- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
---------------------
COMMISSION FILE NUMBER 33-58677
---------------------
THE TRAVELERS LIFE AND ANNUITY COMPANY
(Exact name of registrant as specified in its charter)
<Table>
CONNECTICUT 06-0904249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE CITYPLACE, HARTFORD, CONNECTICUT 06103-3415
(Address of principal executive offices) (Zip Code)
</Table>
(860) 308-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of the date hereof, there were outstanding 30,000 shares of common
stock, par value $100 per share, of the registrant, all of which are owned by
The Travelers Insurance Company, a wholly-owned subsidiary of MetLife, Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the
reduced disclosure format.
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- --------------------------------------------------------------------------------
THE TRAVELERS LIFE AND ANNUITY COMPANY
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Interim Condensed Statements of Income for the three and six 3
months ended June 30, 2005 and 2004 (unaudited).............
Interim Condensed Balance Sheets at June 30, 2005 4
(unaudited) and December 31, 2004...........................
Interim Condensed Statements of Changes in Shareholder's 5
Equity for the six months ended June 30, 2005 and 2004
(unaudited).................................................
Interim Condensed Statements of Cash Flows for the six 6
months ended June 30, 2005 and 2004 (unaudited).............
Notes to Interim Condensed Financial Statements 7
(unaudited).................................................
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 14
AND RESULTS OF OPERATIONS...................................
ITEM 4. CONTROLS AND PROCEDURES..................................... 20
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 21
ITEM 6. EXHIBITS.................................................... 22
Signatures.................................................................... 23
Exhibit Index................................................................. 24
Exhibit 31.01................................................................. 25
Exhibit 31.02................................................................. 26
Exhibit 32.01................................................................. 27
Exhibit 32.02................................................................. 28
</Table>
2
THE TRAVELERS LIFE AND ANNUITY COMPANY
INTERIM CONDENSED STATEMENTS OF INCOME
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -----------
2005 2004 2005 2004
----- ----- ---- ----
(UNAUDITED)
($ IN MILLIONS)
REVENUES
Premiums.................................................... $ 10 $ 10 $ 20 $ 20
Net investment income....................................... 118 102 223 190
Net realized investment gains (losses)...................... (8) 7 (6) (4)
Fee income.................................................. 114 77 221 153
Other revenues.............................................. 6 4 12 9
---- ---- ---- ----
Total Revenues............................................ 240 200 470 368
---- ---- ---- ----
BENEFITS AND EXPENSES
Current and future insurance benefits....................... 26 14 49 38
Interest credited to contractholders........................ 64 57 126 114
Amortization of deferred acquisition costs.................. 71 44 132 87
General and administrative expenses......................... 33 10 52 25
---- ---- ---- ----
Total Benefits and Expenses............................... 194 125 359 264
---- ---- ---- ----
Income before federal income taxes.......................... 46 75 111 104
Federal income taxes........................................ 14 26 35 27
---- ---- ---- ----
Net Income................................................ $ 32 $ 49 $ 76 $ 77
==== ==== ==== ====
</Table>
See Notes to Interim Condensed Financial Statements.
3
THE TRAVELERS LIFE AND ANNUITY COMPANY
INTERIM CONDENSED BALANCE SHEETS
<Table>
<Caption>
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
(UNAUDITED)
($ IN MILLIONS)
ASSETS
Investments (including $0 and $133 subject to securities
lending agreements, respectively)......................... $ 7,163 $ 7,329
Separate and variable accounts.............................. 11,617 11,631
Deferred acquisition costs.................................. 1,612 1,522
Premiums and fees receivable................................ 72 75
Other assets................................................ 224 268
------- -------
Total Assets.............................................. $20,688 $20,825
======= =======
LIABILITIES
Contractholder funds........................................ $ 5,428 $ 5,227
Future policy benefits and claims........................... 1,101 1,079
Separate and variable accounts.............................. 11,617 11,631
Deferred federal income taxes............................... 162 180
Other liabilities........................................... 346 747
------- -------
Total Liabilities......................................... 18,654 18,864
------- -------
SHAREHOLDER'S EQUITY
Common stock, par value $100 per share; 100,000 shares
authorized, 30,000 issued and outstanding................. 3 3
Additional paid-in capital.................................. 821 817
Retained earnings........................................... 998 922
Accumulated other changes in equity from nonowner sources... 212 219
Total Shareholder's Equity................................ 2,034 1,961
------- -------
Total Liabilities and Shareholder's Equity................ $20,688 $20,825
======= =======
</Table>
See Notes to Interim Condensed Financial Statements.
4
THE TRAVELERS LIFE AND ANNUITY COMPANY
INTERIM CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-----------------
2005 2004
------- -------
(UNAUDITED)
($ IN MILLIONS)
COMMON STOCK
Balance, beginning of period................................ $ 3 $ 3
Changes in common stock..................................... -- --
------ ------
Balance, end of period...................................... $ 3 $ 3
====== ======
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period................................ $ 817 $ 417
Assumption of liabilities by parent......................... 4 --
Contribution from parent.................................... -- 400
------ ------
Balance, end of period...................................... $ 821 $ 817
====== ======
RETAINED EARNINGS
Balance, beginning of period................................ $ 922 $ 764
Net income.................................................. 76 77
------ ------
Balance, end of period...................................... $ 998 $ 841
====== ======
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES
Balance, beginning of period................................ $ 219 $ 215
Unrealized gains (losses), net income of taxes.............. (5) (93)
Derivative instrument hedging activity losses, net of income
taxes..................................................... (2) (3)
------ ------
Balance, end of period...................................... $ 212 $ 119
====== ======
SUMMARY OF CHANGES IN EQUITY FROM NONOWNER SOURCES
Net income.................................................. $ 76 $ 77
Other changes in equity from nonowner sources............... (7) (96)
------ ------
Total changes in equity from nonowner sources............... $ 69 $ (19)
====== ======
TOTAL SHAREHOLDER'S EQUITY
Balance, beginning of period................................ $1,961 $1,399
Changes in nonowner sources................................. 69 (19)
Changes in additional paid in capital....................... 4 400
------ ------
Balance, end of period...................................... $2,034 $1,780
====== ======
</Table>
See Notes to Interim Condensed Financial Statements.
5
THE TRAVELERS LIFE AND ANNUITY COMPANY
INTERIM CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-----------------
2005 2004
------ --------
(UNAUDITED)
($ IN MILLIONS)
NET CASH USED IN OPERATING ACTIVITIES....................... $(252) $ (71)
----- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities....................................... 283 281
Equity securities...................................... -- 3
Mortgage loans......................................... 18 42
Proceeds from sales of investments
Fixed maturities....................................... 204 476
Equity securities...................................... 8 3
Mortgage loans......................................... -- 6
Real estate............................................ -- 2
Purchases of investments
Fixed maturities....................................... (376) (1,039)
Equity securities...................................... (1) (4)
Mortgage loans......................................... (75) (59)
Policy loans, net......................................... (4) (3)
Short-term securities (purchases) sales, net.............. 135 (391)
Other investment purchases, net........................... (14) (15)
Securities transactions in course of settlement, net...... (125) (8)
----- -------
Net cash provided by (used in) investing activities....... 53 (706)
----- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits.............................. 476 493
Contractholder fund withdrawals and maturities............ (276) (115)
Contribution from parent company.......................... -- 400
----- -------
Net cash provided by financing activities................. 200 778
----- -------
Net increase in cash........................................ 1 1
Cash at beginning of period................................. 1 1
----- -------
Cash at end of period....................................... $ 2 $ 2
----- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid......................................... $(277) $ (168)
===== =======
</Table>
See Notes to Interim Condensed Financial Statements.
6
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
At June 30, 2005, The Travelers Life and Annuity Company ("TLAC" or the
"Company") was a wholly-owned subsidiary of The Travelers Insurance Company
("TIC"), a wholly-owned subsidiary of Citigroup Insurance Holding Corporation
("CIHC"), an indirect wholly-owned subsidiary of Citigroup Inc. ("Citigroup").
The interim condensed financial statements of the Company and the notes thereto
are prepared in conformity with accounting principles generally accepted in the
United States of America ("GAAP") and are unaudited.
On January 31, 2005, Citigroup announced its intention to sell (the "sale")
TIC, the Company and certain other domestic and international insurance
businesses ("Life Insurance and Annuities Businesses"), to MetLife, Inc.
("MetLife"). The sale closed on July 1, 2005.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
benefits and expenses during the reporting period. Actual results could differ
from those estimates.
The unaudited interim condensed financial statements reflect all normal
recurring adjustments necessary for a fair presentation of results for the
periods reported. The accompanying unaudited interim condensed financial
statements should be read in conjunction with the financial statements and
related notes included in TLAC's Annual Report on Form 10-K for the year ended
December 31, 2004 ("Form 10-K") filed with the Securities and Exchange
Commission ("SEC"). The condensed balance sheet at December 31, 2004 was derived
from the audited balance sheet included in the Form 10-K. Certain financial
information that is normally included in annual financial statements prepared in
accordance with GAAP, but is not required for interim reporting purposes, has
been condensed or omitted. Certain prior year amounts have been reclassified to
conform to the 2005 presentation. Interim results are not necessarily indicative
of future performance.
2. ACCOUNTING STANDARDS
CHANGES IN ACCOUNTING PRINCIPLES
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts
On January 1, 2004, the Company adopted the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants Statement of
Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" ("SOP 03-1").
The main components of SOP 03-1 provide guidance on accounting and reporting by
insurance enterprises for separate account presentation, accounting for an
insurer's interest in a separate account, transfers to a separate account,
valuation of certain liabilities, contracts with death or other benefit
features, contracts that provide annuitization benefits, and sales inducements
to contract holders.
The following summarizes the more significant aspects of the Company's
adoption of SOP 03-1, effective January 1, 2004:
Variable Annuity Contracts with Guaranteed Minimum Death Benefit
Features. For variable annuity contracts with guaranteed minimum death benefit
("GMDB") features, SOP 03-1 requires the reporting entity to categorize the
contract as either an insurance or investment contract based upon the
significance of mortality or morbidity risk. SOP 03-1 provides explicit guidance
for calculating a reserve for insurance
7
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
contracts, and provides that the reporting entity does not hold reserves for
investment contracts (i.e. there is no significant mortality risk).
The Company determined that the mortality risk on its GMDB features was not
a significant component of the total variable annuity product, and accordingly
continued to classify these products as investment contracts.
Reserving for Universal Life and Variable Universal Life Contracts. SOP
03-1 requires that a reserve, in addition to the account balance, be established
for certain insurance benefit features provided under universal life ("UL") and
variable universal life ("VUL") products if the amounts assessed against the
contract holder each period for the insurance benefit feature are assessed in a
manner that is expected to result in profits in earlier years and losses in
subsequent years from the insurance benefit function.
The Company's UL and VUL products were reviewed to determine whether an
additional reserve is required under SOP 03-1. The Company determined that SOP
03-1 applied to some of its UL and VUL contracts with these features and
established an additional reserve of less than $1 million. The Company evaluates
new issues of variable products to determine that mortality risk on GMDB
features is insignificant.
Sales Inducements to Contract Holders. SOP 03-1 provides that,
prospectively, sales inducements provided to contract holders meeting certain
criteria are to be capitalized and amortized over the expected life of the
contract as a component of benefit expense. During the first six months of 2005
and 2004, the Company capitalized sales inducements of $12 million and $13
million, respectively, in accordance with SOP 03-1. These inducements relate to
bonuses on certain products offered by the Company. For the six months ended
June 30, 2005 and 2004, amortization of these capitalized amounts was
insignificant.
Consolidation of Variable Interest Entities
On January 1, 2004, the Company adopted Financial Accounting Standards
Board ("FASB") Interpretation No. 46, "Consolidation of Variable Interest
Entities -- An Interpretation of ARB No. 51" ("FIN 46") (revised December 2003,
"FIN 46-R"), which includes substantial changes from the original FIN 46.
Included in these changes, the calculation of expected losses and expected
residual returns has been altered to reduce the impact of decision maker and
guarantor fees in the calculation of expected residual returns and expected
losses. In addition, the definition of a variable interest has been changed in
the revised guidance. The adoption of the provisions of FIN 46-R on January 1,
2004 did not require the Company to consolidate any variable interest entities
("VIEs").
FIN 46 and FIN 46-R change the method of determining whether certain
entities, including securitization entities, should be included in the Company's
condensed financial statements. An entity is subject to FIN 46 and FIN 46-R and
is called a VIE if it has (1) equity that is insufficient to permit the entity
to finance its activities without additional subordinated financial support from
other parties, or (2) equity investors that cannot make significant decisions
about the entity's operations or that do not absorb the expected losses or
receive the expected returns of the entity. All other entities are evaluated for
consolidation under Statement of Financial Accounting Standards ("SFAS") No. 94,
"Consolidation of All Majority-Owned Subsidiaries" ("SFAS 94"). A VIE is
consolidated by its primary beneficiary, which is the party involved with the
VIE that has a majority of the expected losses or a majority of the expected
residual returns or both.
8
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Other-Than-Temporary Impairments of Certain Investments
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 will issue a FASB Staff Position Paper
("FSP") 115-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments" ("FSP 115-1"), superseding EITF 03-1 and
EITF Topic D-44, "Recognition of Other-Than-Temporary Impairment on the Planned
Sale of a Security Whose Cost Exceeds Fair Value" ("Topic D-44"). FSP 115-1 will
nullify the accounting guidance on the determination of whether an investment is
other-than-temporarily impaired as set forth in EITF 03-1. FSP 115-1 will be
effective for other-than-temporary impairment analysis conducted in periods
beginning after September 15, 2005. The Company has complied with the disclosure
requirements of EITF 03-1, which were effective December 31, 2003 and remain in
effect.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of Accounting Principles Board ("APB") Opinion No. 20
and SFAS No. 3" ("SFAS 154"). SFAS 154 is a result of a broader effort by the
FASB to converge standards with the International Accounting Standards Board.
The statement requires retrospective application to prior periods' financial
statements for a voluntary change in accounting principle unless it is
impracticable. It also requires that a change in method of depreciation,
amortization, or depletion for long-lived, nonfinancial 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. SFAS 154 is not expected to have
a material impact on the Company's condensed financial statements.
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS 123-R"), which replaces the existing SFAS 123 and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123-R requires
companies to measure and record compensation expense for stock options and other
share-based payments based on the instruments' fair value. SFAS 123-R is
effective for interim and annual reporting periods beginning after June 15,
2005. In April 2005, the SEC issued a final ruling allowing public companies to
defer adoption of SFAS 123-R until the beginning of the first fiscal year
following June 15, 2005. At the close of the sale on July 1, 2005, all
outstanding options and awards of Citigroup stock held by employees of the
Company vested. All related stock option expense was recorded at the time of
vesting by Citigroup. As such, the Company does not expect the adoption of SFAS
123-R to have any impact on its financial statements.
9
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities were
as follows at:
<Table>
<Caption>
JUNE 30, 2005
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
($ IN MILLIONS)
AVAILABLE FOR SALE:
Mortgage-backed securities -- CMOs and
pass-through securities................. $ 915 $ 29 $ 1 $ 943
U.S. Treasury securities and obligations of
U.S. Government and government agencies
and authorities......................... 123 18 -- 141
Obligations of states, municipalities and
political subdivisions.................. 59 14 -- 73
Debt securities issued by foreign
governments............................. 59 6 -- 65
All other corporate bonds.................. 3,593 200 9 3,784
Other debt securities...................... 1,068 63 3 1,128
Redeemable preferred stock................. 2 2 -- 4
------ ---- --- ------
Total Available For Sale................ $5,819 $332 $13 $6,138
====== ==== === ======
</Table>
<Table>
<Caption>
DECEMBER 31, 2004
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
($ IN MILLIONS)
AVAILABLE FOR SALE:
Mortgage-backed securities -- CMOs and
pass-through securities................. $ 906 $ 24 $ 1 $ 929
U.S. Treasury securities and obligations of
U.S. Government and government agencies
and authorities......................... 154 9 -- 163
Obligations of states, municipalities and
political subdivisions.................. 57 8 -- 65
Debt securities issued by foreign
governments............................. 63 6 -- 69
All other corporate bonds.................. 3,565 219 4 3,780
Other debt securities...................... 1,180 71 2 1,249
Redeemable preferred stock................. 4 2 -- 6
------ ---- ---- ------
Total Available For Sale................ $5,929 $339 $ 7 $6,261
====== ==== ==== ======
</Table>
10
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
AGING OF GROSS UNREALIZED LOSSES ON AVAILABLE FOR SALE
The aging of gross unrealized losses on fixed maturity investments is as
follows:
<Table>
<Caption>
JUNE 30, 2005
-----------------------------------------------
TOTAL FIXED MATURITIES TOTAL FIXED MATURITIES
IN AN UNREALIZED WITH UNREALIZED LOSS
LOSS POSITION TOTALING 20% OR MORE
---------------------- ----------------------
AMORTIZED UNREALIZED AMORTIZED UNREALIZED
COST LOSS COST LOSS
--------- ---------- --------- ----------
($ IN MILLIONS)
Six months or less.......................... $430 $ 6 $ 7 $ 2
Greater than six months to nine months...... 183 3 -- --
Greater than nine months to twelve months... 45 1 -- --
Greater than twelve months.................. 119 3 -- --
---- --- ----- -----
Total..................................... $777 $13 $ 7 $ 2
==== === ===== =====
</Table>
<Table>
<Caption>
DECEMBER 31, 2004
-----------------------------------------------
TOTAL FIXED MATURITIES TOTAL FIXED MATURITIES
IN AN UNREALIZED WITH UNREALIZED LOSS
LOSS POSITION TOTALING 20% OR MORE
---------------------- ----------------------
AMORTIZED UNREALIZED AMORTIZED UNREALIZED
COST LOSS COST LOSS
--------- ---------- --------- ----------
($ IN MILLIONS)
Six months or less.......................... $505 $ 3 $ -- $ --
Greater than six months to nine months...... 134 2 -- --
Greater than nine months to twelve months... 26 1 -- --
Greater than twelve months.................. 40 1 -- --
---- ----- ----- -----
Total..................................... $705 $ 7 $ -- $ --
==== ===== ===== =====
</Table>
<Table>
<Caption>
NET REALIZED
CAPITAL GAINS (LOSSES)
--------------------------------
FOR THE FOR THE
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2005 2004 2005 2004
----- ----- ----- -----
($ IN MILLIONS)
NET REALIZED CAPITAL GAINS (LOSSES) BY ASSET CLASS:
Fixed maturities..................................... $(3) $(10) $(5) $(10)
Equities............................................. 1 -- 2 --
Derivatives:
Guaranteed minimum withdrawal benefit derivatives,
net............................................. (5) 1 (2) (4)
Other derivatives................................. (1) 17 (1) 7
Other................................................ -- (1) -- 3
--- ---- --- ----
Total............................................. $(8) $ 7 $(6) $ (4)
=== ==== === ====
</Table>
11
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
4. DEPOSIT FUNDS AND RESERVES
At June 30, 2005 and December 31, 2004, the Company had $6.5 billion and
$6.3 billion of life and annuity deposit funds and reserves, respectively, as
follows:
<Table>
<Caption>
JUNE 30, 2005 DECEMBER 31, 2004
---------------- --------------------
($ IN MILLIONS)
Subject to discretionary withdrawal:
With fair value adjustments........................... $2,509 $2,594
Subject to surrender charges.......................... 1,862 1,672
Surrenderable without charge.......................... 331 289
------ ------
Total................................................. $4,702 $4,555
Not subject to discretionary withdrawal................. 1,815 1,744
------ ------
Total................................................. $6,517 $6,299
====== ======
</Table>
5. SHAREHOLDER'S EQUITY
Statutory capital and surplus of TLAC was $942 million at December 31,
2004. Under the Insurance Law of the State of Connecticut, TLAC's state of
domicile, the Company is permitted, without prior insurance regulatory
clearance, to pay a shareholder dividend to its parent, as long as the amount of
such dividend, when aggregated with all other dividends in the preceding 12
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. TLAC will 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 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
stockholders. Accordingly, the Company may not pay dividends during 2005 without
prior approval of the State of Connecticut Insurance Department (the
"Department"). As described in Note 1, Citigroup completed the sale of its Life
Insurance and Annuities Businesses, including the Company, to MetLife on July 1,
2005. The Department requires prior approval for any dividends for a period of
two years following a change in control. As a result of the acquisition of TIC
and TLAC by MetLife, under Connecticut Insurance Law all dividend payments by
TLAC through June 30, 2007 require prior approval of the Commissioner.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION AND REGULATORY PROCEEDINGS
In August 1999, an amended putative class action complaint captioned Lisa
Macomber, et al. vs. Travelers Property Casualty Corporation, et al. was filed
in New Britain, Connecticut Superior Court against the Company, Travelers Equity
Sales, Inc. and certain former affiliates. The amended complaint alleges
Travelers Property Casualty Corporation, a former affiliate, purchased
structured settlement annuities from the Company and spent less on the purchase
of those structured settlement annuities than agreed with claimants; and that
commissions paid to brokers of structured settlement annuities, were paid, in
part, to Travelers Property Casualty Corporation. The amended complaint was
dismissed and, following
12
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
an appeal by the plaintiff in September 2002, the Connecticut Supreme Court
reversed the dismissal of several of the plaintiff's claims. On May 26, 2004,
the Connecticut Superior Court certified a nationwide class action involving the
following claims: violation of the Connecticut Unfair Trade Practice Statute,
unjust enrichment and civil conspiracy. On June 15, 2004, the defendants
appealed the Connecticut Superior Court's May 26, 2004 class certification
order.
In 2003 and 2004, several issues in the mutual fund and variable insurance
product industries have come under the scrutiny of federal and state regulators.
Like many other companies in our industry, the Company has received a request
for information from the SEC and a subpoena from the New York Attorney General
regarding market timing and late trading. During 2004, the SEC requested
additional information about the Company's variable product operations on market
timing, late trading and revenue sharing, and the SEC, the National Association
of Securities Dealers and the New York Insurance Department have made inquiries
into these issues and other matters associated with the sale and distribution of
insurance products. In addition, like many insurance companies and agencies, in
2004 and 2005, the Company received inquiries from certain state Departments of
Insurance regarding producer compensation and bidding practices. The Company is
cooperating fully with all of these requests and is not able to predict their
outcomes.
In addition, the Company is a defendant or co-defendant in various other
litigation matters in the normal course of business. These include civil
actions, arbitration proceedings and other matters arising in the normal course
of business out of activities as an insurance company, a broker and dealer in
securities or otherwise.
In the opinion of the Company's management, the ultimate resolution of
these legal and regulatory proceedings would not be likely to have a material
adverse effect on the Company's financial condition or liquidity, but, if
involving monetary liability, may be material to the Company's operating results
for any particular period.
7. SUBSEQUENT EVENT -- METLIFE, INC. TRANSACTION
On July 1, 2005, Citigroup completed the sale of its Life Insurance and
Annuities Businesses to MetLife pursuant to an acquisition agreement. In the
normal course of accounting for acquisitions, purchase accounting ("PGAAP")
adjustments will be made to the assets and liabilities of the Company during the
third quarter of 2005. These PGAAP adjustments will mark to market the assets
and liabilities of the Company as of the closing date of the sale. At this time,
the Company cannot predict the effect the PGAAP adjustments may have on the
financial statements of the Company, although such adjustments may be material.
Consistent with MetLife's business plan filed with the Department, the
Company will generally phase out the products that it currently issues by the
end of 2006. This phase out of the products will likely result in fewer assets
and liabilities reported by the Company.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's narrative analysis of the results of operations of The
Travelers Life and Annuity Company ("TLAC" or the "Company") is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A"), pursuant to General Instruction H(2)(a) of Form 10-Q.
This MD&A should be read in conjunction with the MD&A included in TLAC's Annual
Report on Form 10-K for the year ended December 31, 2004.
TLAC's Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, and
all amendments to these reports are available at www.metlife.com by selecting
"Investor Relations." The information found on the website is not part of this
or any other report filed with or furnished to the Securities and Exchange
Commission ("SEC").
At June 30, 2005, the Company was a wholly-owned subsidiary of The
Travelers Insurance Company ("TIC"), a wholly-owned subsidiary of Citigroup
Insurance Holdings Corporation, an indirect wholly-owned subsidiary of Citigroup
Inc. ("Citigroup"). On January 31, 2005, Citigroup announced its intention to
sell (the "sale") TIC, the Company and certain other domestic and international
insurance businesses (the "Life Insurance and Annuities Businesses"), to
MetLife, Inc. ("MetLife"). The sale closed on July 1, 2005. See "-- Subsequent
Event."
The Company offers fixed and variable retail annuities and individual life
insurance to individuals and small businesses. TIC has a license from The St.
Paul Travelers Companies, Inc. to permit it and the Company to use the names
"Travelers Life & Annuity," "The Travelers Insurance Company," "The Travelers
Life and Annuity Company" and related names in connection with their businesses.
RESULTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
2005 2004 2005 2004
------ ------ ------ ------
($ IN MILLIONS)
Revenues................................................. $240 $200 $470 $368
Insurance benefits and interest credited................. 90 71 175 152
Operating expenses....................................... 104 54 184 112
---- ---- ---- ----
Income before income taxes............................... 46 75 111 104
Income taxes............................................. 14 26 35 27
---- ---- ---- ----
Net income............................................... $ 32 $ 49 $ 76 $ 77
==== ==== ==== ====
</Table>
Net income for the second quarter of 2005 was $32 million, versus $49
million in the prior year second quarter. The decrease in net income was
primarily driven by increases in the amortization of deferred acquisition costs
("DAC") from increased account balances ("business volumes") related to
Universal Life ("UL"), net realized capital losses on investments and expenses
related to net transaction costs of a statutory reinsurance transaction with an
affiliate. See "-- Outlook." Such increases were partially offset by increased
fee income and net investment income ("NII").
Net income for the six months ended June 30, 2005 was level with the prior
year six-month period. Increased NII and fee income were offset by increased
expenses including expenses related to net transaction costs of a statutory
reinsurance transaction with an affiliate.
The $40 million revenue increase for the second quarter of 2005 over the
prior year period was primarily driven by a 48% increase in fee income. Fee
income in the retail annuity and individual life product lines together
increased $37 million due to higher business volumes, particularly in the
individual life line. NII increased $16 million or 16% in the second quarter of
2005 versus the same period in 2004, primarily as the result of a one-time real
estate joint venture transaction totaling $15 million. Net realized
14
losses on derivative activity of $6 million in the three months ended June 30,
2005 compared to gains of $18 million in the prior year period, partially offset
the increased fee income and NII.
Revenues for the six months ended June 30, 2005 and June 30, 2004 were $470
million and $368 million, respectively. Fee income increased $68 million, or
44%, due to continued business volume growth in the individual life product
line. NII increased $33 million, or 17%, primarily related to a larger invested
asset base from the continued growth in business volumes over the previous
twelve months, the $400 million capital contribution from TIC in June 2004 and
the $15 million one-time real estate transaction that occurred in the second
quarter of 2005.
Insurance benefits increased $12 million for the quarter over prior year,
mainly due to increased UL production and changes in reserves for structured
settlements resulting from a 2004 second quarter one-time reserve release of $9
million pre-tax. The interest credited increase of $7 million over the 2004
quarter was also due to the increased volume growth of UL.
Insurance benefits and interest credited for the six months ended June 30,
2005 were $175 million versus $152 million for the same 2004 period. This $23
million increase was due to UL production and the 2004 second quarter structured
settlement reserve release.
Operating expenses increased from $54 million to $104 million for the
three-month period ended June 30, 2005 over June 30, 2004. This increase is
primarily related to the amortization of DAC, which was $71 million in 2005
versus $44 million in 2004, the majority of which related to the continued
momentum of UL production. Expenses related to net transaction costs of a
statutory reinsurance transaction with an affiliate were $20 million during the
second quarter of 2005. This reinsurance transaction was established in the
fourth quarter of 2004.
Operating expenses were up 64% to $184 million for the six-month period of
2005 from $112 million for the same period of 2004. The $72 million increase was
primarily the result of increased DAC amortization in the UL product line due to
increased business volume and expenses related to net transaction costs of a
statutory reinsurance transaction with an affiliate.
15
The majority of the annuity business and a substantial portion of the life
business written by the Company are accounted for as investment contracts, such
that the premiums are considered deposits and are not included in revenues.
Deposits represent a statistic integral to managing operations, which management
uses for measuring business volumes, and may not be comparable to similarly
captioned measurements used by other life insurance companies. The following
table shows net written premiums and deposits by product type for the quarterly
and six-month periods ended June 30, 2005 and 2004.
PREMIUMS AND DEPOSITS
<Table>
<Caption>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
--------------- -----------------
2005 2004 2005 2004
------ ------ ------- -------
($ IN MILLIONS)
Premiums
- --------
Individual Life....................................... $ 8 $ 8 $ 16 $ 17
Retail Annuity........................................ 2 1 4 1
Other Annuity......................................... -- 1 -- 2
---- ---- ------ ------
Total Premiums...................................... $ 10 $ 10 $ 20 $ 20
---- ---- ------ ------
Deposits
- --------
Retail Annuity -- Fixed............................... $ 14 $106 $ 28 $ 231
Retail Annuity -- Variable............................ 294 435 632 982
---- ---- ------ ------
Total Retail Annuity................................ 308 541 660 1,213
Individual Life....................................... 195 215 459 447
Other Annuity......................................... -- (2) -- --
---- ---- ------ ------
Total Deposits...................................... $503 $754 $1,119 $1,660
---- ---- ------ ------
</Table>
Retail annuity deposits collected for the quarter ended June 30, 2005
decreased $233 million, or 43% versus the prior year quarter. Deposits collected
for the six months ended June 30, 2005 decreased $553 million or 46% versus the
same 2004 six-month period. These decreases were driven by a third quarter 2004
shift in offering certain variable annuity products by TIC, which were
previously offered by the Company. Retail annuity account balances and benefit
reserves were $14.9 billion at both June 30, 2005 and December 31, 2004. This is
reflective of flat market appreciation for the six-month 2005 period and
decreased net sales of variable annuity investments for both the quarter and the
six-month period.
Deposits for the life insurance business decreased $20 million, or 9% for
the three months ended June 30, 2005 versus 2004 while on a six-month basis,
they increased $12 million or 3%. The quarterly decrease is due to significant
second quarter 2004 UL single premium sales, reflecting a slowdown in sales from
a single premium product introduced in the first quarter of 2004. The
year-to-date increase was the result of the continued momentum of universal life
production. Life insurance in force was $59 billion at June 30, 2005, up from
$55 billion at December 31, 2004.
SUBSEQUENT EVENT
On July 1, 2005 MetLife completed the acquisition of the Company. In the
normal course of accounting for acquisitions, purchase accounting ("PGAAP")
adjustments will be made to the assets and liabilities of the Company during the
third quarter of 2005. These PGAAP adjustments will mark to market the assets
and liabilities of the Company as of the closing date of the sale. At this time,
the Company cannot predict the effect the PGAAP adjustments may have on the
financial statements of the Company, although such adjustments may be material.
16
OUTLOOK
On January 31, 2005, Citigroup, the Company's ultimate parent at June 30,
2005, agreed to sell its Life Insurance and Annuities Businesses to MetLife. The
sale closed on July 1, 2005 and, at that time, the Company became part of
MetLife. MetLife filed with the State of Connecticut Insurance Department (the
"Department") an Amended and Restated Form A Statement Regarding the Acquisition
of Control of or Merger with a Domestic Insurer, dated April 19, 2005 (the "Form
A"), seeking the approval of the Department to acquire control of the Company
and TIC. The Form A was approved by the Department on June 30, 2005. The Form A
includes MetLife's post-acquisition business plan and financial projections for
the Company and TIC after the closing date. Consistent with MetLife's business
plan, the Company and TIC will generally phase out the products that they
currently issue by the end of 2006. This phase out of the products will likely
result in fewer assets and liabilities reported by the Company over time.
The Company is managed in conjunction with TIC and its outlook should be
considered within that context.
The in-force business of the Company is significantly affected by movements
in the U.S. equity and fixed income credit markets. U.S. equity and credit
market events can have both positive and negative effects on the deposit,
revenue and policy retention performance of the business. A sustained weakness
in the equity markets will decrease revenues and earnings in variable annuity
products. Declines in credit quality of issuers will have a negative effect on
earnings. The retail annuities business is interest rate and equity market
sensitive. The Company's variable annuities include products with guaranteed
features that are equity market sensitive. The guaranteed minimum death benefit
feature pays benefits when at the time of death of a contractholder the account
value is below the guaranteed amount. Another guaranteed feature offered is a
guaranteed minimum withdrawal benefit, which is considered an embedded
derivative. Exposure increases with the decline in equity markets and exposure
decreases with equity market growth. This exposure creates earnings volatility
because the embedded derivative is marked to market through income. The Company
has entered into an alternative hedging strategy to reduce the earnings
volatility.
A significant portion of individual life insurance mortality risk is
reinsured. Increasing prices and reduced capacity may adversely impact assets,
liabilities and earnings of the Company. Also, the Company's universal life
secondary guarantee created a large statutory-only reserve from Regulation AXXX.
This reserve is reinsured on a statutory basis to an affiliate. Disruption of
this reinsurance contract could significantly affect the statutory capital of
the Company.
Federal and state regulators have focused on, and continue to devote
substantial attention to, the mutual fund and variable insurance product
industries. As a result of publicity relating to widespread perceptions of
industry abuses, there have been numerous proposals for legislative and
regulatory reforms, including mutual fund governance, new disclosure
requirements concerning mutual fund share classes, commission breakpoints,
revenue sharing, advisory fees, market timing, late trading, portfolio pricing,
annuity products, hedge funds, producer compensation and other issues. It is
difficult to predict at this time whether changes resulting from new laws and
regulations will affect the industries or the Company's businesses, and, if so,
to what degree.
The statements above are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. See "-- Forward-Looking
Statements."
INSURANCE REGULATIONS
Risk-based capital requirements are used as minimum capital requirements by
the National Association of Insurance Commissioners ("NAIC") and the states to
identify companies that merit further regulatory action. At December 31, 2004,
the Company had total adjusted capital in excess of amounts requiring any
regulatory action as defined by the NAIC.
In accordance with Connecticut statutes, the Company may not pay dividends
during 2005 without prior approval of the Department. On July 1, 2005 Citigroup
sold the Company to MetLife. The Department requires prior approval for any
dividends for a period of two years following a change in
17
control. Accordingly, after July 1, 2005, the Company would need prior approval
to pay a dividend through June 30, 2007.
ACCOUNTING STANDARDS
CHANGES IN ACCOUNTING PRINCIPLES
Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts
On January 1, 2004, the Company adopted the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants Statement of
Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" ("SOP 03-1").
The main components of SOP 03-1 provide guidance on accounting and reporting by
insurance enterprises for separate account presentation, accounting for an
insurer's interest in a separate account, transfers to a separate account,
valuation of certain liabilities, contracts with death or other benefit
features, contracts that provide annuitization benefits, and sales inducements
to contract holders.
The following summarizes the more significant aspects of the Company's
adoption of SOP 03-1, effective January 1, 2004:
Variable Annuity Contracts with Guaranteed Minimum Death Benefit
Features. For variable annuity contracts with guaranteed minimum death benefit
("GMDB") features, SOP 03-1 requires the reporting entity to categorize the
contract as either an insurance or investment contract based upon the
significance of mortality or morbidity risk. SOP 03-1 provides explicit guidance
for calculating a reserve for insurance contracts, and provides that the
reporting entity does not hold reserves for investment contracts (i.e. there is
no significant mortality risk).
The Company determined that the mortality risk on its GMDB features was not
a significant component of the total variable annuity product, and accordingly
continued to classify these products as investment contracts.
Reserving for Universal Life and Variable Universal Life Contracts. SOP
03-1 requires that a reserve, in addition to the account balance, be established
for certain insurance benefit features provided under universal life ("UL") and
variable universal life ("VUL") products if the amounts assessed against the
contract holder each period for the insurance benefit feature are assessed in a
manner that is expected to result in profits in earlier years and losses in
subsequent years from the insurance benefit function.
The Company's UL and VUL products were reviewed to determine whether an
additional reserve is required under SOP 03-1. The Company determined that SOP
03-1 applied to some of its UL and VUL contracts with these features and
established an additional reserve of less than $1 million. The Company evaluates
new issues of variable products to determine that mortality risk on GMDB
features is insignificant.
Sales Inducements to Contract Holders. SOP 03-1 provides that,
prospectively, sales inducements provided to contract holders meeting certain
criteria are to be capitalized and amortized over the expected life of the
contract as a component of benefit expense. During the first six months of 2005
and 2004, the Company capitalized sales inducements of $12 million and $13
million, respectively, in accordance with SOP 03-1. These inducements relate to
bonuses on certain products offered by the Company. For the six months ended
June 30, 2005 and 2004, amortization of these capitalized amounts was
insignificant.
Consolidation of Variable Interest Entities
On January 1, 2004, the Company adopted Financial Accounting Standards
Board ("FASB") Interpretation No. 46, "Consolidation of Variable Interest
Entities -- An Interpretation of ARB No. 51" ("FIN 46") (revised December 2003,
"FIN 46-R"), which includes substantial changes from the original FIN 46.
Included in these changes, the calculation of expected losses and expected
residual returns has
18
been altered to reduce the impact of decision maker and guarantor fees in the
calculation of expected residual returns and expected losses. In addition, the
definition of a variable interest has been changed in the revised guidance. The
adoption of the provisions of FIN 46-R on January 1, 2004 did not require the
Company to consolidate any variable interest entities ("VIEs").
FIN 46 and FIN 46-R change the method of determining whether certain
entities, including securitization entities, should be included in the Company's
condensed financial statements. An entity is subject to FIN 46 and FIN 46-R and
is called a VIE if it has (1) equity that is insufficient to permit the entity
to finance its activities without additional subordinated financial support from
other parties, or (2) equity investors that cannot make significant decisions
about the entity's operations or that do not absorb the expected losses or
receive the expected returns of the entity. All other entities are evaluated for
consolidation under Statement of Financial Accounting Standards ("SFAS") No. 94,
"Consolidation of All Majority-Owned Subsidiaries" ("SFAS 94"). A VIE is
consolidated by its primary beneficiary, which is the party involved with the
VIE that has a majority of the expected losses or a majority of the expected
residual returns or both.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Other-Than-Temporary Impairments of Certain Investments
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 will issue a FASB Staff Position Paper
("FSP") 115-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments" ("FSP 115-1"), superseding EITF 03-1 and
EITF Topic D-44, "Recognition of Other-Than-Temporary Impairment on the Planned
Sale of a Security Whose Cost Exceeds Fair Value" ("Topic D-44"). FSP 115-1 will
nullify the accounting guidance on the determination of whether an investment is
other-than-temporarily impaired as set forth in EITF 03-1. FSP 115-1 will be
effective for other-than-temporary impairment analysis conducted in periods
beginning after September 15, 2005. The Company has complied with the disclosure
requirements of EITF 03-1, which were effective December 31, 2003 and remain in
effect.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of Accounting Principles Board ("APB") Opinion No. 20
and SFAS No. 3" ("SFAS 154"). SFAS 154 is a result of a broader effort by the
FASB to converge standards with the International Accounting Standards Board.
The statement requires retrospective application to prior periods' financial
statements for a voluntary change in accounting principle unless it is
impracticable. It also requires that a change in method of depreciation,
amortization, or depletion for long-lived, nonfinancial 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. SFAS 154 is not expected to have
a material impact on the Company's condensed financial statements.
19
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS 123-R"), which replaces the existing SFAS 123 and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123-R requires
companies to measure and record compensation expense for stock options and other
share-based payments based on the instruments' fair value. SFAS 123-R is
effective for interim and annual reporting periods beginning after June 15,
2005. In April 2005, the SEC issued a final ruling allowing public companies to
defer adoption of SFAS 123-R until the beginning of the first fiscal year
following June 15, 2005. At the close of the sale on July 1, 2005, all
outstanding options and awards of Citigroup stock held by employees of the
Company vested. All related stock option expense was recorded at the time of
vesting by Citigroup. As such, the Company does not expect the adoption of SFAS
123-R to have any impact on its financial statements.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "may increase," "predict," and similar expressions or future or
conditional verbs such as "will," "should," "would," and "could."
Forward-looking statements are made based on management's current expectations
and beliefs concerning future developments and their potential effects on the
Company. Such forward-looking statements are not guarantees of future
performance. Actual results may differ materially from those included in the
forward-looking statements as a result of risks and uncertainties including, but
not limited to, the following: (i) changes in general economic conditions,
including the performance of financial markets and interest rates; (ii)
heightened competition, including with respect to pricing, entry of new
competitors and the development of new products by new and existing competitors;
(iii) unanticipated changes in industry trends; (iv) adverse results or other
consequences from litigation, arbitration or regulatory investigations; (v)
regulatory, accounting or tax changes that may affect the cost of, or demand
for, the Company's products or services; (vi) downgrades in the Company's and
its affiliates' claims paying ability, financial strength or credit ratings;
(vii) changes in rating agency policies or practices; (viii) discrepancies
between actual claims experience and assumptions used in setting prices for the
Company's products and establishing the liabilities for the Company's
obligations for future policy benefits and claims; (ix) discrepancies between
actual experience and assumptions used in establishing liabilities related to
other contingencies or obligations; (x) the effects of business disruption or
economic contraction due to terrorism or other hostilities; (xi) changes in
results of the Company arising from the acquisition by MetLife and integration
of its businesses into MetLife's operations; and (xii) other risks and
uncertainties described from time to time in TLAC's filings with the SEC. The
Company specifically disclaims any obligation to update or revise any
forward-looking statement, whether as a result of new information, future
developments or otherwise.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
TLAC's management, with the participation of TLAC's Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the design and
operation of TLAC's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as
amended ("Exchange Act")) as of the end of the period covered by this report.
Based on such evaluation, TLAC's Chief Executive Officer and Chief Financial
Officer have concluded that TLAC's disclosure controls and procedures are
effective.
20
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in TLAC's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act)
during the quarter ended June 30, 2005 that have materially affected, or are
reasonably likely to materially affect, TLAC's internal control over financial
reporting.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1999, an amended putative class action complaint captioned Lisa
Macomber, et al. vs. Travelers Property Casualty Corporation, et al. was filed
in New Britain, Connecticut Superior Court against the Company, Travelers Equity
Sales, Inc. and certain former affiliates. The amended complaint alleges
Travelers Property Casualty Corporation, a former affiliate, purchased
structured settlement annuities from the Company and spent less on the purchase
of those structured settlement annuities than agreed with claimants; and that
commissions paid to brokers of structured settlement annuities, were paid, in
part, to Travelers Property Casualty Corporation. The amended complaint was
dismissed and, following an appeal by the plaintiff in September 2002, the
Connecticut Supreme Court reversed the dismissal of several of the plaintiff's
claims. On May 26, 2004, the Connecticut Superior Court certified a nationwide
class action involving the following claims: violation of the Connecticut Unfair
Trade Practice Statute, unjust enrichment and civil conspiracy. On June 15,
2004, the defendants appealed the Connecticut Superior Court's May 26, 2004
class certification order.
In 2003 and 2004, several issues in the mutual fund and variable insurance
product industries have come under the scrutiny of federal and state regulators.
Like many other companies in our industry, the Company has received a request
for information from the SEC and a subpoena from the New York Attorney General
regarding market timing and late trading. During 2004, the SEC requested
additional information about the Company's variable product operations on market
timing, late trading and revenue sharing, and the SEC, the National Association
of Securities Dealers and the New York Insurance Department have made inquiries
into these issues and other matters associated with the sale and distribution of
insurance products. In addition, like many insurance companies and agencies, in
2004 and 2005, the Company received inquiries from certain state Departments of
Insurance regarding producer compensation and bidding practices. The Company is
cooperating fully with all of these requests and is not able to predict their
outcomes.
In addition, the Company is a defendant or co-defendant in various other
litigation matters in the normal course of business. These include civil
actions, arbitration proceedings and other matters arising in the normal course
of business out of activities as an insurance company, a broker and dealer in
securities or otherwise.
In the opinion of the Company's management, the ultimate resolution of
these legal and regulatory proceedings would not be likely to have a material
adverse effect on the Company's financial condition or liquidity, but, if
involving monetary liability, may be material to the Company's operating results
for any particular period.
21
<Table>
Item 6. Exhibits
3.01 Charter of The Travelers Life and Annuity Company (the
"Company"), as amended on April 10, 1990, incorporated
herein by reference to Exhibit 6(a) to the Company's
Registration Statement on Form N-4, File No. 33-58131, filed
on March 17, 1995 (the "Registration Statement").
3.02 By-laws of the Company, as amended on October 20, 1994,
incorporated herein by reference to Exhibit 6(b) to the
Company's Registration Statement.
31.01+ Certification of chief executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.02+ Certification of chief financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.01+ Certification of chief executive officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.02+ Certification of chief financial officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
</Table>
- ---------------
+ Filed herewith
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TRAVELERS LIFE AND ANNUITY COMPANY
(Registrant)
/s/ Joseph J. Prochaska, Jr.
------------------------------------------
Joseph J. Prochaska, Jr.
Senior Vice President and Chief Accounting
Officer
(Authorized Signatory and Chief Accounting
Officer)
Date: August 12, 2005
23
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.01 Charter of The Travelers Life and Annuity Company (the
"Company"), as amended on April 10, 1990, incorporated
herein by reference to Exhibit 6(a) to the Company's
Registration Statement on Form N-4, File No. 33-58131, filed
on March 17, 1995 (the "Registration Statement").
3.02 By-laws of the Company, as amended on October 20, 1994,
incorporated herein by reference to Exhibit 6(b) to the
Company's Registration Statement.
31.01+ Certification of chief executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.02+ Certification of chief financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.01+ Certification of chief executive officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.02+ Certification of chief financial officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
</Table>
- ---------------
+ Filed herewith
24