisition costs
to expense as incurred; (ii) establishing future policy benefit liabilities
using different actuarial assumptions; (iii) valuing securities on a different
basis; and (iv) maintaining additional reserves associated with credit default
and interest related investment gains and losses.
In addition, certain assets are not admitted under SAP and are charged
directly to surplus. The most significant assets not admitted by TIC and TLAC
are net deferred tax assets resulting from temporary differences between SAP
basis and tax basis not expected to reverse and become recoverable within a
year.
F-61
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statutory net income of TIC, a Connecticut domiciled insurer, was $1,080
million, $975 million and $935 million for the years ended December 31, 2005,
2004 and 2003, respectively. Statutory capital and surplus, as filed with the
Department, was $4,081 million and $7,886 million at December 31, 2005 and 2004,
respectively.
Statutory net income (loss) of TLAC, a Connecticut domiciled insurer, was
($80) million, ($211) million and $37 million for the years ended December 31,
2005, 2004 and 2003, respectively. Statutory capital and surplus, as filed with
the Department, was $782 million and $942 million at December 31, 2005 and 2004,
respectively.
OTHER COMPREHENSIVE INCOME
The following table sets forth the reclassification adjustments required
for the six months ended December 31, 2005 and June 30, 2005, and the years
ended December 31, 2004 and 2003, in other comprehensive income (loss) that are
included as part of net income for the current year that have been reported as a
part of other comprehensive income (loss) in the current or prior period:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- ---------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- --------------
2005 2005 2004 2003
---------------- ---------------- ----- ------
(IN MILLIONS)
Holding (losses) gains on investments
arising during the period................. $ (517) $ 125 $ 418 $1,412
Income tax effect of holding gains
(losses).................................. 181 (47) (149) (482)
------- ----- ----- ------
Reclassification adjustments:
Recognized holding (gains) losses included
in current period income............... (270) (53) (2) 18
Amortization of premiums and accretion of
discounts associated with
investments............................ 81 (29) (49) (62)
Income tax effect of reclassification
adjustments............................ 66 29 18 16
------- ----- ----- ------
Total reclassification adjustments... (123) (53) (33) (28)
Allocation of holding losses on investments
relating to other policyholder amounts.... 135 -- -- --
Income tax effect of allocation of holding
loss...................................... (47) -- -- --
Unrealized investment gains (losses) of
subsidiary at date of restructuring....... -- (166) -- --
------- ----- ----- ------
Net unrealized investment gains (losses).... (371) (141) 236 902
Foreign currency translation adjustments
arising during the period................. 2 -- 1 4
Effect of transfer of Primerica ............ -- 166 -- --
------- ----- ----- ------
Other comprehensive income
(losses).......................... $ (369) $ 25 $ 237 $ 906
======= ===== ===== ======
</Table>
F-62
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. OTHER EXPENSES
Other expenses were comprised of the following:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- --------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
---------------- ---------------- -------------
2005 2005 2004 2003
---------------- ---------------- ----- -----
(IN MILLIONS)
Compensation......................... $ 86 $ 72 $ 143 $ 121
Commissions.......................... 236 309 606 465
Amortization of DAC and VOBA......... 186 236 410 280
Capitalization of DAC................ (262) (426) (810) (583)
Rent, net of sublease income......... 7 3 12 11
Minority interest.................... 1 -- -- --
Other................................ 129 246 401 263
----- ----- ----- -----
Total other expenses............... $ 383 $ 440 $ 762 $ 557
===== ===== ===== =====
</Table>
13. BUSINESS SEGMENT INFORMATION
Historically, the Company was organized into two operating segments,
Travelers Life and Annuity ("TL&A") and Primerica. On June 30, 2005, in
anticipation of the Acquisition, all of the Company's interests in Primerica
were distributed via dividend to CIHC. See Notes 10 and 14. As a result, at June
30, 2005, the operations of Primerica were reclassified into discontinued
operations and the segment was eliminated, leaving a single operating segment,
TL&A.
On the Acquisition Date, MetLife reorganized the Company's operations into
two operating segments, Institutional and Individual, as well as Corporate &
Other, so as to more closely align the acquired business with the manner in
which MetLife manages its existing businesses. The Institutional segment
includes group life insurance and retirement & savings products and services.
The Individual segment includes a wide variety of protection and asset
accumulation products, including life insurance, annuities and mutual funds.
These segments are managed separately because they either provide different
products and services, require different strategies or have different technology
requirements. Corporate & Other contains the excess capital not allocated to the
business segments and run-off businesses, as well as expenses associated with
certain legal proceedings. Corporate & Other also includes the elimination of
intersegment transactions.
Economic capital is an internally developed risk capital model, the purpose
of which is to measure the risk in the business and to provide a basis upon
which capital is deployed. The economic capital model accounts for the unique
and specific nature of the risks inherent in the Company's businesses. As part
of the economic capital process, a portion of net investment income is credited
to the segments based on the level of allocated equity.
The accounting policies of the segments are the same as those of the
Company, except for the method of capital allocation and the accounting for
gains (losses) from intercompany sales, which are eliminated in consolidation.
Subsequent to the Acquisition Date, the Company allocates capital to each
segment based upon an internal capital allocation system used by MetLife that
allows MetLife and the Company to effectively manage its capital. The Company
evaluates the performance of each operating segment based upon net income
excluding certain net investment gains (losses), net of income taxes, and
adjustments related to net investment gains (losses), net of income taxes.
F-63
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Set forth in the tables below is certain financial information with respect
to the Company's segments, as well as Corporate & Other, for the six months
ended December 31, 2005 and June 30, 2005 and the years ended December 31, 2004
and 2003. Segment results for periods prior to the Acquisition Date have been
restated to reflect segment results in conformity with MetLife's segment
presentation. The revised presentation conforms to the manner in which the
Company manages and assesses its business. While the prior period presentations
have been prepared using the classification of products in conformity with
MetLife's segment presentation, they do not reflect the segment results using
MetLife's method of capital allocation which allocates capital to each segment
based upon an internal capital allocation system as described in the preceding
paragraph. In periods prior to the Acquisition Date, earnings on capital were
allocated to segments based upon a statutory risk based capital allocation
method which resulted in less capital being allocated to the segments and more
being retained at Corporate & Other. As it was impracticable to retroactively
reflect the impact of applying MetLife's economic capital model on periods prior
to the Acquisition Date, they were not restated for this change.
<Table>
<Caption>
SUCCESSOR
--------------------------------------------------
AS OF OR FOR THE SIX MONTHS ENDED CORPORATE &
DECEMBER 31, 2005 INSTITUTIONAL INDIVIDUAL OTHER TOTAL
- --------------------------------- ------------- ---------- ----------- -------
(IN MILLIONS)
Premiums.......................................... $ 116 $ 93 $ 13 $ 222
Universal life and investment-type product policy
fees............................................ 17 425 -- 442
Net investment income............................. 711 381 124 1,216
Other revenues.................................... 10 45 2 57
Net investment gains (losses)..................... (87) (99) (2) (188)
Policyholder benefits and claims.................. 324 177 22 523
Interest credited to policyholder account
balances........................................ 303 201 -- 504
Other expenses.................................... 30 367 (14) 383
Income from continuing operations before provision
for income taxes................................ 111 99 129 339
Net income........................................ 73 86 82 241
Total assets...................................... 36,751 52,048 10,672 99,471
DAC and VOBA...................................... 161 3,540 -- 3,701
Goodwill.......................................... 305 159 392 856
Separate account assets........................... 3,177 28,061 -- 31,238
Policyholder liabilities.......................... 28,340 18,705 4,305 51,350
Separate account liabilities...................... 3,177 28,061 -- 31,238
</Table>
F-64
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PREDECESSOR
--------------------------------------------------
FOR THE SIX MONTHS ENDED CORPORATE &
JUNE 30, 2005 INSTITUTIONAL INDIVIDUAL OTHER TOTAL
- ------------------------ ------------- ---------- ----------- -------
(IN MILLIONS)
Premiums........................................... $ 206 $ 102 $ 17 $ 325
Universal life and investment-type product policy
fees............................................. 33 373 -- 406
Net investment income.............................. 778 547 283 1,608
Other revenues..................................... (1) 66 48 113
Net investment gains (losses)...................... (10) (3) 39 26
Policyholder benefits and claims................... 448 131 20 599
Interest credited to policyholder account
balances......................................... 380 318 -- 698
Other expenses..................................... 20 392 28 440
Income from continuing operations before provision
for income taxes................................. 158 244 339 741
Income from discontinued operations, net of income
taxes............................................ -- -- 240 240
Net income......................................... 103 173 500 776
</Table>
<Table>
<Caption>
PREDECESSOR
---------------------------------------------------
AS OF OR FOR THE YEAR ENDED CORPORATE &
DECEMBER 31, 2004 INSTITUTIONAL INDIVIDUAL OTHER TOTAL
- --------------------------- ------------- ---------- ----------- --------
(IN MILLIONS)
Premiums......................................... $ 719 $ 158 $ 34 $ 911
Universal life and investment-type product policy
fees........................................... 73 617 -- 690
Net investment income............................ 1,443 1,027 542 3,012
Other revenues................................... 5 118 84 207
Net investment gains (losses).................... (19) 24 4 9
Policyholder benefits and claims................. 1,190 182 39 1,411
Interest credited to policyholder account
balances....................................... 688 617 -- 1,305
Other expenses................................... 40 656 66 762
Income from continuing operations before
provision for income taxes..................... 303 489 559 1,351
Income from discontinued operations, net of
income taxes................................... -- -- 491 491
Net income....................................... 197 370 914 1,481
Total assets..................................... 32,837 48,343 24,663 105,843
DAC and VOBA..................................... 222 2,627 13 2,862
Goodwill......................................... -- 101 95 196
Separate account assets.......................... 3,509 27,233 -- 30,742
Policyholder liabilities......................... 26,809 16,506 3,718 47,033
Separate account liabilities..................... 3,509 27,233 -- 30,742
</Table>
F-65
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PREDECESSOR
-------------------------------------------------
FOR THE YEAR ENDED CORPORATE &
DECEMBER 31, 2003 INSTITUTIONAL INDIVIDUAL OTHER TOTAL
- ------------------ ------------- ---------- ----------- ------
(IN MILLIONS)
Premiums........................................... $ 921 $126 $ 35 $1,082
Universal life and investment-type product policy
fees............................................. 69 462 -- 531
Net investment income.............................. 1,268 950 525 2,743
Other revenues..................................... -- 74 69 143
Net investment gains (losses)...................... (6) (34) 72 32
Policyholder benefits and claims................... 1,368 153 47 1,568
Interest credited to policyholder account
balances......................................... 650 598 -- 1,248
Other expenses..................................... 41 456 60 557
Income from continuing operations before provision
for income taxes................................. 193 371 594 1,158
Income from discontinued operations, net of income
taxes............................................ -- -- 440 440
Net income......................................... 126 306 926 1,358
</Table>
Net investment income and net investment gains (losses) are based upon the
actual results of each segment's specifically identifiable asset portfolio
adjusted for allocated capital. Other costs are allocated to each of the
segments based upon: (i) a review of the nature of such costs; (ii) time studies
analyzing the amount of employee compensation costs incurred by each segment;
and (iii) cost estimates included in the Company's product pricing.
Revenues derived from any customer did not exceed 10% of consolidated
revenues. Substantially all of the Company's revenues originated in the United
States.
14. DISCONTINUED OPERATIONS
As described in Note 1, and in accordance with the Acquisition Agreement,
Primerica, a former operating segment of the Company, was distributed in the
form of a dividend to CIHC on June 30, 2005.
In accordance with SFAS No. 144 the distribution of Primerica by dividend
to CIHC qualifies as a disposal by means other than a sale. As such, Primerica
was treated as continuing operations until the date of disposal and, upon the
date of disposal, the results from the operations were reclassified as
discontinued operations for all periods presented.
F-66
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes Primerica's financial information:
<Table>
<Caption>
PREDECESSOR
----------------------------------
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
---------------- ---------------
2005 2004 2003
---------------- ------ ------
(IN MILLIONS)
Revenues from discontinued operations............... $900 $1,770 $1,660
Expenses from discontinued operations............... 539 1,038 989
---- ------ ------
Income from discontinued operations before provision
for income taxes.................................. 361 732 671
Provision for income taxes.......................... 121 241 231
---- ------ ------
Income from discontinued operations, net of income
taxes.......................................... $240 $ 491 $ 440
==== ====== ======
</Table>
The following is a summary of Primerica's assets and liabilities at:
<Table>
<Caption>
PREDECESSOR
-------------
DECEMBER 31,
2004
-------------
(IN MILLIONS)
ASSETS
Investments................................................. $ 5,891
Cash and cash equivalents................................... 31
Premiums and other receivables.............................. 844
Deferred policy acquisition costs........................... 2,177
Other assets................................................ 492
Separate account assets..................................... 584
-------
Total assets held-for-sale.................................. $10,019
=======
LIABILITIES
Future policy benefits...................................... $ 3,545
Deferred income taxes payable............................... 849
Other liabilities........................................... 767
Separate account liabilities................................ 584
-------
Total liabilities held-for-sale............................. $ 5,745
=======
</Table>
Primerica Financial Services, Inc. ("PFS"), a former affiliate, was a
distributor of products for the Company. PFS or its affiliates sold $473
million, $983 million and $714 million of individual annuities for the six
months ended June 30, 2005 and for the years ended December 31, 2004 and 2003,
respectively. Commissions and fees paid to PFS were $19 million, $75 million and
$58 million for the six months ended June 30, 2005 and for the years ended
December 31, 2004 and 2003, respectively.
Included in investments above is a $391 million investment in Citigroup
Preferred Stock for the year ended December 31, 2004 carried at cost.
F-67
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. FAIR VALUE INFORMATION
The estimated fair values of financial instruments have been determined by
using available market information and the valuation methodologies described
below. Considerable judgment is often required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented herein may
not necessarily be indicative of amounts that could be realized in a current
market exchange. The use of different assumptions or valuation methodologies may
have a material effect on the estimated fair value amounts.
Amounts related to the Company's financial instruments were as follows:
<Table>
<Caption>
SUCCESSOR
--------------------------------
NOTIONAL CARRYING ESTIMATED
DECEMBER 31, 2005 AMOUNT VALUE FAIR VALUE
- ----------------- -------- -------- ----------
(IN MILLIONS)
Assets:
Fixed maturities.......................................... $48,162 $ 48,162
Trading securities........................................ $ 452 $ 452
Equity securities......................................... $ 421 $ 421
Mortgage and consumer loans............................... $ 2,094 $ 2,087
Policy loans.............................................. $ 881 $ 881
Short-term investments.................................... $ 1,486 $ 1,486
Cash and cash equivalents................................. $ 521 $ 521
Mortgage loan commitments................................. $339 $ -- $ (2)
Commitments to fund partnership investments............... $715 $ -- $ --
Liabilities:
Policyholder account balances............................. $28,851 $ 27,795
Payables for collateral under securities loaned and other
transactions........................................... $ 8,750 $ 8,750
</Table>
<Table>
<Caption>
PREDECESSOR
--------------------------------
NOTIONAL CARRYING ESTIMATED
DECEMBER 31, 2004 AMOUNT VALUE FAIR VALUE
- ----------------- -------- -------- ----------
(IN MILLIONS)
Assets:
Fixed maturities.......................................... $ 42,621 $ 42,621
Trading securities........................................ $ 1,346 $ 1,346
Equity securities......................................... $ 374 $ 374
Mortgage and consumer loans............................... $ 2,124 $ 2,197
Policy loans.............................................. $ 1,084 $ 1,084
Short-term investments.................................... $ 3,502 $ 3,502
Cash and cash equivalents................................. $ 215 $ 215
Mortgage loan commitments................................. $213 $ -- $ --
Commitments to fund partnership investments............... $389 $ -- $ --
Liabilities:
Policyholder account balances............................. $ 29,601 $ 29,769
Payables for collateral under securities loaned and other
transactions........................................... $ 2,215 $ 2,215
</Table>
F-68
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The methods and assumptions used to estimate the fair values of financial
instruments are summarized as follows:
FIXED MATURITIES, TRADING SECURITIES AND EQUITY SECURITIES
The fair value of fixed maturities, trading securities and equity
securities are based upon quotations published by applicable stock exchanges or
received from other reliable sources. For securities for which the market values
were not readily available, fair values were estimated using quoted market
prices of comparable investments.
MORTGAGE AND CONSUMER LOANS, MORTGAGE LOAN COMMITMENTS AND COMMITMENTS TO FUND
PARTNERSHIP INVESTMENTS
Fair values for mortgage and consumer loans are estimated by discounting
expected future cash flows, using current interest rates for similar loans with
similar credit risk. For mortgage loan commitments, the estimated fair value is
the net premium or discount of the commitments. Commitments to fund partnership
investments have no stated interest rate and are assumed to have a fair value of
zero.
POLICY LOANS
The carrying values for policy loans approximate fair value.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The carrying values for cash and cash equivalents and short-term
investments approximated fair values due to the short-term maturities of these
instruments.
POLICYHOLDER ACCOUNT BALANCES
The fair value of policyholder account balances which have final
contractual maturities are estimated by discounting expected future cash flows
based upon interest rates currently being offered for similar contracts with
maturities consistent with those remaining for the agreements being valued. The
fair value of policyholder account balances without final contractual maturities
are assumed to equal their current net surrender value.
PAYABLES FOR COLLATERAL UNDER SECURITIES LOANED AND OTHER TRANSACTIONS
The carrying values for payables for collateral under securities loaned and
other transactions approximate fair value.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of derivative instruments, including financial futures,
interest rate, credit default and foreign currency swaps, foreign currency
forwards, caps, and options are based upon quotations obtained from dealers or
other reliable sources. See Note 4 for derivative fair value disclosures.
16. RELATED PARTY TRANSACTIONS
During 1995, Metropolitan Life Insurance Company ("Metropolitan Life"), a
wholly-owned subsidiary of MetLife, acquired 100% of the group life business of
TIC. The Company's consolidated balance sheet includes a reinsurance receivable
related to this business of $387 million at December 31, 2005 and $409 million
at December 31, 2004. Ceded premiums related to this business were $1 million
for both the six
F-69
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months ended December 31, 2005 and June 30, 2005. Ceded benefits related to this
business were $11 million and $13 million, for the six months ended December 31,
2005 and June 30, 2005, respectively.
In December 2004, TIC and TLAC entered into a reinsurance agreement with
TLARC related to guarantee features included in certain of their universal life
and variable universal life products. This reinsurance agreement is treated as a
deposit-type contract and at December 31, 2005, the Company had a recoverable
from TLARC of $48 million. Fees associated with this contract, included within
other expenses, were $1 million and $40 million for the six months ended
December 31, 2005 and June 30, 2005, respectively.
In addition, TIC's and TLAC's individual insurance mortality risk is
reinsured, in part, to Reinsurance Group of America, Incorporated ("RGA"), an
affiliate. Reinsurance recoverables, under these agreements with RGA, were $47
million and $30 million at December 31, 2005 and 2004, respectively. Ceded
premiums earned, universal life fees and benefits incurred were $4 million, $34
million and $54 million, respectively, for the six months ended December 31,
2005 and $5 million, $18 million and $28 million, respectively, for the six
months ended June 30, 2005.
At June 30, 2005 and December 31, 2004, the Company had investments in
Tribeca Citigroup Investments Ltd. ("Tribeca"), an affiliate of the Company, in
the amounts of $10 million and $14 million, respectively. Income (loss) of ($1)
million, $1 million and $7 million was recognized on these investments in the
six months ended June 30, 2005 and the years ended December 31, 2004 and 2003,
respectively. In July 2005, the Company sold its investment in Tribeca.
Prior to the Acquisition, the Company had related party transactions with
its former parent and/or affiliates. These transactions are described as
follows:
Citigroup and certain of its subsidiaries provided investment management
and accounting services, payroll, internal auditing, benefit management and
administration, property management and investment technology services to the
Company. The Company paid Citigroup and its subsidiaries $22 million, $41
million and $55 million for the six months ended June 30, 2005 and the years
ended December 31, 2004 and 2003, respectively, for these services.
The Company has received reimbursements from Citigroup and its former
affiliates related to the Company's increased benefit and lease expenses after
the spin-off of Travelers Property and Casualty, a former affiliate of the
Company and Citigroup. These reimbursements totaled $8 million, $27 million and
$34 million for the six months ended June 30, 2005 and the years ended December
31, 2004 and 2003, respectively.
At December 31, 2004, the Company maintained a short-term investment pool
in which its insurance affiliates participated. The position of each company
participating in the pool is calculated and adjusted daily. The Company's pool
amounted to $3.3 billion at December 31, 2004.
The Company had outstanding loaned securities to a former affiliate,
Citigroup Global Markets, Inc., of $342 million for the year ended December 31,
2004.
Included in other invested assets was a $2.8 billion investment in
Citigroup Preferred Stock for the year ended December 31, 2004 carried at cost.
Dividends received on these investments were $84 million and $203 million for
the six months ended June 30, 2005 and the year ended December 31, 2004,
respectively. The dividends received in 2005 were subsequently distributed back
to Citigroup as part of the restructuring transactions prior to the Acquisition.
See Note 10.
The Company had investments in an affiliated joint venture, Tishman Speyer,
of $93 million at December 31, 2004. Income of $99 million, $54 million and $19
million was earned on these investments for the six months ended June 30, 2005,
and the years ended December 31, 2004 and 2003, respectively.
F-70
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the ordinary course of business, the Company purchased and sold
securities through affiliated broker-dealers, including Smith Barney. These
transactions were conducted on an arm's-length basis. Amounts due to Smith
Barney were $364 million at December 31, 2004. The Company marketed deferred
annuity products and life insurance through its affiliate, Smith Barney. Annuity
products related to these products were $345 million, $877 million $835 million
in the six months ended June 30, 2005 and for the years ended December 31, 2004
and 2003, respectively. Life premiums were $55 million, $138 million and $115
million in the six months ended June 30, 2005 and for the years ended December
31, 2004 and 2003, respectively. Commissions and fees paid to Smith Barney were
$33 million, $72 million and $70 million in the six months ended June 30, 2005
and for the years ended December 31, 2004 and 2003, respectively. The Company
also marketed individual annuity and life insurance through its affiliated
broker-dealers. Deposits received from affiliated broker-dealers were $1.1
billion, $2.0 billion and $1.8 billion in the six months ended June 30, 2005 and
for the years ended December 31, 2004 and 2003, respectively. Commissions and
fees paid to affiliated broker-dealers were $45 million, $90 million and $83
million in the six months ended June 30, 2005 and in 2004 and 2003,
respectively.
17. SUBSEQUENT EVENTS
On February 14, 2006, TIC filed, with the State of Connecticut Office of
the Secretary of the State, a Certificate of Amendment to the Charter as Amended
and Restated of The Travelers Insurance Company (the "Charter Amendment"). The
Charter Amendment changes the name of TIC to "MetLife Insurance Company of
Connecticut" and is effective on May 1, 2006.
On September 15, 2006, the Company's Board of Directors declared a cash
dividend of up to $917 million. A cash dividend of $917 million was paid to the
parent on September 18, 2006. As required for all dividends paid within two
years of the Company's acquisition, the Company obtained the approval of the
Department prior to the dividend declaration.
A portion of the $917 million dividend exceeds the cumulative retained
earnings of the Company. The retained earnings of the Company at the dividend
date represents the cumulative earnings since the Acquisition on July 1, 2005.
That portion of the dividend which exceeds the cumulative earnings of the
Company is a return of capital.
F-71
THE TRAVELERS INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF METLIFE, INC.)
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN AFFILIATES
DECEMBER 31, 2005
(IN MILLIONS)
<Table>
<Caption>
SUCCESSOR
-----------------------------------------------
AMOUNT AT
COST OR ESTIMATED WHICH SHOWN ON
AMORTIZED COST(1) FAIR VALUE BALANCE SHEET
----------------- ---------- --------------
TYPE OF INVESTMENT
Fixed Maturities:
Bonds:
U.S. Treasury/agency securities............... $ 6,153 $ 6,112 $ 6,112
State and political subdivision securities.... 632 607 607
Foreign government securities................. 472 487 487
Public utilities.............................. 2,590 2,546 2,546
Convertibles and bonds with warrants
attached.................................... 1 1 1
All other corporate bonds..................... 19,520 19,107 19,107
Residential and commercial mortgage-backed, and
other asset-backed securities................. 19,443 19,266 19,266
Redeemable and preferred stock................... 37 36 36
------- ------- -------
Total fixed maturities........................ 48,848 $48,162 48,162
------- ======= -------
Trading Securities................................. 457 $ 452 452
=======
Equity Securities:
Common stocks:
Banks, trust and insurance companies.......... 1 1 1
Industrial, miscellaneous and all other....... 96 97 97
Non-redeemable preferred stocks.................. 327 323 323
------- ------- -------
Total equity securities....................... 424 $ 421 421
------- ======= -------
Mortgage and consumer loans........................ 2,094 2,094
Policy loans....................................... 881 881
Real estate and real estate joint ventures......... 96 96
Other limited partnership interests................ 1,248 1,248
Short-term investments............................. 1,486 1,486
Other invested assets.............................. 1,029 1,029
------- -------
Total investments............................. $56,563 $55,869
======= =======
</Table>
- ---------------
(1) The Company's trading securities portfolio is mainly comprised of fixed
maturities. Cost for fixed maturities and mortgage and consumer loans
represents original cost reduced by repayments, net valuation allowances and
writedowns from other-than-temporary declines in value and adjusted for
amortization of premiums or accretion of discount; for equity securities,
cost represents original cost reduced by writedowns from
other-than-temporary declines in value; for real estate, cost represents
original cost reduced by writedowns and adjusted for valuation allowances
and depreciation; cost for real estate joint ventures and limited
partnership interests represents original cost reduced for other-than-
temporary impairments or original cost adjusted for equity in earnings and
distributions.
F-72
THE TRAVELERS INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF METLIFE, INC.)
SCHEDULE III
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
AS OF DECEMBER 31, 2005 (SUCCESSOR) AND DECEMBER 31, 2004 (PREDECESSOR)
(IN MILLIONS)
<Table>
<Caption>
DAC FUTURE POLICY POLICYHOLDER
AND BENEFITS AND OTHER ACCOUNT UNEARNED
SEGMENT VOBA POLICYHOLDER FUNDS BALANCES REVENUE (1)
- ------- ------ ------------------- ------------ -----------
AS OF DECEMBER 31, 2005 (SUCCESSOR)
Institutional................................... $ 161 $11,880 $16,460 $ 1
Individual...................................... 3,540 2,179 16,526 21
Corporate & Other............................... -- 4,305 -- --
------ ------- ------- ----
$3,701 $18,364 $32,986 $ 22
====== ======= ======= ====
AS OF DECEMBER 31, 2004 (PREDECESSOR)
Institutional................................... $ 222 $ 8,011 $18,798 $ 17
Individual...................................... 2,627 1,549 14,957 206
Corporate & Other............................... 13 3,718 -- --
------ ------- ------- ----
$2,862 $13,278 $33,755 $223
====== ======= ======= ====
</Table>
- ---------------
(1) Amounts are included in other policyholder funds column for successor and in
other liabilities for predecessor.
F-73
THE TRAVELERS INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF METLIFE, INC.)
SCHEDULE III
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 (SUCCESSOR)
AND JUNE 30, 2005 (PREDECESSOR)
AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (PREDECESSOR)
(IN MILLIONS)
<Table>
<Caption>
PREMIUM POLICYHOLDER AMORTIZATION OF
REVENUES NET BENEFITS AND DAC AND VOBA OTHER PREMIUMS
AND POLICY INVESTMENT INTEREST CHARGED TO OPERATING WRITTEN
SEGMENT FEES INCOME CREDITED OTHER EXPENSES EXPENSES (EXCLUDING LIFE)
- ------- ---------- ---------- ------------ --------------- --------- ----------------
FOR THE SIX MONTHS ENDED
DECEMBER 31, 2005 (SUCCESSOR)
Institutional............ $ 133 $ 711 $ 627 $ 1 $ 29 $ --
Individual............... 518 381 378 185 182 --
Corporate & Other........ 13 124 22 -- (14) --
------ ------ ------ ---- ---- ----
$ 664 $1,216 $1,027 $186 $197 $ --
====== ====== ====== ==== ==== ====
FOR THE SIX MONTHS ENDED
JUNE 30, 2005 (PREDECESSOR)
Institutional............ $ 239 $ 778 $ 828 $ 4 $ 16 $206
Individual............... 475 547 449 231 162 62
Corporate & Other........ 17 283 20 1 27 17
------ ------ ------ ---- ---- ----
$ 731 $1,608 $1,297 $236 $205 $285
====== ====== ====== ==== ==== ====
FOR THE YEAR ENDED
DECEMBER 31, 2004 (PREDECESSOR)
Institutional............ $ 792 $1,443 $1,878 $ 7 $ 33 $719
Individual............... 775 1,027 799 401 255 72
Corporate & Other........ 34 542 39 2 64 34
------ ------ ------ ---- ---- ----
$1,601 $3,012 $2,716 $410 $352 $825
====== ====== ====== ==== ==== ====
FOR THE YEAR ENDED
DECEMBER 31, 2003 (PREDECESSOR)
Institutional............ $ 990 $1,268 $2,018 $ 12 $ 29 $921
Individual............... 588 950 751 266 190 25
Corporate & Other........ 35 525 47 2 58 35
------ ------ ------ ---- ---- ----
$1,613 $2,743 $2,816 $280 $277 $981
====== ====== ====== ==== ==== ====
</Table>
F-74
THE TRAVELERS INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF METLIFE, INC.)
SCHEDULE IV
CONSOLIDATED REINSURANCE
AS OF DECEMBER 31, 2005 AND 2004 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2005 AND JUNE 30, 2005
AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(IN MILLIONS)
<Table>
<Caption>
% AMOUNT
GROSS NET ASSUMED
AMOUNT CEDED ASSUMED AMOUNT TO NET
-------- ------- ------- ------- --------
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2005 (SUCCESSOR)
Life insurance in-force.............................. $109,333 $78,438 $ -- $30,895 --%
======== ======= ====== =======
Insurance Premium:
Life insurance..................................... $ 237 $ 34 $ -- $ 203 --%
Accident and health................................ 144 125 -- 19 --%
-------- ------- ------ -------
Total insurance premium.......................... $ 381 $ 159 $ -- $ 222 --%
======== ======= ====== =======
FOR THE SIX MONTHS ENDED
JUNE 30, 2005 (PREDECESSOR)
Insurance Premium:
Life insurance..................................... $ 335 $ 27 $ -- $ 308 --%
Accident and health................................ 129 112 -- 17 --%
Property and casualty insurance.................... 2 2 -- -- --%
-------- ------- ------ -------
Total insurance premium.......................... $ 466 $ 141 $ -- $ 325 --%
======== ======= ====== =======
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2004 (PREDECESSOR)
Life insurance in-force.............................. $100,794 $73,575 $3,313 $30,532 10.9%
======== ======= ====== =======
Insurance Premium:
Life insurance..................................... $ 927 $ 51 $ -- $ 876 --%
Accident and health................................ 263 228 -- 35 --%
Property and casualty insurance.................... 1 1 -- -- --%
-------- ------- ------ -------
Total insurance premium.......................... $ 1,191 $ 280 $ -- $ 911 --%
======== ======= ====== =======
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2003 (PREDECESSOR)
Life insurance in-force.............................. $ 89,443 $62,957 $3,362 $29,848 11.3%
======== ======= ====== =======
Insurance Premium:
Life insurance..................................... $ 1,086 $ 40 $ -- $ 1,046 --%
Accident and health................................ 269 233 -- 36 --%
Property and casualty insurance.................... 21 21 -- -- --%
-------- ------- ------ -------
Total insurance premium.......................... $ 1,376 $ 294 $ -- $ 1,082 --%
======== ======= ====== =======
</Table>
F-75