- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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: 33-03094
---------------------
THE TRAVELERS INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<Table>
CONNECTICUT 06-0566090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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 check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At November 18, 2005, 40,000,000 shares of the Registrant's Common Stock,
$2.50 par value per share, were outstanding, all of which are owned by 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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- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS........................................ 4
Interim Condensed Consolidated Balance Sheets at September 30, 2005
(Successor) (Unaudited) and December 31, 2004 (Predecessor)............. 4
Interim Condensed Consolidated Statements of Income for the Three Months
Ended September 30, 2005 (Successor) and 2004 (Predecessor) 5
(Unaudited).............................................................
Interim Condensed Consolidated Statements of Income for the Three Months
Ended September 30, 2005 (Successor) and the Six Months Ended June 30,
2005 (Predecessor) and the Nine Months Ended September 30, 2004 6
(Predecessor) (Unaudited)...............................................
Interim Condensed Consolidated Statements of Stockholder's Equity for the
Three Months Ended September 30, 2005 (Successor) and the Six Months
Ended June 30, 2005 (Predecessor) (Unaudited)........................... 7
Interim Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2005 (Successor) and the Six Months Ended
June 30, 2005 (Predecessor) and the Nine Months Ended September 30, 2004 8
(Predecessor) (Unaudited)...............................................
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 36
ITEM 4. CONTROLS AND PROCEDURES..................................... 42
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 43
ITEM 6. EXHIBITS.................................................... 43
SIGNATURES................................................................. 44
EXHIBIT INDEX.............................................................. 45
</Table>
2
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains
statements which constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements relating
to trends in the operations and financial results and the business and the
products of The Travelers Insurance Company and its subsidiaries, as well as
other statements including words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend" and other similar expressions. Forward-looking
statements are made based upon management's current expectations and beliefs
concerning future developments and their potential effects on The Travelers
Insurance Company and its subsidiaries. Such forward-looking statements are not
guarantees of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------- ------------
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $46,581 and $40,466, respectively).... $ 45,922 $ 42,621
Trading securities, at fair value (cost: $498 and $1,220,
respectively).......................................... 509 1,346
Equity securities available-for-sale, at fair value (cost:
$545 and $332, respectively)........................... 545 374
Mortgage loans on real estate............................. 2,147 2,124
Policy loans.............................................. 882 1,084
Real estate and real estate joint ventures
held-for-investment.................................... 102 266
Other limited partnership interests....................... 1,009 1,105
Short-term investments.................................... 2,533 3,502
Other invested assets..................................... 1,202 4,095
-------- --------
Total investments...................................... 54,851 56,517
Cash and cash equivalents................................... 1,508 215
Accrued investment income................................... 496 548
Premiums and other receivables.............................. 5,678 4,000
Deferred policy acquisition costs and value of business
acquired.................................................. 3,626 2,862
Assets of subsidiaries held-for-sale........................ -- 10,019
Goodwill.................................................... 814 196
Net deferred income tax asset............................... 1,198 --
Other assets................................................ 434 744
Separate account assets..................................... 31,565 30,742
-------- --------
Total assets........................................... $100,170 $105,843
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits.................................... $ 17,065 $ 12,682
Policyholder account balances............................. 33,855 33,755
Other policyholder funds.................................. 462 596
Liabilities of subsidiaries held-for-sale................. -- 5,745
Current income taxes payable.............................. 106 305
Deferred income tax liability............................. -- 1,371
Payables under securities loaned transactions............. 8,305 1,986
Other liabilities......................................... 1,976 4,356
Separate account liabilities.............................. 31,565 30,742
-------- --------
Total liabilities...................................... 93,334 91,538
-------- --------
Stockholder's Equity:
Common stock, par value $2.50 per share; 40,000,000 shares
authorized, issued and outstanding at September 30, 2005
and December 31, 2004..................................... 100 100
Additional paid-in capital.................................. 6,904 5,449
Retained earnings........................................... 187 7,159
Accumulated other comprehensive (loss) income............... (355) 1,597
-------- --------
Total stockholder's equity............................. 6,836 14,305
-------- --------
Total liabilities and stockholder's equity............. $100,170 $105,843
======== ========
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------- -------------
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
REVENUES
Premiums.................................................... $ 161 $ 333
Universal life and investment-type product policy fees...... 211 175
Net investment income....................................... 619 746
Other revenues.............................................. 41 64
Net investment gains (losses)............................... (25) --
------ ------
Total revenues............................................ 1,007 1,318
------ ------
EXPENSES
Policyholder benefits and claims............................ 298 461
Interest credited to policyholder account balances.......... 262 336
Other expenses.............................................. 170 208
------ ------
Total expenses............................................ 730 1,005
------ ------
Income from continuing operations before provision for
income taxes.............................................. 277 313
Provision for income taxes.................................. 90 90
------ ------
Income from continuing operations........................... 187 223
Income from discontinued operations, net of income taxes.... -- 123
------ ------
Net income.................................................. $ 187 $ 346
====== ======
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND THE SIX MONTHS ENDED JUNE 30,
2005
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------- ------------------------------
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2005 2005 2004
------------- -------------- -------------
REVENUES
Premiums............................................. $ 161 $ 325 $ 656
Universal life and investment-type product policy
fees............................................... 211 406 505
Net investment income................................ 619 1,608 2,225
Other revenues....................................... 41 113 149
Net investment gains (losses)........................ (25) 26 (16)
------ ------ ------
Total revenues..................................... 1,007 2,478 3,519
------ ------ ------
EXPENSES
Policyholder benefits and claims..................... 298 599 1,033
Interest credited to policyholder account balances... 262 698 962
Other expenses....................................... 170 440 536
------ ------ ------
Total expenses..................................... 730 1,737 2,531
------ ------ ------
Income from continuing operations before provision
for income taxes................................... 277 741 988
Provision for income taxes........................... 90 205 261
------ ------ ------
Income from continuing operations.................... 187 536 727
Income from discontinued operations, net of income
taxes.............................................. -- 240 367
------ ------ ------
Net income........................................... $ 187 $ 776 $1,094
====== ====== ======
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
AND THE SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED)
(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, 2005
(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 7, 8 and 11)................ (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
Comprehensive income (loss):
Net income........................ 187 187
Other comprehensive income (loss):
Unrealized investment gains
(losses), net of related
offsets and income taxes...... (357) (357)
Foreign currency translation
adjustments................... 2 2
-------
Other comprehensive income
(loss)........................ (355)
-------
Comprehensive income (loss)....... (168)
---- ------- ------- ------- ----- -------
BALANCE AT SEPTEMBER 30, 2005
(SUCCESSOR)....................... $100 $ 6,904 $ 187 $ (357) $ 2 $ 6,836
==== ======= ======= ======= ===== =======
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND THE SIX MONTHS ENDED
JUNE 30, 2005 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------- ------------------------------------
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED JUNE 30, ENDED SEPTEMBER 30,
2005 2005 2004
------------------- -------------- -------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.... $ (444) $ 1,196 $ 999
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities................................... 11,818 6,011 10,259
Equity securities.................................. 102 102 136
Mortgage loans on real estate...................... 511 288 529
Real estate and real estate joint ventures......... 54 11 53
Other limited partnership interests................ 91 -- --
Purchases of:
Fixed maturities................................... (17,399) (5,435) (13,180)
Equity securities.................................. -- (116) (91)
Mortgage loans on real estate...................... (305) (452) (744)
Real estate and real estate joint ventures......... (13) -- --
Other limited partnership interests................ (43) -- --
Policy loans......................................... 1 201 9
Net change in short-term investments................. 131 987 (286)
Net change in other invested assets.................. 53 (341) 391
Other, net........................................... 5 -- 108
-------- ------- --------
Net cash provided by (used in) investing activities.... (4,994) 1,256 (2,816)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits........................................... 5,537 3,252 7,454
Withdrawals........................................ (6,151) (3,927) (5,088)
Net change in payable under securities loaned
transactions....................................... 7,142 (823) 311
Dividends on common stock............................ -- (675) (773)
Restructuring transactions........................... -- (259) --
Other, net........................................... (25) -- --
-------- ------- --------
Net cash provided by (used in) financing activities.... 6,503 (2,432) 1,904
-------- ------- --------
Change in cash and cash equivalents.................... 1,065 20 87
Cash and cash equivalents, beginning of period......... 443 215 139
-------- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 1,508 $ 235 $ 226
======== ======= ========
Supplemental disclosures of cash flow information:
Net cash paid during the period for income taxes..... $ -- $ 406 $ 35
======== ======= ========
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 $ --
======== ======= ========
</Table>
- ---------------
See Note 1 for purchase accounting adjustments.
See Notes 7, 8 and 11 for non-cash restructuring transactions.
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
8
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 Insurance Holding Corporation ("CIHC"), an indirect,
wholly-owned subsidiary of Citigroup (the "Acquisition") for $12.0 billion.
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 (the "Acquisition Agreement") by both parties.
In accordance with Statement of Financial Accounting Standard ("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 Staff
Accounting Bulletin 54, Push Down Basis of Accounting in Financial Statements of
a Subsidiary, 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, are presented below.
The fair value of certain assets acquired and liabilities assumed, including
goodwill, may be 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.
9
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
SUCCESSOR
---------------------------------------
AS OF JULY 1, 2005
---------------------------------------
(IN MILLIONS)
TOTAL PURCHASE PRICE................................... $11,960
Purchase price allocated to other affiliates......... 4,956
------------------
Purchase price allocated to the Company.............. 7,004
NET ASSETS ACQUIRED PRIOR TO PURCHASE ACCOUNTING
ADJUSTMENTS.......................................... $ 8,207
ADJUSTMENTS TO REFLECT ASSETS ACQUIRED AT FAIR VALUE:
Fixed maturities available-for-sale.................. (17)
Mortgage loans on real estate........................ 71
Real estate and real estate joint ventures
held-for-investment............................... 39
Other limited partnership interests.................. 18
Premiums and other receivables....................... 1,002
Elimination of historical deferred policy acquisition
costs............................................. (3,052)
Value of business acquired........................... 3,490
Value of distribution agreements and customer
relationships acquired............................ 74
Net deferred income tax asset........................ 1,644
Elimination of historical goodwill................... (196)
Other assets......................................... (2)
ADJUSTMENTS TO REFLECT LIABILITIES ASSUMED AT FAIR
VALUE:
Future policy benefits............................... (3,412)
Policyholder account balances........................ (1,869)
Other liabilities.................................... 193
------------------
NET FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES
ASSUMED.............................................. 6,190
------------------
GOODWILL RESULTING FROM THE ACQUISITION................ $ 814
==================
</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............................................... $283
Individual.................................................. 147
Corporate & Other........................................... 384
----
TOTAL..................................................... $814
====
</Table>
The entire amount of goodwill is expected to be deductible for tax
purposes.
10
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (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....................... $41,219
Trading securities........................................ 555
Equity securities available-for-sale...................... 617
Mortgage loans on real estate............................. 2,362
Policy loans.............................................. 884
Real estate and real estate joint ventures
held-for-investment.................................... 126
Other limited partnership interests....................... 1,090
Short-term investments.................................... 2,225
Other invested assets..................................... 1,241
-------
Total investments...................................... 50,319
Cash and cash equivalents................................. 443
Accrued investment income................................. 494
Premiums and other receivables............................ 4,689
Value of business acquired................................ 3,490
Goodwill.................................................. 814
Other intangible assets................................... 74
Net deferred income tax asset............................. 1,021
Other assets.............................................. 789
Separate account assets................................... 30,427
-------
Total assets acquired.................................. 92,560
-------
LIABILITIES:
Future policy benefits.................................... 17,211
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.............................. 85,556
-------
Net assets acquired.................................... $ 7,004
=======
</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 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
11
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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.
For purposes of calculating the VOBA and other intangible assets relating
to the Acquisition, management considered the Company's 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
---------
JULY 1,
2005
---------
(IN
MILLIONS)
Value of business acquired.................................. $3,490
Value of distribution agreements and customer relationships
acquired.................................................. 74
------
Total value of amortizable intangible assets acquired..... 3,564
Non-amortizable intangible assets acquired.................. --
------
Total value of intangible assets acquired, excluding
goodwill............................................... $3,564
======
</Table>
The estimated future amortization of the value of business acquired,
distribution agreements and customer relationships acquired from 2005 to 2010 is
as follows:
<Table>
<Caption>
SUCCESSOR
---------
AS OF
SEPTEMBER
30, 2005
---------
(IN
MILLIONS)
Three months ended December 31, 2005........................ $ 79
2006........................................................ $327
2007........................................................ $320
2008........................................................ $304
2009........................................................ $285
2010........................................................ $264
</Table>
2. SUMMARY OF ACCOUNTING POLICIES
BUSINESS
TIC is a Connecticut corporation incorporated in 1863. As described more
fully in Note 1, TIC became a wholly-owned subsidiary of MetLife, a leading
provider of insurance and other financial services to individual and
institutional customers, on July 1, 2005. The Company offers retail annuities,
individual life insurance, corporate-owned life insurance and institutional
annuity insurance products distributed by TIC and TLAC. Primerica was
distributed via dividend from TIC to CIHC on June 30, 2005 in contemplation of
the Acquisition. Primerica is reported in discontinued operations for all
periods presented. See Note 11.
12
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
BASIS OF PRESENTATION
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 unaudited interim condensed 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 deferred policy
acquisition costs ("DAC"), including VOBA; (vi) the measurement of goodwill and
related impairment, if any; (vii) the liability for future policyholder
benefits; (viii) the liability for litigation and regulatory matters; and (ix)
accounting for reinsurance transactions. 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 service industries;
others are specific to the Company's businesses and operations. Actual results
could differ from these estimates.
The accompanying unaudited interim condensed 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.
Certain amounts in the prior periods' consolidated financial statements
have been reclassified to conform with the 2005 presentation.
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 presented on a consistent
basis, the six month period prior to the Acquisition is presented separately
from the three month period subsequent to the Acquisition.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (including normal recurring adjustments)
necessary to present fairly the consolidated financial position of the Company
at September 30, 2005, its consolidated results of operations for the three
months ended September 30, 2005 and 2004, the six months ended June 30, 2005 and
the nine months ended September 30, 2004, its consolidated statements of
stockholder's equity for the three months ended September 30, 2005 and the six
months ended June 30, 2005, and its consolidated cash flows for the three months
ended September 30, 2005, the six months ended June 30, 2005 and the nine months
ended September 30, 2004 in accordance with GAAP. Interim results are not
necessarily indicative of full year performance. These unaudited interim
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements of the Company included in TIC's Annual
Report on Form 10-K for the year ended December 31, 2004 filed with the U.S.
Securities and Exchange Commission ("SEC").
13
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies included in TIC's Annual
Report on Form 10-K for the year ended December 31, 2004 filed with the SEC have
been updated or amended in connection with the Acquisition as follows:
Goodwill
Goodwill is the excess of cost over the fair value of net assets acquired.
Changes in goodwill are as follows:
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30, 2005
------------------
(IN MILLIONS)
Balance, beginning of year (Predecessor).................... $ 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)................. 814
-----
Balance, end of period (Successor).......................... $ 814
=====
</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 discounted cash flow models. When available
and as appropriate, comparative market multiples are used to corroborate
discounted cash flow results.
Liability for Future Policy Benefits and Policyholder Account Balances
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life products. The annuity payout
reserves were historically calculated using the mortality and interest
assumptions used in the actual pricing of the benefits. Mortality assumptions
were based on the Company's experience and are adjusted to reflect deviations
such as substandard mortality in structured settlement benefits. Traditional
life products include whole life and term insurance. Traditional life product
reserves are estimated on the basis of actuarial assumptions as to mortality,
persistency and interest rates, established at policy issue. Assumptions
established at policy issuance as to mortality and persistency are based on the
Company's experience which, together with interest assumptions, include a margin
for adverse deviation. For those contracts in-force at the time of the
Acquisition, the Company revalued the reserves using updated assumptions as to
interest rates, mortality, persistency and provisions for adverse deviation
which were current as of the time of the Acquisition.
Policyholder account balances represent receipts from the issuance of
universal life, corporate owned life insurance ("COLI"), pension, investment,
guaranteed investment, and certain deferred annuity contracts. For universal
life and COLI contracts, policyholder account balances are increased by receipts
for mortality
14
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
coverage, contract administration, surrender charges and interest accrued where
one or more of these elements are not fixed or guaranteed. These balances are
decreased by withdrawals, mortality charges and administrative expenses charged
to policyholders where these charges are not fixed or guaranteed. Pension,
investment, guaranteed investment and certain annuity contracts do not contain
significant insurance risks and are considered investment type contracts.
Policyholder account balances are increased by receipts and credited interest
and reduced by withdrawals and administrative expenses charged to the
policyholder. For those contracts in-force at the time of the Acquisition, the
Company revalued the policyholder account balances using current market credit
rates on similar newly issued policies.
Single Premium Immediate Annuities, Structured Settlements and Immediate
Participation Guarantees
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 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.
Deferred Annuities with Guaranteed Minimum Death Benefit Features
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").
Amortization of Deferred Acquisition Costs for Deferred and Payout Annuities
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
15
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
deferred annuity contracts in proportion to anticipated gross profits and payout
annuity contracts in proportion to anticipated premiums.
Equity Method of Accounting for Joint Ventures
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.
Federal Income Taxes
Federal income taxes for interim periods have been computed using an actual
effective tax rate. 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 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 5.
APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS
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 coverage 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 unaudited interim condensed 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. SFAS 153 did not have a material impact on the Company's
unaudited interim condensed consolidated financial statements.
16
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
In June 2005, the Financial Accounting Standards Board ("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 FASB Staff Position ("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. FSP 115-1 is
effective on a prospective basis for other-than-temporary impairments on certain
investments in periods beginning after December 15, 2005. The Company has
complied with the disclosure requirements of EITF 03-1, which was effective
December 31, 2003 and will remain in effect until the adoption of FSP 115-1. The
Company does not anticipate that the adoption will have a material impact on its
unaudited interim condensed consolidated financial statements.
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 unaudited interim condensed 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 is not expected to have a material impact on the Company's unaudited
interim condensed consolidated financial statements.
In June 2005, the FASB cleared SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("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 Implementation Issue No. B39, Embedded
Derivatives: Application of Paragraph 13(b) in Call Options That Are Exercisable
Only by the Debtor ("Issue B39"). Issue B38 clarifies that the potential
settlement of a debtor's obligation to a creditor that would occur upon exercise
of a put or call option meets the net settlement criteria of SFAS 133. Issue B39
clarifies 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.
Issue Nos. B38 and B39, which must be adopted as of the first day of the first
fiscal quarter beginning after December 15, 2005, are not expected to have a
material impact on the Company's unaudited interim condensed 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
17
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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
unaudited interim condensed 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 unaudited interim condensed 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).
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 Contract Holders. 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.
During the first nine months of 2005 and 2004, the Company capitalized
sales inducements of approximately $48 million and $35 million,
respectively, in accordance with SOP 03-1. These inducements relate to
bonuses on certain products offered by the Company. For the three months
ended September 30, 2005 and 2004, the six months ended June 30, 2005 and
the nine months ended September 30, 2004, amortization of these capitalized
amounts was insignificant.
18
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Effective January 1, 2004, the Company adopted FASB Interpretation No. 46,
Consolidation of Variable Interest Entities -- An Interpretation of ARB No. 51
("FIN 46") 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 unaudited interim condensed consolidated 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) on January 1, 2004 did not
require the Company to consolidate any additional VIEs that were not previously
consolidated.
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
---------------------------------------------
SEPTEMBER 30, 2005
---------------------------------------------
GROSS
COST OR UNREALIZED
AMORTIZED ----------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ---- ---- ---------- ------
(IN MILLIONS)
U.S. corporate securities.................. $22,500 $32 $382 $22,150 48.2%
Mortgage-backed securities................. 12,930 10 153 12,787 27.8
Foreign corporate securities............... 5,345 27 105 5,267 11.5
U.S. treasury/agency securities............ 4,735 -- 78 4,657 10.1
State and political subdivision
securities............................... 652 -- 22 630 1.4
Foreign government securities.............. 382 13 3 392 0.9
------- --- ---- ------- ------
Total bonds.............................. 46,544 82 743 45,883 99.9
Redeemable preferred stocks................ 37 3 1 39 0.1
------- --- ---- ------- ------
Total fixed maturities................... $46,581 $85 $744 $45,922 100.0%
======= === ==== ======= ======
Nonredeemable preferred stocks............. $ 329 $-- $ 3 $ 326 59.8%
Common stocks.............................. 216 8 5 219 40.2
------- --- ---- ------- ------
Total equity securities.................. $ 545 $ 8 $ 8 $ 545 100.0%
======= === ==== ======= ======
</Table>
19
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
PREDECESSOR
----------------------------------------------
DECEMBER 31, 2004
----------------------------------------------
GROSS
COST OR UNREALIZED
AMORTIZED ------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ------ ---- ---------- -----
(IN MILLIONS)
U.S. corporate securities...................... $23,773 $1,354 $36 $25,091 58.9%
Mortgage-backed securities..................... 6,885 235 7 7,113 16.7
Foreign corporate securities................... 6,899 384 12 7,271 17.0
U.S. treasury/agency securities................ 1,818 99 -- 1,917 4.5
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%
======= ====== === ======= =====
Nonredeemable 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>
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 September 30,
2005 and December 31, 2004:
<Table>
<Caption>
SUCCESSOR
------------------------------------------------------------------------------------------
SEPTEMBER 30, 2005
------------------------------------------------------------------------------------------
EQUAL TO OR GREATER THAN
LESS THAN 12 MONTHS 12 MONTHS TOTAL
---------------------------- ---------------------------- ----------------------------
ESTIMATED GROSS ESTIMATED GROSS ESTIMATED GROSS
FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS
---------- --------------- ---------- --------------- ---------- ---------------
(DOLLARS IN MILLIONS)
U.S. corporate securities... $18,285 $382 $ -- $ -- $18,285 $382
Mortgage-backed
securities................ 11,533 153 -- -- 11,533 153
Foreign corporate
securities................ 4,612 105 -- -- 4,612 105
U.S. treasury/agency
securities................ 4,367 78 -- -- 4,367 78
State and political
subdivision securities.... 529 22 -- -- 529 22
Foreign government
securities................ 146 3 -- -- 146 3
------- ---- ----- ----- ------- ----
Total bonds............... 39,472 743 -- -- 39,472 743
Redeemable preferred
stocks.................... 29 1 -- -- 29 1
------- ---- ----- ----- ------- ----
Total fixed maturities.... $39,501 $744 $ -- $ -- $39,501 $744
======= ==== ===== ===== ======= ====
Equity securities......... $ 214 $ 8 $ -- $ -- $ 214 $ 8
======= ==== ===== ===== ======= ====
Total number of securities
in an unrealized loss
position............... 5,672 -- 5,672
======= ===== =======
</Table>
20
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (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
---------- --------------- ---------- --------------- ---------- ---------------
(IN MILLIONS)
U.S. corporate securities.... $3,232 $28 $237 $ 8 $3,469 $36
Mortgage-backed securities... 801 6 60 1 861 7
Foreign corporate
securities................. 949 8 178 4 1,127 12
U.S. treasury/agency
securities................. 60 -- -- -- 60 --
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
====== === ==== === ====== ===
</Table>
The Company records impairments as investment losses and adjusts the cost
basis of the fixed maturities and equity securities accordingly. The Company
does not change the revised cost basis for subsequent recoveries in value.
Impairments of fixed maturities and equity securities were $0 million and $12
million for the three months ended September 30, 2005 and 2004, respectively, $4
million for the six months ended June 30, 2005, and $38 million for the nine
months ended September 30, 2004.
AGING OF GROSS UNREALIZED LOSSES FOR FIXED MATURITIES AND EQUITY SECURITIES
AVAILABLE-FOR-SALE
The following table presents the cost or amortized cost, gross unrealized
losses and number of securities for fixed maturities and equity securities at
September 30, 2005 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
------------------------------------------------------------
SEPTEMBER 30, 2005
------------------------------------------------------------
COST OR GROSS NUMBER OF
AMORTIZED COST UNREALIZED LOSSES 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.................... $40,329 $138 $704 $48 5,620 52
------- ---- ---- --- ----- ---
Total................................. $40,329 $138 $704 $48 5,620 52
======= ==== ==== === ===== ===
</Table>
The cost of fixed maturity and equity securities is adjusted for
impairments in value deemed to be other-than-temporary in the period that such
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 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.
Such considerations used by the Company in the impairment evaluation process
include, but are not limited to: (i) the length of
21
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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. 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.
NET INVESTMENT GAINS (LOSSES)
Net investment gains (losses) are as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------ ------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------ ------------------
(IN MILLIONS)
Fixed maturities.................................... $(73) $ 29
Equity securities................................... 2 1
Mortgage loans on real estate....................... (6) 1
Real estate and real estate joint ventures.......... 1 (1)
Other limited partnership interests................. -- --
Derivatives......................................... 49 (31)
Other............................................... 2 1
---- ----
Net investment gains (losses)..................... $(25) $ --
==== ====
</Table>
22
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------ ----------------------------------
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, 2005 JUNE 30, 2005 SEPTEMBER 30, 2004
------------------ ------------- ------------------
(IN MILLIONS)
Fixed maturities....................... $(73) $ 17 $(22)
Equity securities...................... 2 35 14
Mortgage loans on real estate.......... (6) 1 1
Real estate and real estate joint
ventures............................. 1 7 (3)
Other limited partnership interests.... -- 2 5
Derivatives............................ 49 (36) (3)
Other.................................. 2 -- (8)
---- ---- ----
Net investment gains (losses)........ $(25) $ 26 $(16)
==== ==== ====
</Table>
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.
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 as 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 at September 30, 2005:
<Table>
<Caption>
NOT PRIMARY BENEFICIARY
-----------------------
MAXIMUM
TOTAL EXPOSURE TO
ASSETS(1) LOSS(2)
--------- -----------
(IN MILLIONS)
Asset-backed securitizations................................ $1,444 $ 85
Real estate joint ventures(3)............................... 97 19
Other limited partnerships(4)............................... 290 138
Other investments(5)........................................ 200 15
------ ----
Total..................................................... $2,031 $257
====== ====
</Table>
- ---------------
(1) The assets of the asset-backed securitizations are reflected at fair value
at September 30, 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
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 retained interests. 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.
(3) Real estate joint ventures include partnerships and other ventures, which
engage in the acquisition, development, management and disposal of real
estate investments.
23
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
(4) Other limited partnerships include partnerships established for the purpose
of investing 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
The Company previously disclosed in its consolidated financial statements
for the year ended December 31, 2004, its types and uses of derivative
instruments, and financial statement classifications. This information should be
read in conjunction with Notes 1 and 11 of Notes to Consolidated Financial
Statements included in TIC's Annual Report on Form 10-K for the year ended
December 31, 2004 filed with the SEC. As a part of the Acquisition, positive
derivative revaluation gains were reclassified from other assets to other
invested assets to conform with MetLife's presentation.
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 redesignated in hedging
relationships. Accordingly, all changes in derivative fair values for the three
months ended September 30, 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
------------------------------- -------------------------------
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------------------- -------------------------------
CURRENT MARKET CURRENT MARKET
OR FAIR VALUE OR FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Interest rate swaps.................. $ 6,614 $ 355 $ 63 $ 5,702 $ 59 $109
Interest rate caps................... 2,021 15 -- 118 3 --
Financial futures.................... 81 -- 2 1,339 -- --
Foreign currency swaps............... 3,098 518 50 3,219 850 45
Foreign currency forwards............ 443 10 -- 431 -- 8
Options.............................. -- 165 4 -- 189 --
Financial forwards................... -- -- 3 -- 2 2
Credit default swaps................. 225 1 2 415 4 3
------- ------ ---- ------- ------ ----
Total.............................. $12,482 $1,064 $124 $11,224 $1,107 $167
======= ====== ==== ======= ====== ====
</Table>
The Company enters into various collateral arrangements, which require both
the pledging and accepting of collateral in connection with its derivative
instruments. As of September 30, 2005 and December 31, 2004, the Company was
obligated to return cash collateral under its control of $24 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 other
liabilities in the interim condensed consolidated balance sheet. As of September
30, 2005 and December 31, 2004, the Company had also accepted collateral
consisting of various securities with a fair market value of $452 million and
$584 million, respectively, which is held in separate custodial accounts and is
not reflected in the interim condensed consolidated financial statements. The
Company is permitted by contract to sell or repledge this collateral, but as of
September 30, 2005 and December 31, 2004, none of the collateral had been sold
or repledged.
24
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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
------------------------------- -------------------------------
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------------------- -------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Fair Value........................... $ -- $ -- $ -- $ 1,506 $ -- $ 14
Cash flow............................ -- -- -- 7,560 897 142
Foreign operations................... -- -- -- 25 -- --
Non-qualifying....................... 12,482 1,064 124 2,133 210 11
------- ------ ---- ------- ------ ----
Total.............................. $12,482 $1,064 $124 $11,224 $1,107 $167
======= ====== ==== ======= ====== ====
</Table>
EMBEDDED DERIVATIVES
The Company has certain embedded derivatives which 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 $45 million and
$85 million at September 30, 2005 and December 31, 2004, respectively. The
amounts included in net investment gains (losses) during the three months ended
September 30, 2005 and 2004 were $22 million and $18 million, respectively. The
amounts included in net investment gains (losses) during the six months ended
June 30, 2005 and the nine months ended September 30, 2004, were ($7) million
and $27 million, respectively.
5. INCOME TAXES
The net deferred income tax asset (liability) was comprised of the tax
effects of temporary differences related to the following assets and
liabilities:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------ -----------------
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
(IN MILLIONS)
Deferred income tax assets:
Benefit, reinsurance and other reserves................... $ 2,068 $ 756
Operating lease reserves.................................. 13 47
Employee benefits......................................... 18 169
Net unrealized investment losses.......................... 192 --
Other..................................................... 49 114
------- -------
Total..................................................... 2,340 1,086
======= =======
Deferred income tax liabilities:
Deferred policy acquisition costs and value of business
acquired............................................... (1,142) (785)
Net unrealized investment gains........................... -- (763)
Investments, net.......................................... -- (832)
Other..................................................... -- (77)
------- -------
Total..................................................... (1,142) (2,457)
------- -------
Net deferred income tax asset (liability)................... $ 1,198 $(1,371)
======= =======
</Table>
25
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
If the Company determines that any of its deferred income 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 income tax asset will be realized.
6. COMMITMENTS, CONTINGENCIES AND GUARANTEES
LITIGATION AND REGULATORY PROCEEDINGS
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 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.
On a quarterly basis, the Company reviews relevant information with respect
to liabilities for litigation and 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. 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 September 30, 2005.
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: violation of the Connecticut Unfair Trade
Practice Statute, unjust enrichment, and civil conspiracy. On June 15, 2004, the
defendants appealed the class certification order and the appeal is now pending
before the Connecticut Supreme Court.
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,
26
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
the NASD and the Connecticut Department of Banking. One arbitration matter was
commenced in June 2005 against Tower Square and the other unaffiliated
broker-dealers with whom the registered representative was formerly registered.
It is reasonably possible that other matters will be brought regarding this
matter. Tower Square intends to defend itself vigorously in all such cases.
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 the insurance 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 NASD 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. 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.
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 $781 million
and $1,012 million at September 30, 2005 and December 31, 2004, respectively.
The Company anticipates that these amounts will be invested in partnerships over
the next five years.
GUARANTEES
In the 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, 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 ranging up to $1 billion, 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.
27
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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.
TIC has provided a guarantee on behalf of MetLife International Insurance,
Ltd. ("MLII") (formerly Citicorp International Life Insurance Company, Ltd.), an
affiliate. 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 in force under this guarantee at September
30, 2005 is $446 million. The Company does not hold any collateral related to
this guarantee.
In conjunction with replicated synthetic asset transactions ("RSATs"), the
Company writes credit default swap obligations requiring payment of principal
due in exchange for the reference 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 at risk, assuming the value
of the reference credits become worthless, is $169 million at September 30,
2005. The credit default swaps expire at various times during the next three
years.
OTHER
TIC is a member of the Federal Home Loan Bank of Boston (the "Bank") and
holds $70 million of common stock of the Bank, which is included in equity
securities in the unaudited interim condensed consolidated balance sheets. TIC
has also entered into several funding agreements (the "funding agreements") with
the Bank whereby TIC has issued such funding agreements in exchange for cash and
for which the Bank 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 Bank'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 Bank as of September
30, 2005 is $1 billion, which is included in policyholder account balances.
7. RESTRUCTURING TRANSACTIONS
As described in Note 1, on July 1, 2005, MetLife acquired the Company from
CIHC. Prior to the sale, certain restructuring transactions were required
pursuant to the Acquisition Agreement. All restructuring amounts 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 11);
5. All TIC's obligations in the amount of $105 million, the related
deferred tax assets of $37 million and cash in the amount of $68 million
associated with the Connecticut River Plaza lease;
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
28
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 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; and
9. All tax reserves 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 State of 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 accompanying
unaudited interim condensed consolidated financial statements include the
results of operations related to the aforementioned restructuring transactions
through the date of distribution.
8. EQUITY
Under Connecticut State Insurance Law, TIC and TLAC are each permitted,
without prior insurance regulatory clearance, to pay shareholder dividends to
their respective parents as long as the amount of such dividends, 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 $302.5
million, $147.5 million and $225.0 million on January 3, 2005, March 30, 2005
and June 30, 2005, respectively. Due to the timing of the payment, the January
3, 2005 dividend required approval. 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 of TIC and TLAC by MetLife, under
Connecticut State Insurance Law all dividend payments by TIC and TLAC through
June 30, 2007 require prior approval of the Commissioner.
As discussed in Note 7, 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.
29
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
In connection with the restructuring transactions as discussed in Note 7,
the Company's additional paid-in capital ("APIC"), retained earnings and
accumulated other comprehensive income ("AOCI") 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>
9. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------- -------------------
THREE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2005 2004
------------------- -------------------
(IN MILLIONS)
Net income....................................... $ 187 $ 346
Other comprehensive income (loss):
Unrealized gains (losses) on derivative
instruments, net of income taxes............ -- (16)
Unrealized investment-related gains (losses),
net of related offsets and income taxes..... (357) 591
Foreign currency translation adjustments....... 2 --
----- -----
Other comprehensive income (loss)................ (355) 575
----- -----
Comprehensive income (loss)................. $(168) $ 921
===== =====
</Table>
30
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR PREDECESSOR
------------------- -------------- -------------------
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED JUNE 30, ENDED SEPTEMBER 30,
2005 2005 2004
------------------- -------------- -------------------
(IN MILLIONS)
Net income....................... $ 187 $776 $1,094
Other comprehensive income
(loss):
Unrealized gains (losses) on
derivative instruments, net
of income taxes............. -- 57 44
Unrealized investment-related
gains (losses), net of
related offsets and income
taxes....................... (357) (32) 75
Foreign currency translation
adjustments................. 2 -- 1
----- ---- ------
Other comprehensive income
(loss)......................... (355) 25 120
----- ---- ------
Comprehensive income
(loss).................... $(168) $801 $1,214
===== ==== ======
</Table>
10. 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 Note 11. 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 July 1, 2005, MetLife reorganized the Company's operations into two
operating segments, Institutional and Individual, so as to more closely align
the acquired business with the manner in which it 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, as well as run-off businesses and the elimination of all intersegment
transactions. The Company also allocates certain non-recurring items, such as
expenses associated with certain legal proceedings, to Corporate & Other.
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 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.
Set forth in the tables below is certain financial information with respect
to the Company's segments, as well as Corporate & Other, for the three months
ended September 30, 2005 and 2004, the six months ended
31
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
June 30, 2005, and the nine months ended September 30, 2004. 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's management intends to
manage and assess the business going forward. 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
- ---------
FOR THE THREE MONTHS ENDED CORPORATE &
SEPTEMBER 30, 2005 INSTITUTIONAL INDIVIDUAL OTHER TOTAL
- -------------------------- ------------- ---------- ----------- -----
(IN MILLIONS)
Premiums..................................... $106 $ 49 $ 6 $161
Universal life and investment-type product
policy fees................................ 9 202 -- 211
Net investment income........................ 358 203 58 619
Other revenues............................... 5 39 (3) 41
Net investment gains (losses)................ (18) (6) (1) (25)
Income from continuing operations before
provision for income taxes................. 81 136 60 277
</Table>
<Table>
<Caption>
PREDECESSOR
- -----------
FOR THE THREE MONTHS ENDED CORPORATE &
SEPTEMBER 30, 2004 INSTITUTIONAL INDIVIDUAL OTHER TOTAL
- -------------------------- ------------- ---------- ----------- -----
(IN MILLIONS)
Premiums..................................... $278 $ 47 $ 8 $333
Universal life and investment-type product
policy fees................................ 17 158 -- 175
Net investment income........................ 367 256 123 746
Other revenues............................... 4 29 31 64
Net investment gains (losses)................ (2) 15 (13) --
Income from continuing operations before
provision for income taxes................. 79 110 124 313
</Table>
32
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (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
Income from continuing operations before
provision for income taxes............... 158 244 339 741
</Table>
<Table>
<Caption>
PREDECESSOR
- -----------
FOR THE NINE MONTHS ENDED CORPORATE &
SEPTEMBER 30, 2004 INSTITUTIONAL INDIVIDUAL OTHER TOTAL
- ------------------------- ------------- ---------- ----------- ------
(IN MILLIONS)
Premiums................................... $ 522 $109 $ 25 $ 656
Universal life and investment-type product
policy fees.............................. 55 450 -- 505
Net investment income...................... 1,062 768 395 2,225
Other revenues............................. 4 83 62 149
Net investment gains (losses).............. (25) 8 1 (16)
Income from continuing operations before
provision for income taxes............... 211 365 412 988
</Table>
The following table presents assets with respect to the Company's segments,
as well as Corporate & Other, at:
<Table>
<Caption>
PREDECESSOR
SUCCESSOR ------------
------------- DECEMBER 31,
SEPTEMBER 30, 2004
2005 (UNAUDITED)
------------- ------------
(IN MILLIONS)
Institutional............................................ $ 39,293 $ 32,569
Individual............................................... 52,865 48,611
Corporate & Other........................................ 8,012 24,663
-------- --------
Total.................................................. $100,170 $105,843
======== ========
</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 one customer did not exceed 10% of consolidated
revenues. Substantially all of the Company's revenues were originated in the
United States.
33
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
11. DISCONTINUED OPERATIONS
As described in Note 7, 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, Accounting for the Impairment or Disposal
of Long-Lived Assets, the distribution of Primerica by dividend to CIHC
qualifies as a disposal by means other than a sale. As such, Primerica was
treated as held-for-use (i.e. 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.
The following summarizes Primerica's financial information:
<Table>
<Caption>
PREDECESSOR
---------------------------------------------------------
SIX MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2004
---------------- ------------------ -----------------
(IN MILLIONS)
Revenues from discontinued
operations...................... $900 $437 $1,316
Expenses from discontinued
operations...................... 539 250 773
---- ---- ------
Income from discontinued
operations before provision for
income taxes.................... 361 187 543
Provision for income taxes........ 121 64 176
---- ---- ------
Income from discontinued
operations, net of income
taxes........................ $240 $123 $ 367
==== ==== ======
</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>
34
THE TRAVELERS INSURANCE COMPANY
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS
During 1995, Metropolitan Life Insurance Company, 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 $390 million at September 30, 2005 and $409 million at December 31,
2004. Ceded premiums related to this business were $0.3 million and $0.8
million, respectively, for the three months ended September 30, 2005 and the six
months ended June 30, 2005. Ceded benefits related to this business were $6
million and $13 million, respectively, for the three months ended September 30,
2005 and the six months ended June 30, 2005.
TIC and TLAC are beneficiaries under a reinsurance transaction entered into
in December 2004 involving TIC, TLAC and an affiliate, The Travelers Life and
Annuity Reinsurance Company ("TLARC"), with respect to TIC's and TLAC's reserves
related to guarantee features included in certain of their universal life and
variable universal life products. This transaction is treated as a deposit-type
contract and at September 30, 2005, TIC had a recoverable from TLARC of $42
million. Fees associated with this contract, included within other expenses,
were ($10) million for the three months ended September 30, 2005 and $40 million
for the six months ended June 30, 2005.
In addition, TIC's and TLAC's individual insurance mortality risk is
reinsured, in part, to Reinsurance Group of America, Incorporated ("RGA"), an
affiliate. Under these agreements with RGA, reinsurance receivables include $61
million at September 30, 2005 and $30 million at December 31, 2004. Ceded
premiums paid and benefits received were $18 million and $32 million,
respectively, for the three months ended September 30, 2005 and $31 million and
$28 million, respectively, for the six months ended June 30, 2005.
35
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 Insurance Company ("TIC," together with its subsidiaries, 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 narrative analysis should be read in
conjunction with the MD&A included in TIC's Annual Report on Form 10-K for the
year ended December 31, 2004.
This narrative analysis contains statements which constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements relating to trends in the
operations and financial results and the business and the products of the
Company, as well as other statements including words such as "anticipate,"
"believe," "plan," "estimate," "expect," "intend" and other similar expressions.
Forward-looking statements are made based upon 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, Inc. ("MetLife")
and integration of its businesses into MetLife's operations; and (xii) other
risks and uncertainties described from time to time in TIC's filings with the
U.S. Securities and Exchange Commission ("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.
TIC'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 SEC.
THE ACQUISITION
On July 1, 2005 (the "Acquisition Date"), 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 from Citigroup Insurance Holding Corporation ("CIHC"), an
indirect, wholly-owned subsidiary of Citigroup (the "Acquisition") for $12.0
billion.
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 (the "Acquisition Agreement") by both parties.
BUSINESS
The Company's core offerings include group retirement & savings products,
group life insurance and a wide variety of individual protection and asset
accumulation products. The group retirement & savings products include
institutional pensions, guaranteed investment contracts ("GICs"), payout
annuities and group annuities sold to employer sponsored retirement and savings
plans, structured settlements and funding
36
agreements. Group life insurance is offered through corporate-owned life
insurance ("COLI"), a variable universal life product. The individual protection
and asset accumulation products include traditional life, universal and variable
life insurance, as well as fixed and variable deferred annuities.
The Company has a license from The St. Paul Travelers Companies, Inc. to
use the names "Travelers Life & Annuity," "The Travelers Insurance Company,"
"The Travelers Life and Annuity Company" and related names in connection with
the Company's business.
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 Company's individual annuity products are 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.
FINANCIAL CONDITION
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 SEC Staff Accounting Bulletin 54, Push Down Basis of
Accounting in Financial Statements of a Subsidiary, 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."
The establishment of a new basis of accounting resulted in significant fair
value adjustments related to certain invested assets not already carried at
their fair value, deferred policy acquisition costs, value of business acquired,
future policy benefits and policyholder account balances and the establishment
of goodwill. Additionally, the Company's parent, MetLife, made an election under
Internal Revenue Code Section 338 to adjust the tax bases of the assets acquired
and liabilities assumed which resulted in the establishment of a deferred income
tax asset. Period over period comparisons will be impacted by such adjustments.
In connection with the Acquisition, 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. 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 after the closing date.
The Company will generally phase out the products that it currently issues by
the end of 2006 which may, over time, result in fewer assets and liabilities.
The Company may, however, determine to introduce new products in the future.
RESULTS OF OPERATIONS
For purposes of management's discussion and analysis only, the pro forma
combined results of operations for the nine month period ended September 30,
2005 discussed below represents the mathematical addition of
37
the historical results for the predecessor period from January 1, 2005 through
June 30, 2005 and the successor period from July 1, 2005 through September 30,
2005. This approach is not consistent with accounting principles generally
accepted in the United States of America and yields results that are not
comparable on a period-over-period basis due to the new basis of accounting
established at the Acquisition Date. However, management believes it is the most
meaningful way to comment on the results of operations for the nine month period
ended September 30, 2005 compared to the nine month period ended September 30,
2004.
The results of operations are as follows:
<Table>
<Caption>
PRO FORMA
SUCCESSOR PREDECESSOR COMBINED RESULTS PREDECESSOR
------------------ ---------------- ------------------ ------------------
THREE MONTHS ENDED SIX MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2005 JUNE 30, 2005 SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------ ---------------- ------------------ ------------------
(IN MILLIONS)
REVENUES
Premiums........................ $ 161 $ 325 $ 486 $ 656
Universal life and
investment-type product policy
fees.......................... 211 406 617 505
Net investment income........... 619 1,608 2,227 2,225
Other revenues.................. 41 113 154 149
Net investment gains (losses)... (25) 26 1 (16)
------ ------ ------ ------
Total revenues................ 1,007 2,478 3,485 3,519
------ ------ ------ ------
EXPENSES
Policyholder benefits and
claims........................ 298 599 897 1,033
Interest credited to
policyholder account
balances...................... 262 698 960 962
Other expenses.................. 170 440 610 536
------ ------ ------ ------
Total expenses................ 730 1,737 2,467 2,531
------ ------ ------ ------
Income from continuing
operations before provision
for income taxes.............. 277 741 1,018 988
Provision for income taxes...... 90 205 295 261
------ ------ ------ ------
Income from continuing
operations.................... 187 536 723 727
Income from discontinued
operations, net of income
taxes......................... -- 240 240 367
------ ------ ------ ------
Net income...................... $ 187 $ 776 $ 963 $1,094
====== ====== ====== ======
</Table>
Income from continuing operations decreased by $4 million, or 1%, to $723
million in the nine months ended September 30, 2005 from $727 million in the
comparable 2004 period. This decrease is the result of a decrease in total
revenues of $34 million due to lower premiums resulting from a reduction in
group annuity sales attributable to several large sales in the corresponding
period in the prior year, partially offset by an increase in universal life and
investment-type product policy fees arising from growth in the business and
market performance and a reduction of net investment gains (losses). Total
expenses declined by $64 million as a result of lower policyholder benefits and
claims commensurate with the reduction in premiums, partially offset by an
increase in other expenses relating to costs associated with a reinsurance
contract with an affiliate entered into in December 2004, increased amortization
of deferred policy acquisition costs and lower capitalization of policy
acquisition costs. The increase in income taxes of $34 million is the result of
an increase in income from continuing operations before provision for income
taxes and an increase in the effective tax rate arising from a reduction in the
dividend received deduction.
Total revenues, excluding net investment gains (losses), decreased by $51
million, or 1%, to $3,484 million for the nine months ended September 30, 2005
from $3,535 million for the comparable 2004 period. This includes a decline in
premiums of $170 million, or 26%, primarily resulting from lower group annuity
sales, including closeouts and structured settlements. The third quarter of 2004
includes several large pension
38
closeout sales. The remaining decrease is due to minor declines across several
products. Premiums from retirement & savings products are significantly
influenced by large transactions and, as a result, can fluctuate from period to
period. Partially offsetting the decrease in premiums is an increase in
universal life and investment-type product policy fees for universal life and
variable annuity products of $112 million, or 22%, which is largely attributable
to the impact of growth in the business and favorable market performance. Also
offsetting the decline in premiums is an increase of $5 million in other
revenues. Net investment income remained essentially flat for the nine months
ended September 30, 2005 compared to the comparable period of 2004, with
increases from a larger asset base resulting from increased growth in the
business being offset by lower yields from the revaluation of the investment
portfolio through the application of the purchase method of accounting.
Total expenses decreased by $64 million, or 3%, to $2,467 million for the
nine months ended September 30, 2005 from $2,531 million for the comparable 2004
period. Policyholder benefits and claims declined by $136 million, or 13%,
commensurate with decreases in premiums related to the group annuity business,
partially offset by less favorable mortality in the Company's universal life
products. Partially offsetting the decrease in policyholder benefits and claims
is an increase in other expenses of $74 million, or 14%, primarily due to costs
associated with a reinsurance contract with an affiliate entered into in
December 2004. Additionally, other expenses increased due to higher amortization
of deferred policy acquisition costs during the first six months of 2005 as a
result of growth in the business and higher account balances related to
universal life products and lower capitalization of deferred policy acquisition
costs during the three months ended September 30, 2005, due to a change in
policy subsequent to the Acquisition. Interest credited to policyholder account
balances was essentially flat during the nine months ended September 30, 2005 as
compared to the prior year period. Growth in the business and an increase in
crediting rates on retirement and savings products as a result of an increase in
short-term interest rates are offset by lower crediting rates on annuity
products due to the revaluation of the policyholder account balance through the
application of the purchase method of accounting.
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.
Under Connecticut State Insurance Law, TIC and TLAC are each permitted,
without prior insurance regulatory clearance, to pay shareholder dividends to
their respective parents as long as the amount of such dividends, 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 $302.5
million, $147.5 million and $225.0 million on January 3, 2005, March 30, 2005
and June 30, 2005, respectively. Due to the timing of the payment, the January
3, 2005 dividend required approval. 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 of TIC and TLAC by MetLife, under
Connecticut State Insurance Law all dividend payments by TIC and TLAC through
June 30, 2007 require prior approval of the Commissioner.
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
39
complete the restructuring transactions via dividend, and to pay its dividends.
The total amount of these dividends, made on June 30, 2005, was $4.5 billion on
a statutory accounting basis.
APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS
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 coverage 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 unaudited interim condensed 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. SFAS 153 did not have a material impact on the Company's
unaudited interim condensed consolidated financial statements.
In June 2005, the Financial Accounting Standards Board ("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 FASB Staff Position ("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. FSP 115-1 is
effective on a prospective basis for other-than-temporary impairments on certain
investments in periods beginning after December 15, 2005. The Company has
complied with the disclosure requirements of EITF 03-1, which was effective
December 31, 2003 and will remain in effect until the adoption of FSP 115-1. The
Company does not anticipate that the adoption will have a material impact on its
unaudited interim condensed consolidated financial statements.
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
40
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 unaudited interim condensed 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 is not
expected to have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
In June 2005, the FASB cleared SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("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 Implementation Issue No. B39, Embedded
Derivatives: Application of Paragraph 13(b) in Call Options That Are Exercisable
Only by the Debtor ("Issue B39"). Issue B38 clarifies that the potential
settlement of a debtor's obligation to a creditor that would occur upon exercise
of a put or call option meets the net settlement criteria of SFAS 133. Issue B39
clarifies 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.
Issue Nos. B38 and B39, which must be adopted as of the first day of the first
fiscal quarter beginning after December 15, 2005, are not expected to have a
material impact on the Company's unaudited interim condensed 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.
SFAS 154 is not expected to have a material impact on the Company's unaudited
interim condensed 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 unaudited interim condensed 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
41
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).
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 Contract Holders. 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.
During the first nine months of 2005 and 2004, the Company capitalized
sales inducements of approximately $48 million and $35 million,
respectively, in accordance with SOP 03-1. These inducements relate to
bonuses on certain products offered by the Company. For the three months
ended September 30, 2005 and 2004, the six months ended June 30, 2005 and
the nine months ended September 30, 2004, amortization of these capitalized
amounts was insignificant.
Effective January 1, 2004, the Company adopted FASB Interpretation No. 46,
Consolidation of Variable Interest Entities -- An Interpretation of ARB No. 51
("FIN 46") 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 unaudited interim condensed consolidated 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) on January 1, 2004 did not
require the Company to consolidate any additional VIEs that were not previously
consolidated.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
TIC's management, with the participation of TIC's Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the design and
operation of TIC's disclosure controls and procedures as 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, TIC's Chief Executive Officer and Chief Financial Officer have
concluded that TIC's disclosure controls and procedures are effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING
On July 1, 2005, MetLife completed the Acquisition of TIC. MetLife is in
the process of completing its post-merger integration plan which includes
integrating TIC's internal control over financial reporting with
42
that of MetLife. Such integration plan has resulted in changes that materially
affected or are reasonably likely to materially affect TIC's internal control
over financial reporting during the three months ended September 30, 2005.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Subsequent to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005, there have been no material developments in the Company's
material legal proceedings.
ITEM 6. EXHIBITS
<Table>
3.1 Charter of The Travelers Insurance Company ("TIC"), as
effective October 19, 1994, incorporated by reference to
Exhibit 3.01 to TIC's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1994 (File No. 33-33691)
(the "September 30, 1994 10-Q").
3.2 By-laws of TIC, as effective October 20, 1994, incorporated
by reference to Exhibit 3.02 to the September 30, 1994 10-Q.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
</Table>
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TRAVELERS INSURANCE COMPANY
By: /s/ Joseph J. Prochaska, Jr.
------------------------------------
Name: Joseph J. Prochaska, Jr.
Title: Senior Vice-President
and Chief Accounting Officer
(Authorized Signatory
and Chief Accounting Officer)
Date: November 18, 2005
44
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT NAME
------- ------------
3.1 Charter of The Travelers Insurance Company ("TIC"), as
effective October 19, 1994, incorporated by reference to
Exhibit 3.01 to TIC's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1994 (File No. 33-33691)
(the "September 30, 1994 10-Q").
3.2 By-laws of TIC, as effective October 20, 1994, incorporated
by reference to Exhibit 3.02 to the September 30, 1994 10-Q.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
</Table>
45