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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
<Caption>
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER: 33-58677
---------------------
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Exact name of registrant as specified in its charter)
<Table>
CONNECTICUT 06-0904249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE CITYPLACE, HARTFORD, CONNECTICUT 06103-3415
(Address of principal executive offices) (Zip Code)
</Table>
(860) 308-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
<Table>
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
</Table>
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 May 11, 2006, 30,000 shares of the registrant's common stock, $100 par
value per share, were outstanding, all of which are owned by MetLife Insurance
Company of Connecticut (formerly, The Travelers Insurance Company), a
wholly-owned subsidiary of MetLife, Inc.
REDUCED DISCLOSURE FORMAT
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
H(1)(a) AND (b) OF FORM 10-Q AND IS, THEREFORE, FILING THIS FORM 10-Q WITH THE
REDUCED DISCLOSURE FORMAT.
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS...................................... 4
Interim Condensed Consolidated Balance Sheets at March 31, 2006
(SUCCESSOR) (Unaudited) and December 31, 2005 (SUCCESSOR)......... 4
Interim Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2006 (SUCCESSOR) (Unaudited) and March 31, 5
2005 (PREDECESSOR) (Unaudited)....................................
Interim Condensed Consolidated Statement of Stockholder's Equity for
the Three Months Ended March 31, 2006 (SUCCESSOR) (Unaudited)..... 6
Interim Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2006 (SUCCESSOR) (Unaudited) and March 31,
2005 (PREDECESSOR) (Unaudited).................................... 7
Notes to Interim Condensed Consolidated Financial Statements 8
(Unaudited).......................................................
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 26
ITEM 4. CONTROLS AND PROCEDURES................................... 32
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................... 33
ITEM 6. EXHIBITS.................................................. 34
SIGNATURES........................................................... 35
EXHIBIT INDEX........................................................ E-1
</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 MetLife Life and Annuity Company of Connecticut (formerly, The
Travelers Life and Annuity Company) and its subsidiary, 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 MetLife Life and Annuity Company of
Connecticut and its subsidiary. 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
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 (UNAUDITED) AND DECEMBER 31, 2005
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
SUCCESSOR
----------------------------------
MARCH 31, 2006 DECEMBER 31, 2005
-------------- -----------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $5,949 and $6,158, respectively)....... $ 5,732 $ 6,055
Equity securities available-for-sale, at fair value (cost:
$5 and $4, respectively)................................ 5 4
Mortgage loans on real estate............................. 257 258
Policy loans.............................................. 46 37
Other limited partnership interests....................... 70 73
Short-term investments.................................... 178 57
Other invested assets..................................... 344 333
------- -------
Total investments....................................... 6,632 6,817
Cash and cash equivalents................................... 217 233
Accrued investment income................................... 67 69
Premiums and other receivables.............................. 296 201
Deferred policy acquisition costs and value of business
acquired.................................................. 1,831 1,777
Goodwill.................................................... 243 243
Current income tax recoverable.............................. 19 20
Deferred income tax asset................................... 100 90
Other assets................................................ 18 22
Separate account assets..................................... 12,435 12,179
------- -------
Total assets............................................ $21,858 $21,651
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits.................................... $ 1,725 $ 1,740
Policyholder account balances............................. 5,628 5,688
Other policyholder funds.................................. 74 68
Payables for collateral under securities loaned and other
transactions............................................ 99 108
Other liabilities......................................... 166 132
Separate account liabilities.............................. 12,435 12,179
------- -------
Total liabilities....................................... 20,127 19,915
------- -------
Stockholder's Equity:
Common stock, par value $100 per share; 100,000 shares
authorized, 30,000 shares issued and outstanding.......... 3 3
Additional paid-in capital.................................. 1,725 1,725
Retained earnings........................................... 99 50
Accumulated other comprehensive income (loss)............... (96) (42)
------- -------
Total stockholder's equity.............................. 1,731 1,736
------- -------
Total liabilities and stockholder's equity.............. $21,858 $21,651
======= =======
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2006 2005
------------------ ------------------
REVENUES
Premiums................................................. $ 12 $ 10
Universal life and investment-type product policy fees... 121 107
Net investment income.................................... 86 105
Other revenues........................................... 7 6
Net investment gains (losses)............................ (32) 2
------------------ ------------------
Total revenues......................................... 194 230
------------------ ------------------
EXPENSES
Policyholder benefits and claims......................... 25 23
Interest credited to policyholder account balances....... 29 62
Other expenses........................................... 71 80
------------------ ------------------
Total expenses......................................... 125 165
------------------ ------------------
Income before provision for income taxes................. 69 65
Provision for income taxes............................... 20 21
------------------ ------------------
Net income............................................... $ 49 $ 44
================== ==================
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006 (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS)
-----------------
ADDITIONAL NET UNREALIZED
COMMON PAID-IN RETAINED INVESTMENT GAINS
STOCK CAPITAL EARNINGS (LOSSES) TOTAL
------ ---------- -------- ----------------- ------
Balance at January 1, 2006 (SUCCESSOR)..... $ 3 $1,725 $ 50 $ (42) $1,736
Comprehensive income (loss):
Net income............................... 49 49
Other comprehensive income (loss):
Unrealized investment gains (losses),
net of related offsets and income
taxes............................... (54) (54)
------
Other comprehensive income (loss)..... (54)
------
Comprehensive income (loss).............. (5)
----- ------ ------- ----- ------
Balance at March 31, 2006 (SUCCESSOR)...... $ 3 $1,725 $ 99 $ (96) $1,731
===== ====== ======= ===== ======
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2006 2005
------------------ ------------------
NET CASH USED IN OPERATING ACTIVITIES.................... $ (89) $ (58)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities.................................... 1,436 309
Equity securities................................... -- 2
Mortgage loans on real estate....................... 2 5
Other limited partnership interests................. 12 11
Purchases of:
Fixed maturities.................................... (1,248) (347)
Equity securities................................... -- (1)
Mortgage loans on real estate....................... -- (22)
Other limited partnership interests................. (8) (26)
Net change in policy loans............................. (9) (1)
Net change in short-term investments................... (121) (42)
Net change in other invested assets.................... 24 9
Other, net............................................. -- 3
------------------ ------------------
Net cash provided by (used in) investing activities...... 88 (100)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................ 194 269
Withdrawals......................................... (200) (119)
Net change in payables for collateral under securities
loaned and other transactions....................... (9) 9
------------------ ------------------
Net cash provided by (used in) financing activities...... (15) 159
------------------ ------------------
Change in cash and cash equivalents...................... (16) 1
Cash and cash equivalents, beginning of period........... 233 1
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 217 $ 2
================== ==================
Supplemental disclosures of cash flow information:
Net cash paid during the period for income taxes from
continuing operations............................... $ -- $ (268)
================== ==================
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES
BUSINESS
The "Company" refers to MetLife Life and Annuity Company of Connecticut
("MLAC," formerly, The Travelers Life and Annuity Company), a Connecticut
corporation incorporated in 1973, together with its subsidiary. MLAC is a
wholly-owned subsidiary of MetLife Insurance Company of Connecticut ("MICC,"
formerly, The Travelers Insurance Company). The Company offers annuities and
life insurance to individuals and small businesses in the United States.
The Company currently operates as a single segment and, as such, financial
results are prepared and reviewed by management as a single operating segment.
The Company continually evaluates its operating activities and the method
utilized by management to evaluate the performance of such activities and will
report on a segment basis if appropriate to do so.
On February 14, 2006, a Certificate of Amendment was filed with the State
of Connecticut Office of the Secretary of the State changing the name of The
Travelers Life and Annuity Company to MLAC, effective May 1, 2006.
On July 1, 2005 (the "Acquisition Date"), MLAC and other affiliated
entities, including the Company's parent, MICC, and substantially all of
Citigroup Inc.'s ("Citigroup") international insurance businesses, excluding
Primerica Life Insurance Company and its subsidiaries ("Primerica")
(collectively, "Travelers"), were acquired by MetLife, Inc. ("MetLife") from
Citigroup (the "Acquisition") for $12.0 billion. The accounting policies of the
Company were conformed to those of MetLife upon the Acquisition.
Consideration paid by MetLife for the purchase consisted of approximately
$10.9 billion in cash and 22,436,617 shares of MetLife's common stock with a
market value of approximately $1.0 billion to Citigroup and approximately $100
million in other transaction costs. Consideration paid to Citigroup will be
finalized subject to review of the June 30, 2005 financial statements of
Travelers by both MetLife and Citigroup and interpretation of the provisions of
the acquisition agreement, dated as of January 31, 2005 between MetLife and
Citigroup (the "Acquisition Agreement"), by both parties.
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets, the Acquisition was
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 values as of the Acquisition Date. As required by the U.S. Securities
and Exchange Commission ("SEC") Staff Accounting Bulletin Topic 5-J., Push Down
Basis of Accounting Required in Certain Limited Circumstances, the purchase
method of accounting applied by MetLife to the acquired assets and liabilities
associated with the Company has been "pushed down" to the consolidated financial
statements of the Company, thereby establishing a new basis of accounting. This
new basis of accounting is referred to as the "successor basis," while the
historical basis of accounting is referred to as the "predecessor basis."
Financial statements included herein for periods prior and subsequent to the
Acquisition Date are labeled "predecessor" and "successor," respectively.
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
8
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
allocation of the purchase price to the net assets acquired based upon their
respective fair values as of July 1, 2005 resulted in goodwill of $243 million
as follows:
<Table>
<Caption>
SUCCESSOR
-------------
AS OF JULY 1,
2005
-------------
(IN MILLIONS)
Total assets acquired....................................... $ 20,830
Total liabilities assumed................................... (19,345)
--------
Net assets acquired......................................... 1,485
Goodwill, resulting from acquisition........................ 243
--------
Total purchase price attributed to the Company.............. 1,728
Total purchase price attributed to other affiliates......... 10,238
--------
Total purchase price of Travelers......................... $ 11,966
========
</Table>
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 including certain future policy benefit
liabilities. In no case will these adjustments extend beyond one year from the
Acquisition Date.
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") and the establishment and amortization of value of
business acquired ("VOBA"); (vi) the measurement of goodwill and related
impairment, if any; (vii) the liability for future policyholder benefits; (viii)
accounting for reinsurance transactions; and (ix) the liability for litigation
and regulatory matters. The application of purchase accounting requires the use
of estimation techniques in determining the fair value of the assets acquired
and liabilities assumed -- the most significant of which relate to the
aforementioned critical estimates. In applying these policies, management makes
subjective and complex judgments that frequently require estimates about matters
that are inherently uncertain. Many of these policies, estimates and related
judgments are common in the insurance and financial services industries; others
are specific to the Company's business 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
for which the Company is deemed to be the primary beneficiary. Intercompany
accounts and transactions have been eliminated.
Certain amounts in the predecessor interim condensed consolidated financial
statements for the three months ended March 31, 2005 have been reclassified to
conform with the presentation of the successor.
9
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Reclassifications to the interim condensed consolidated statement of income for
the three months ended March 31, 2005 were primarily related to certain
reinsurance and other revenues previously reported as a reduction in general and
administrative expenses which are now reported in other revenues. In addition,
amortization of DAC is now reported in other expenses rather than being reported
separately. The interim condensed consolidated statement of cash flows for the
three months ended March 31, 2005 has been presented using the indirect method.
Reclassifications made to the interim condensed consolidated statement of cash
flows for the three months ended March 31, 2005 primarily related to
investment-type policy activity previously reported as cash flows from operating
activities which are now reported as cash flows from financing activities. In
addition, net changes in payables for collateral under securities loaned and
other transactions and derivative collateral were reclassified from cash flows
from investing activities to cash flows from financing activities and interest
credited on policyholder account balances were reclassified from cash flows from
financing activities to cash flows from operating activities.
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 March 31, 2006, its consolidated results of operations for the three months
ended March 31, 2006 and 2005, its consolidated cash flows for the three months
ended March 31, 2006 and 2005 and its consolidated statement of stockholder's
equity for the three months ended March 31, 2006, in conformity with GAAP.
Interim results are not necessarily indicative of full year performance. The
December 31, 2005 condensed consolidated balance sheet data was derived from the
audited financial statements included in the Company's 2005 Annual Report on
Form 10-K filed with the SEC ("2005 Annual Report"), which includes all
disclosures required by GAAP. Therefore, these unaudited interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company included in the 2005 Annual
Report.
Federal Income Taxes
Federal income taxes for interim periods have been computed using an
estimated annual effective income tax rate. For federal income tax purposes, an
election under Internal Revenue Code Section 338 was made by the Company's
ultimate 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.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted guidance relating to derivative financial
instruments as follows:
- Effective January 1, 2006, the Company adopted prospectively SFAS No.
155, Accounting for Certain Hybrid Instruments ("SFAS 155"). SFAS 155
amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
("SFAS 133") and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("SFAS 140"). SFAS
155 allows financial instruments that have embedded derivatives to be
accounted for as a whole, eliminating the need to bifurcate the
derivative from its host, if the holder elects to account for the whole
instrument on a fair value basis. In addition, among other changes, SFAS
155 (i) clarifies which interest-only strips and principal-only strips
are not subject to the requirements of SFAS 133; (ii) establishes a
requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring
bifurcation; (iii) clarifies that concentrations of credit risk in the
form of subordination are not embedded derivatives; and (iv) eliminates
the prohibition on a qualifying special-purpose entity ("QSPE") from
holding a derivative financial instrument that pertains to a beneficial
interest other than another
10
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
derivative financial interest. The adoption of SFAS 155 did not have a
material impact on the Company's unaudited interim condensed consolidated
financial statements.
- Effective January 1, 2006, the Company adopted prospectively SFAS 133
Implementation Issue No. B38, Embedded Derivatives: Evaluation of Net
Settlement with Respect to the Settlement of a Debt Instrument through
Exercise of an Embedded Put Option or Call Option ("Issue B38") and SFAS
133 Implementation Issue No. B39, Embedded Derivatives: Application of
Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor
("Issue B39"). Issue B38 clarifies that the potential settlement of a
debtor's obligation to a creditor occurring upon exercise of a put or
call option meets the net settlement criteria of SFAS 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. The adoption of Issues B38 and B39 did
not have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
Effective January 1, 2006, the Company adopted 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. The adoption of SFAS 154 did not have a
material impact on the Company's unaudited interim condensed consolidated
financial statements.
In June 2005, the Emerging Issues Task Force ("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. For all other limited partnerships, EITF 04-5
required adoption by January 1, 2006 through a cumulative effect of a change in
accounting principle recorded in opening equity or applied retrospectively by
adjusting prior period financial statements. The adoption of the provisions of
EITF 04-5 did not have a material impact on the Company's unaudited interim
condensed consolidated financial statements.
Effective November 9, 2005, the Company prospectively adopted the guidance
in FASB Staff Position ("FSP") FAS 140-2, Clarification of the Application of
Paragraphs 40(b) and 40(c) of FAS 140 ("FSP 140-2"). FSP 140-2 clarified certain
criteria relating to derivatives and beneficial interests when considering
whether an entity qualifies as a QSPE. Under FSP 140-2, the criteria must only
be met at the date the QSPE issues beneficial interests or when a derivative
financial instrument needs to be replaced upon the occurrence of a specified
event outside the control of the transferor. The adoption of FSP 140-2 did not
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
11
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
for fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 did
not have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
In June 2005, the FASB completed its review of 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, that are
impaired at the balance sheet date but for which an other-than-temporary
impairment has not been recognized. The FASB decided not to provide additional
guidance on the meaning of other-than-temporary impairment but has issued FSP
115-1, The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments ("FSP 115-1"), which nullifies the accounting guidance on
the determination of whether an investment is other-than-temporarily impaired as
set forth in EITF 03-1. As required by FSP 115-1, the Company adopted this
guidance on a prospective basis, which had no material impact on the Company's
unaudited interim condensed consolidated financial statements, and has provided
the required disclosures.
FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets -- an amendment of FASB Statement No. 140 ("SFAS 156"). SFAS
156 amends the guidance in SFAS 140. Among other requirements, SFAS 156 requires
an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in certain situations. SFAS 156 will be applied prospectively
and is effective for fiscal years beginning after September 15, 2006. SFAS 156
is not expected to have a material impact on the Company's consolidated
financial statements.
In September 2005, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 05-1, Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with Modifications or
Exchanges of Insurance Contracts ("SOP 05-1"). SOP 05-1 provides guidance on
accounting by insurance enterprises for deferred acquisition costs on internal
replacements of insurance and investment contracts other than those specifically
described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and For Realized Gains and Losses from the Sale
of Investments. SOP 05-1 defines an internal replacement as a modification in
product benefits, features, rights, or coverages that occurs by the exchange of
a contract for a new contract, or by amendment, endorsement, or rider to a
contract, or by the election of a feature or coverage within a contract. Under
SOP 05-1, modifications that result in a substantially unchanged contract will
be accounted for as a continuation of the replaced contract. A replacement
contract that is substantially changed will be accounted for as an
extinguishment of the replaced contract resulting in a release of unamortized
deferred acquisition costs, unearned revenue and deferred sales inducements
associated with the replaced contract. The guidance in SOP 05-1 will be applied
prospectively and is effective for internal replacements occurring in fiscal
years beginning after December 15, 2006. The Company is currently evaluating the
impact of SOP 05-1 and does not expect that the pronouncement will have a
material impact on the Company's consolidated financial statements.
12
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
2. INVESTMENTS
FIXED MATURITIES 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 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
----------------------------------------------
MARCH 31, 2006
----------------------------------------------
GROSS
COST OR UNREALIZED
AMORTIZED ------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ---- ------ ---------- -----
(IN MILLIONS, EXCEPT NUMBER OF SECURITIES)
U.S. corporate securities................. $2,342 $ 2 $ 99 $2,245 39.2%
Residential mortgage-backed securities.... 798 1 17 782 13.6
Foreign corporate securities.............. 975 3 47 931 16.2
U.S. Treasury/agency securities........... 843 -- 37 806 14.1
Commercial mortgage-backed securities..... 691 -- 15 676 11.8
Asset-backed securities................... 121 -- 2 119 2.1
Foreign government securities............. 88 3 2 89 1.5
State and political subdivision
securities.............................. 88 -- 7 81 1.4
------ --- ------ ------ -----
Total bonds............................. 5,946 9 226 5,729 99.9
Redeemable preferred stock................ 3 -- -- 3 0.1
------ --- ------ ------ -----
Total fixed maturities.................. $5,949 $ 9 $ 226 $5,732 100.0%
====== === ====== ====== =====
Common stock.............................. $ 2 $-- $ -- $ 2 40.0%
Non-redeemable preferred stock............ 3 -- -- 3 60.0
------ --- ------ ------ -----
Total equity securities................. $ 5 $-- $ -- $ 5 100.0%
====== === ====== ====== =====
Total number of securities in an
unrealized
loss position........................... 1,531
======
</Table>
13
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
SUCCESSOR
----------------------------------------------
DECEMBER 31, 2005
----------------------------------------------
GROSS
COST OR UNREALIZED
AMORTIZED ------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ---- ------ ---------- -----
(IN MILLIONS, EXCEPT NUMBER OF SECURITIES)
U.S. corporate securities................. $2,808 $ 6 $ 70 $2,744 45.3%
Residential mortgage-backed securities.... 1,021 1 17 1,005 16.6
Foreign corporate securities.............. 562 4 16 550 9.1
U.S. Treasury/agency securities........... 793 4 6 791 13.1
Commercial mortgage-backed securities..... 665 3 9 659 10.9
Asset-backed securities................... 147 -- 2 145 2.4
Foreign government securities............. 75 3 1 77 1.3
State and political subdivision
securities.............................. 84 -- 3 81 1.3
------ --- ------ ------ -----
Total bonds............................. 6,155 21 124 6,052 100.0
Redeemable preferred stock................ 3 -- -- 3 --
------ --- ------ ------ -----
Total fixed maturities.................. $6,158 $21 $ 124 $6,055 100.0%
====== === ====== ====== =====
Common stock.............................. $ 1 $ 1 $ 1 $ 1 25.0%
Non-redeemable preferred stock............ 3 -- -- 3 75.0
------ --- ------ ------ -----
Total equity securities................. $ 4 $ 1 $ 1 $ 4 100.0%
====== === ====== ====== =====
Total number of securities in an
unrealized
loss position........................... 1,504
======
</Table>
All fixed maturities and equity securities in an unrealized loss position
at March 31, 2006 and December 31, 2005 have been in a continuous unrealized
loss position for less then twelve months, as a new cost basis was established
at the Acquisition Date, July 1, 2005, which was within the last twelve months.
AGING OF GROSS UNREALIZED LOSSES FOR FIXED MATURITIES AND EQUITY SECURITIES
AVAILABLE-FOR-SALE
The following tables present the cost or amortized cost, gross unrealized
losses and number of securities for fixed maturities and equity securities at
March 31, 2006 and December 31, 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
------------------------------------------------------------
MARCH 31, 2006
------------------------------------------------------------
COST OR GROSS UNREALIZED NUMBER OF
AMORTIZED COST LOSS SECURITIES
------------------ ------------------ ------------------
LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR
20% MORE 20% MORE 20% MORE
--------- ------ --------- ------ --------- ------
(IN MILLIONS, EXCEPT NUMBER OF SECURITIES)
Less than six months............ $4,155 $20 $141 $ 9 910 25
Six months or greater but less
than nine months.............. 1,450 2 75 1 595 1
------ --- ---- --- ----- --
Total......................... $5,605 $22 $216 $10 1,505 26
====== === ==== === ===== ==
</Table>
14
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
SUCCESSOR
-------------------------------------------------------------
DECEMBER 31, 2005
-------------------------------------------------------------
COST OR GROSS UNREALIZED NUMBER OF
AMORTIZED COST LOSS SECURITIES
------------------- ------------------ ------------------
LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR
20% MORE 20% MORE 20% MORE
---------- ------ --------- ------ --------- ------
(IN MILLIONS, EXCEPT NUMBER OF SECURITIES)
Less than six months........... $4,843 $14 $119 $6 1,480 24
------ --- ---- -- ----- --
Total........................ $4,843 $14 $119 $6 1,480 24
====== === ==== == ===== ==
</Table>
As of March 31, 2006 and December 31, 2005, the Company had $226 million
and $125 million, respectively, of gross unrealized losses related to its fixed
maturities and equity securities. These securities are concentrated, calculated
as a percentage of gross unrealized loss, as follows:
<Table>
<Caption>
SUCCESSOR
------------------------
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
(IN MILLIONS)
SECTOR:
U.S. corporates........................................... 44% 56%
Foreign corporates........................................ 21 13
U.S. Treasury/agency securities........................... 16 5
Other..................................................... 19 26
--- ---
Total.................................................. 100% 100%
=== ===
INDUSTRY:
Finance................................................... 16% 17%
Governmental.............................................. 16 5
Industrial................................................ 15 14
Mortgage-backed........................................... 14 16
Consumer goods............................................ 8 16
Other..................................................... 31 32
--- ---
Total.................................................. 100% 100%
=== ===
</Table>
As of March 31, 2006, $216 million of unrealized losses related to
securities with an unrealized loss position less than 20% of cost or amortized
cost, which represented 4% of the cost or amortized cost of such securities. As
of December 31, 2005, $119 million of unrealized losses related to securities
with an unrealized loss position less than 20% of cost or amortized cost, which
represented 2% of the cost or amortized cost of such securities.
As of March 31, 2006, $10 million of unrealized losses related to
securities with an unrealized loss position of 20% or more of cost or amortized
cost, which represented 45% of the cost or amortized cost of such securities. Of
such unrealized losses of $10 million, $9 million have been in an unrealized
loss position for a period of less than six months. As of December 31, 2005, $6
million of unrealized losses related to securities with an unrealized loss
position of 20% or more of cost or amortized cost, which represented 43% of the
cost or amortized cost of such securities. Of such unrealized losses of $6
million, all have been in an unrealized loss position for a period of less than
six months.
15
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The Company performs a regular evaluation, on a security-by-security basis,
of its investment holdings in accordance with its impairment policy in order to
evaluate whether such securities are other-than-temporarily impaired. In
connection with the Acquisition, the Company's investment portfolio was revalued
in accordance with purchase accounting as of July 1, 2005. The increase in the
unrealized losses during the three months ended March 31, 2006 is principally
driven by an increase in interest rates since the portfolio revaluation at the
Acquisition Date. Based upon the Company's evaluation of the securities in
accordance with its impairment policy, the cause of the decline being
principally attributable to the general rise in rates during the period, and the
Company's intent and ability to hold the fixed income and equity securities with
unrealized losses for a period of time sufficient for them to recover, the
Company has concluded that the aforementioned securities are not
other-than-temporarily impaired.
This information should be read in conjunction with the significant
accounting policies and estimates related to investments and the Company's
evaluation of investments for impairments as disclosed in Note 2 of Notes to
Consolidated Financial Statements included in the 2005 Annual Report.
NET INVESTMENT INCOME
The components of net investment income were as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2006 2005
------------------ ------------------
(IN MILLIONS)
Fixed maturities................................. $77 $ 94
Mortgage loans on real estate.................... 4 4
Real estate and real estate joint ventures....... -- 3
Policy loans..................................... 1 --
Other limited partnership interests.............. 2 4
Cash, cash equivalents and short-term
investments.................................... 3 2
--- ----
Total.......................................... $87 $107
Less: Investment expenses........................ 1 2
--- ----
Net investment income.......................... $86 $105
=== ====
</Table>
16
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
NET INVESTMENT GAINS (LOSSES)
Net investment gains (losses) were as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2006 2005
------------------ ------------------
(IN MILLIONS)
Fixed maturities................................. $(28) $(2)
Equity securities................................ -- 1
Mortgage loans on real estate.................... 1 --
Derivatives...................................... (5) 3
---- ---
Net investment gains (losses).................. $(32) $ 2
==== ===
</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.
3. DERIVATIVE FINANCIAL INSTRUMENTS
TYPES OF DERIVATIVE INSTRUMENTS
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
-----------------------------------------------------------------
MARCH 31, 2006 DECEMBER 31, 2005
------------------------------- -------------------------------
CURRENT MARKET OR CURRENT MARKET OR
FAIR VALUE FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Interest rate swaps............. $1,321 $237 $41 $1,069 $202 $ 2
Financial futures............... 46 1 1 64 1 1
Foreign currency swaps.......... 30 -- 7 31 -- 7
Foreign currency forwards....... 4 -- -- 8 -- --
Options......................... -- 91 3 -- 115 3
Financial forwards.............. -- -- -- -- -- 2
Credit default swaps............ 3 -- -- 4 -- --
------ ---- --- ------ ---- ---
Total......................... $1,404 $329 $52 $1,176 $318 $15
====== ==== === ====== ==== ===
</Table>
The above table does not include notional values for equity futures, equity
financial forwards, and equity options. At March 31, 2006 and December 31, 2005,
the Company owned 280 and 413 equity futures contracts, respectively. Equity
futures market values are included in financial futures in the preceding table.
At March 31, 2006 and December 31, 2005, the Company owned 12,000 and 36,500
equity financial forwards. Equity financial forwards market values are included
in financial forwards in the preceding table. At March 31, 2006 and December 31,
2005, the Company owned 838,300 and 1,058,300 equity options, respectively.
Equity options market values are included in options in the preceding table.
17
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
This information should be read in conjunction with Note 4 of Notes to
Consolidated Financial Statements included in the 2005 Annual Report.
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
-----------------------------------------------------------------
MARCH 31, 2006 DECEMBER 31, 2005
------------------------------- -------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Non-qualifying.................. $1,404 $329 $52 $1,176 $318 $15
------ ---- --- ------ ---- ---
Total......................... $1,404 $329 $52 $1,176 $318 $15
====== ==== === ====== ==== ===
</Table>
FAIR VALUE HEDGES
The Company designates and accounts for the following as fair value hedges
when they have met the requirements of SFAS 133: (i) interest rate swaps to
convert fixed rate investments to floating rate investments; (ii) foreign
currency swaps to hedge the foreign currency fair value exposure of
foreign-currency-denominated investments and liabilities; and (iii) interest
rate futures to hedge against changes in value of fixed rate securities.
The Company recognized net investment gains (losses) representing the
ineffective portion of all fair value hedges as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2006 2005
------------------ ------------------
(IN MILLIONS)
Changes in the fair value of derivatives......... $ -- $ 2
Changes in the fair value of the items hedged.... -- (2)
------ ---
Net ineffectiveness of fair value hedging
activities..................................... $ -- $--
====== ===
</Table>
All components of each derivative's gain or loss were included in the
assessment of hedge ineffectiveness, except for financial futures where the time
value component of the derivative has been excluded from the assessment of
ineffectiveness. For the three months ended March 31, 2006, there was no cost of
carry for financial futures. For the three months ended March 31, 2005, the cost
of carry for financial futures was insignificant.
There were no instances in which the Company discontinued fair value hedge
accounting due to a hedged firm commitment no longer qualifying as a fair value
hedge.
CASH FLOW HEDGES
The Company designates and accounts for the following as cash flow hedges,
when they have met the requirements of SFAS 133: (i) interest rate swaps to
convert floating rate investments to fixed rate
18
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
investments; and (ii) foreign currency swaps to hedge the foreign currency cash
flow exposure of foreign-currency-denominated investments and liabilities.
For the three months ended March 31, 2006, the Company did not recognize
any net investment gains (losses) which represented the ineffective portion of
all cash flow hedges. For the three months ended March 31, 2005, the Company
recognized net investment gains (losses) of ($1) million, which represented the
ineffective portion of all cash flow hedges. All components of each derivative's
gain or loss were included in the assessment of hedge ineffectiveness. For the
three months ended March 31, 2006 and 2005, there were no instances in which the
Company discontinued cash flow hedge accounting because the forecasted
transactions did not occur on the anticipated date or in the additional time
period permitted by SFAS 133. There were no hedged forecasted transactions,
other than the receipt or payment of variable interest payments.
Presented below is a rollforward of the components of other comprehensive
income (loss), before income taxes, related to cash flow hedges:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------------------- -------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED
MARCH 31, DECEMBER 31, JUNE 30, MARCH 31,
------------------ ---------------- ---------------- ------------------
2006 2005 2005 2005
------------------ ---------------- ---------------- ------------------
(IN MILLIONS)
BALANCE, BEGINNING OF PERIOD........ $-- $-- $ 2 $ 2
Gains (losses) deferred in other
comprehensive income (loss) on the
effective portion of cash flow
hedges............................ -- -- (3) (3)
Amounts reclassified to net
investment income................. -- -- 1 1
--- --- --- ---
BALANCE, END OF PERIOD.............. $-- $-- $-- $--
=== === === ===
</Table>
NON-QUALIFYING DERIVATIVES AND DERIVATIVES FOR PURPOSES OTHER THAN HEDGING
The Company enters into the following derivatives that do not qualify for
hedge accounting under SFAS 133 or for purposes other than hedging: (i) interest
rate swaps and interest rate futures to minimize its exposure to interest rate
volatility; (ii) foreign currency forwards and swaps to minimize its exposure to
adverse movements in exchange rates; (iii) credit default swaps to minimize its
exposure to adverse movements in credit; and (iv) equity futures, equity index
options and equity variance swaps to economically hedge liabilities embedded in
certain variable annuity products.
For the three months ended March 31, 2006 and 2005, the Company recognized
as net investment gains (losses) changes in fair value of ($7) million and $1
million, respectively, related to derivatives that do not qualify for hedge
accounting.
EMBEDDED DERIVATIVES
The Company has certain embedded derivatives that are required to be
separated from their host contracts and accounted for as derivatives. These host
contracts include guaranteed minimum withdrawal contracts and guaranteed minimum
accumulation contracts. The fair value of the Company's embedded derivatives was
a $3 million asset and a $22 million liability at March 31, 2006 and December
31, 2005, respectively. The amounts recorded in net investment gains (losses)
during the three months ended March 31, 2006 and 2005 were gains of $25 million
and $3 million, respectively.
19
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
CREDIT RISK
The Company may be exposed to credit related losses in the event of
nonperformance by counterparties to derivative financial instruments. Generally,
the current credit exposure of the Company's derivative contracts is limited to
the fair value at the reporting date. The credit exposure of the Company's
derivative transactions is represented by the fair value of contracts with a net
positive fair value at the reporting date.
The Company manages its credit risk related to over-the-counter derivatives
by entering into transactions with creditworthy counterparties, maintaining
collateral arrangements and through the use of master agreements that provide
for a single net payment to be made by one counterparty to another at each due
date and upon termination. Because exchange traded futures are effected through
regulated exchanges, and positions are marked to market on a daily basis, the
Company has minimal exposure to credit related losses in the event of
nonperformance by counterparties to such derivative instruments.
The Company enters into various collateral arrangements, which require both
the pledging and accepting of collateral in connection with its derivative
instruments. As of March 31, 2006 and December 31, 2005, the Company was
obligated to return cash collateral under its control of $99 million and $108
million, respectively. This unrestricted cash collateral is included in cash and
cash equivalents and the obligation to return it is included in payables for
collateral under securities loaned and other transactions in the consolidated
balance sheets. As of March 31, 2006 and December 31, 2005, the Company had also
accepted collateral consisting of various securities with a fair market value of
$10 million and $22 million, respectively, which are held in separate custodial
accounts. The Company is permitted by contract to sell or repledge this
collateral, but as of March 31, 2006 and December 31, 2005, none of the
collateral had been sold or repledged. As of March 31, 2006, the Company had not
pledged any collateral related to derivative instruments.
4. CONTINGENCIES, COMMITMENTS AND GUARANTEES
CONTINGENCIES
LITIGATION
The Company is a defendant in a number of litigation matters. In some of
the matters, large and/or 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.
20
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The Company is a party to a number of legal actions and is and/or has been
involved in regulatory investigations. Given the inherent unpredictability of
these matters, it is difficult to estimate the impact on the Company's
consolidated financial position. On a quarterly and yearly basis, the Company
reviews relevant information with respect to liabilities for litigation,
regulatory investigations and litigation-related contingencies to be reflected
in the Company's consolidated financial statements. The review includes senior
legal and financial personnel. Unless stated below, estimates of possible
additional losses or ranges of loss for particular matters cannot in the
ordinary course be made with a reasonable degree of certainty. The limitations
of available data and uncertainty regarding numerous variables make it difficult
to estimate liabilities. Liabilities are established when it is probable that a
loss has been incurred and the amount of the loss can be reasonably estimated.
It is possible that some of the matters could require the Company to pay damages
or make other expenditures or establish accruals in amounts that could not be
estimated as of March 31, 2006. Furthermore, it is possible that an adverse
outcome in certain of the Company's litigation and regulatory investigations, or
the use of different assumptions in the determination of amounts recorded, could
have a material effect upon the Company's consolidated net income or cash flows
in particular quarterly or annual periods.
In August 1999, an amended putative class action complaint was filed in
Connecticut state court against MLAC, Travelers Equity Sales, Inc. and certain
former affiliates. The amended complaint alleges Travelers Property Casualty
Corporation, a former MLAC affiliate, purchased structured settlement annuities
from MLAC 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 MLAC, 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 MLAC: violation of the Connecticut Unfair Trade
Practice Statute; unjust enrichment; and civil conspiracy. On June 15, 2004, the
defendants appealed the class certification order. In March 2006, the
Connecticut Supreme Court reversed the trial court's certification of a class.
Plaintiff may seek upon remand to the trial court to file another motion for
class certification. The Company and Travelers Equity Sales, Inc. intend to
continue to vigorously defend the matter.
Regulatory bodies have contacted the Company and have requested information
relating to market timing and late trading of mutual funds and variable
insurance products and, generally, the marketing of such products. The Company
believes that many of these inquiries are similar to those made to many
financial services companies as part of industry-wide investigations by various
regulatory agencies. In addition, like many insurance companies and agencies in
2004 and 2005, the Company received inquiries from certain state Departments of
Insurance regarding producer compensation and bidding practices. The Company is
fully cooperating with regard to these information requests and investigations.
The Company at the present time is not aware of any systemic problems with
respect to such matters that may have a material adverse effect on the Company's
consolidated financial position.
In addition, the Company is a defendant or co-defendant in various other
litigation matters in the normal course of business. These may include civil
actions, arbitration proceedings and other matters arising in the normal course
of business out of activities as an insurance company 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.
21
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
COMMITMENTS
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 $14 million
and $15 million at March 31, 2006 and December 31, 2005, respectively. The
Company anticipates that these amounts will be invested in partnerships over the
next five years.
MORTGAGE LOAN COMMITMENTS
The Company commits to lend funds under mortgage loan commitments. The
amounts of these mortgage loan commitments were $20 million at both March 31,
2006 and December 31, 2005.
GUARANTEES
In the normal course of its business, the Company may provide 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 may
provide indemnities and guarantees, including those related to tax, 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 may provide 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 contractual limitation, while in other cases such
limitations are not specified or applicable. Therefore, the Company does not
believe that it is possible to determine the maximum potential amount due under
these guarantees in the future.
In addition, the Company indemnifies its directors and officers as provided
in its charters and by-laws. Also, the Company indemnifies 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.
5. EMPLOYEE BENEFIT PLANS
Subsequent to the Acquisition, the Company became a participating employer
in qualified and non-qualified, noncontributory defined benefit pension plans
sponsored by MetLife. Employees were credited with prior service recognized by
Citigroup, solely (with regard to pension purposes) for the purpose of
determining eligibility and vesting under the Metropolitan Life Retirement Plan
for United States Employees (the "Plan"), a noncontributory qualified defined
benefit pension plan, with respect to benefits earned under the Plan subsequent
to the closing date of the Acquisition. MetLife allocates pension benefits to
the Company based on salary ratios. Net periodic expense related to these plans
is based on the employee population as of the valuation date at the beginning of
the year; accordingly, an insignificant expense related to the MetLife plans was
allocated to the Company for the three months ended March 31, 2006.
Prior to the Acquisition, the Company participated in qualified and
non-qualified, noncontributory defined benefit pension plans and certain other
postretirement plans sponsored by Citigroup. The Company's
22
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
share of expense for these plans was insignificant for the three months ended
March 31, 2005. The obligation for benefits earned under these plans was
retained by Citigroup.
6. EQUITY
DIVIDEND RESTRICTIONS
Under Connecticut State Insurance Law, MLAC is permitted, without prior
insurance regulatory clearance, to pay shareholder dividends to its parent, 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. MLAC will be permitted to pay a cash dividend in excess of the greater of
such two amounts only if it files notice of its declaration of such a dividend
and the amount thereof with the Connecticut Commissioner of Insurance
("Commissioner") and the Commissioner does not disapprove the payment within 30
days after notice or until the Commissioner has approved the dividend, whichever
is sooner. In addition, any dividend that exceeds earned surplus (unassigned
funds, reduced by 25% of unrealized appreciation in value or revaluation of
assets or unrealized profits on investments) as of the last filed annual
statutory statement requires insurance regulatory approval. Under Connecticut
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. The Connecticut State
Insurance Law requires prior approval for any dividends for a period of two
years following a change in control. As a result of the Acquisition, under
Connecticut State Insurance Law, all dividend payments by MLAC through June 30,
2007 require prior approval of the Commissioner. MLAC has not paid dividends
since the Acquisition Date.
COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) were as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2006 2005
------------------ ------------------
(IN MILLIONS)
Net income....................................... $ 49 $ 44
Other comprehensive income (loss):
Unrealized gains (losses) on derivative
instruments, net of income taxes............ -- (1)
Unrealized investment gains (losses), net of
related offsets and income taxes............ (54) (92)
---- ----
Other comprehensive income (loss)................ (54) (93)
---- ----
Comprehensive income (loss).................... $ (5) $(49)
==== ====
</Table>
23
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
7. OTHER EXPENSES
Other expenses were comprised of the following:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2006 2005
------------------ ------------------
(IN MILLIONS)
Compensation..................................... $ 11 $ 10
Commissions...................................... 60 91
Amortization of DAC and VOBA..................... 36 61
Capitalization of DAC............................ (55) (107)
Rent, net of sublease income..................... 1 1
Other............................................ 18 24
---- -----
Total other expenses........................... $ 71 $ 80
==== =====
</Table>
8. RELATED PARTY TRANSACTIONS
Subsequent to the Acquisition Date, Metropolitan Life Insurance Company
("Metropolitan Life") and the Company entered into a Master Service Agreement
under which Metropolitan Life provides administrative, accounting, legal and
similar services to the Company. Metropolitan Life charged the Company less than
$1 million dollars for services performed under the Master Service Agreement for
the three months ended March 31, 2006.
As of March 31, 2006 and December 31, 2005, the Company had receivables
from MICC of $122 million and $20 million, respectively. The Company had $2
million of affiliated payables at both March 31, 2006 and December 31, 2005.
In December 2004, MLAC entered into a reinsurance agreement with The
Travelers Life and Annuity Reinsurance Company ("TLARC") related to guarantee
features included in certain of their universal life and variable universal life
products. This reinsurance agreement is treated as a deposit-type contract. As
of March 31, 2006 and December 31, 2005, the Company had a recoverable from
TLARC of $41 million and $40 million, respectively. Fees associated with this
contract, included within other expenses, were $8 million and $2 million for the
three months ended March 31, 2006 and March 31, 2005, respectively.
In addition, MLAC's individual insurance mortality risk is reinsured, in
part, to Reinsurance Group of America, Incorporated ("RGA"), an affiliate
subsequent to the Acquisition Date. Reinsurance recoverables under these
agreements with RGA were $22 million and $33 million as of March 31, 2006 and
December 31, 2005, respectively. Ceded premiums earned, universal life fees and
benefits were $1 million, $4 million and $9 million, respectively, for the three
months ended March 31, 2006 and $1 million, $4 million and $2 million,
respectively, for the three months ended March 31, 2005.
Prior to the Acquisition, Citigroup and certain of its subsidiaries
provided investment management and accounting services, payroll, internal
auditing, benefit management and administration, property management and
investment technology services to the Company. The Company paid MICC an
insignificant amount for the three months ended March 31, 2005 for these
services.
24
METLIFE LIFE AND ANNUITY COMPANY OF CONNECTICUT
(Formerly, The Travelers Life and Annuity Company)
(A Wholly-Owned Subsidiary of MetLife Insurance Company of Connecticut)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
9. SUBSEQUENT EVENT
On February 14, 2006, TLAC filed, with the State of Connecticut Office of
the Secretary of the State, a Certificate of Amendment to the Charter as Amended
and Restated of The Travelers Life and Annuity Company (the "Charter
Amendment"). The Charter Amendment changed the name of TLAC to MetLife Life and
Annuity Company of Connecticut effective May 1, 2006.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of this discussion, the "Company" refers to MetLife Life and
Annuity Company of Connecticut, a Connecticut corporation incorporated in 1973
("MLAC," formerly, The Travelers Life and Annuity Company), together with its
subsidiary. MLAC is a wholly owned subsidiary of MetLife Insurance Company of
Connecticut ("MICC," formerly, The Travelers Insurance Company). The Company
offers annuities and life insurance to individuals and small businesses in the
United States. Management's narrative analysis of the results of operations of
MLAC 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 the Company's Annual Report on Form 10-K for the year ended
December 31, 2005.
On February 14, 2006, a Certificate of Amendment was filed with the State
of Connecticut Office of the Secretary of the State changing the name of The
Travelers Life and Annuity Company to MLAC, effective May 1, 2006.
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) catastrophe losses; (v)
adverse results or other consequences from litigation, arbitration or regulatory
investigations; (vi) regulatory, accounting or tax changes that may affect the
cost of, or demand for, the Company's products or services; (vii) downgrades in
the Company's and its affiliates' claims paying ability or financial strength
ratings; (viii) changes in rating agency policies or practices; (ix)
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; (x) discrepancies
between actual experience and assumptions used in establishing liabilities
related to other contingencies or obligations; (xi) the effects of business
disruption or economic contraction due to terrorism or other hostilities; (xii)
changes in results of the Company arising from the acquisition by MetLife, Inc.
("MetLife") and integration of its businesses into MetLife's operations; and
(xiii) other risks and uncertainties described from time to time in MLAC's
filings with the United States 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.
MLAC'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.
ACQUISITION
On July 1, 2005 (the "Acquisition Date"), MLAC and other affiliated
entities, including the Company's parent, MICC, and 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 (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,
26
2005 financial statements of Travelers by both MetLife and Citigroup and
interpretation of the provisions of the acquisition agreement, dated as of
January 31, 2005 between MetLife and Citigroup (the "Acquisition Agreement"), by
both parties. The accounting policies of the Company were conformed to those of
MetLife upon the Acquisition.
BUSINESS
The Company's core offerings include universal and variable life insurance,
fixed and variable deferred annuities, structured settlements and payout
annuities. The Company may phase out the issuance of products that it is
currently selling 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.
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets, the Acquisition was
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. The Company expects to complete its
review of its estimate of fair value and, if required, further refine its
estimate of fair values through June 30, 2006. As required by the SEC Staff
Accounting Bulletin Topic 5-J., Push Down Basis of Accounting Required in
Certain Limited Circumstances, the purchase method of accounting applied by
MetLife to the acquired assets and liabilities associated with the Company has
been "pushed down" to the consolidated financial statements of the Company,
thereby establishing a new basis of accounting. This new basis of accounting is
referred to as the "successor basis," while the historical basis of accounting
is referred to as the "predecessor basis." Financial statements included herein
for periods prior and subsequent to the Acquisition Date are labeled
"predecessor" and "successor," respectively.
SUMMARY OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the 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") and the establishment and amortization of value of
business acquired ("VOBA"); (vi) the measurement of goodwill and related
impairment, if any; (vii) the liability for future policyholder benefits; (viii)
accounting for reinsurance transactions; and (ix) the liability for litigation
and regulatory matters. The application of purchase accounting requires the use
of estimation techniques in determining the fair value of the assets acquired
and liabilities assumed -- the most significant of which relate to the
aforementioned critical estimates. In applying these policies, management makes
subjective and complex judgments that frequently require estimates about matters
that are inherently uncertain. Many of these policies, estimates and related
judgments are common in the insurance and financial services industries; others
are specific to the Company's business and operations. Actual results could
differ from these estimates.
27
RESULTS OF OPERATIONS
The following table presents consolidated financial information for the
Company for the periods indicated:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2006 MARCH 31, 2005
------------------ ------------------
(IN MILLIONS)
REVENUES
Premiums......................................... $ 12 $ 10
Universal life and investment-type product policy
fees........................................... 121 107
Net investment income............................ 86 105
Other revenues................................... 7 6
Net investment gains (losses).................... (32) 2
---- ----
Total revenues................................. 194 230
---- ----
EXPENSES
Policyholder benefits and claims................. 25 23
Interest credited to policyholder account
balances....................................... 29 62
Other expenses................................... 71 80
---- ----
Total expenses................................. 125 165
---- ----
Income before provision for income taxes......... 69 65
Provision for income taxes....................... 20 21
---- ----
Net income....................................... $ 49 $ 44
==== ====
</Table>
Net Income
Net income increased by $5 million, or 11%, to $49 million for the three
months ended March 31, 2006, from $44 million in the comparable 2005 period.
The increase in net income is primarily due to a decrease in interest
credited to policyholder account balances of $23 million, net of income taxes,
resulting from the revaluation of the policyholder balances through the
application of the purchase method of accounting and lower crediting rates,
partially offset by growth in policyholder account balances.
Lower amortization of DAC, as more fully described below, of $17 million,
net of income tax, and lower spending due to a decline in business activity of
$4 million, net of income tax, also contributed to the increase in net income.
Also included in the increase in net income were higher universal life and
investment-type product policy fee income of $10 million, net of income taxes,
largely due to favorable market conditions and an increase in average account
values.
While the overall underwriting results were relatively flat, favorable
underwriting on structured settlement products was offset by unfavorable
underwriting in the life products.
Partially offsetting the increase in net income were higher net investment
losses of $24 million, net of income taxes, in the current period versus net
investment gains in the prior period. These net investment losses are primarily
attributable to losses on fixed maturity sales resulting principally from
continued portfolio repositioning subsequent to the Acquisition in a rising
interest rate environment. Also contributing to the decrease is lower net
investment income of $13 million, net of income taxes, primarily due to the
application of the purchase method of accounting and lower yields due to
portfolio repositioning.
28
Additionally, a change in policy for the capitalization of deferred policy
acquisition costs ("DAC"), subsequent to the Acquisition, of $14 million, net of
income taxes, partially offset the increase in net income.
Income tax expense for the three months ended March 31, 2006 was $20
million, or 29% of income before provision for income taxes, compared with $21
million, or 32%, for the comparable 2005 period. The 2006 and 2005 effective tax
rates differ from the corporate tax rate of 35% primarily due to the impact of
non-taxable investment income.
Total Revenues
Total revenues, excluding net investment gains (losses), decreased by $2
million, or 1%, to $226 million for the three months ended March 31, 2006 from
$228 million in the comparable 2005 period.
Premiums increased by $2 million primarily due to higher sales of income
annuities.
Universal life and investment-type product policy fees for universal life
and variable annuity products increased by $14 million which is largely
attributable to the impact of favorable market performance and higher average
account values.
Net investment income declined by $19 million primarily due to increased
amortization of premiums on fixed maturity securities resulting from the
application of purchase accounting at the Acquisition Date combined with lower
yields from portfolio repositioning.
Total Expenses
Total expenses decreased by $40 million, or 24%, to $125 million for the
three months ended March 31, 2006 from $165 million for the comparable 2005
period.
Policyholder benefits and claims increased by $2 million commensurate with
higher premiums noted above. Favorable underwriting results for structured
settlements of $6 million were offset by unfavorable mortality in the life
insurance products of $6 million.
Interest credited to policyholder account balances decreased by $33 million
primarily due to lower interest credited in universal life and annuity products.
This decrease resulted from the revaluation of the policyholder balances through
the application of the purchase method of accounting and lower crediting rates,
partially offset by the growth in policyholder account balances.
Other expenses decreased $9 million primarily due to lower amortization of
DAC of $24 million driven by net investment losses in the current period versus
net investment gains in the prior period. In addition, other expenses decreased
by $5 million primarily due to lower business activities. These decreases were
partially offset by a decrease in capitalizable expenses which resulted from a
change in the policy for the capitalization of DAC subsequent to the
Acquisition. The DAC capitalization decrease of $52 million is due to a decline
in deferrable expenses, principally commissions, of approximately $32 million
and $20 million of a decrease which can be attributed to a change of the DAC
capitalization policy.
SUBSEQUENT EVENTS
On February 14, 2006, TLAC filed, with the State of Connecticut Office of
the Secretary of the State, a Certificate of Amendment to the Charter as Amended
and Restated of The Travelers Life and Annuity Company (the "Charter
Amendment"). The Charter Amendment changed the name of TLAC to "MetLife Life and
Annuity Company of Connecticut" effective May 1, 2006.
On May 2, 2006, C. Robert Henrikson ceased serving as MLAC's Chairman of
the Board, President and Chief Executive Officer. On May 2, 2006, MLAC's Board
of Directors elected Stanley J Talbi as President and Eric T. Steigerwalt as
Senior Vice President and Chief Financial Officer, effective as of that date. On
May 8, 2006, MLAC's Board of Directors elected Michael K. Farrell as a director.
29
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, 2005,
the Company had total adjusted capital in excess of amounts requiring any
regulatory action as defined by the NAIC.
Under Connecticut State Insurance Law, the Company is permitted, without
prior insurance regulatory clearance, to pay shareholder dividends to its
parent, 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. MLAC will be permitted to pay a cash dividend in excess of the
greater of such two amounts only if it files notice of its declaration of such a
dividend and the amount thereof with the Connecticut Commissioner of Insurance
("Commissioner") and the Commissioner does not disapprove the payment within 30
days after notice or until the Commissioner has approved the dividend, whichever
is sooner. In addition, any dividend that exceeds earned surplus (unassigned
funds, reduced by 25% of unrealized appreciation in value or revaluation of
assets or unrealized profits on investments) as of the last filed annual
statutory statement requires insurance regulatory approval. Under Connecticut
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. 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 MLAC by
MetLife, under Connecticut State Insurance Law all dividend payments by MLAC
through June 30, 2007 require prior approval of the Commissioner. MLAC has not
paid dividends since the Acquisition Date.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted guidance relating to derivative financial
instruments as follows:
- Effective January 1, 2006, the Company adopted prospectively SFAS No.
155, Accounting for Certain Hybrid Instruments ("SFAS 155"). SFAS 155
amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
("SFAS 133") and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("SFAS 140"). SFAS
155 allows financial instruments that have embedded derivatives to be
accounted for as a whole, eliminating the need to bifurcate the
derivative from its host, if the holder elects to account for the whole
instrument on a fair value basis. In addition, among other changes, SFAS
155 (i) clarifies which interest-only strips and principal-only strips
are not subject to the requirements of SFAS 133; (ii) establishes a
requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring
bifurcation; (iii) clarifies that concentrations of credit risk in the
form of subordination are not embedded derivatives; and (iv) eliminates
the prohibition on a qualifying special-purpose entity ("QSPE") from
holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial interest. The adoption
of SFAS 155 did not have a material impact on the Company's unaudited
interim condensed consolidated financial statements.
- Effective January 1, 2006, the Company adopted prospectively SFAS 133
Implementation Issue No. B38, Embedded Derivatives: Evaluation of Net
Settlement with Respect to the Settlement of a Debt Instrument through
Exercise of an Embedded Put Option or Call Option ("Issue B38") and SFAS
133 Implementation Issue No. B39, Embedded Derivatives: Application of
Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor
("Issue B39"). Issue B38 clarifies that the potential settlement of a
debtor's obligation to a creditor occurring upon exercise of a put or
call option meets the net settlement criteria of SFAS 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
30
its initial net investment. The adoption of Issues B38 and B39 did not
have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
Effective January 1, 2006, the Company adopted 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. The adoption of SFAS 154 did not have a
material impact on the Company's unaudited interim condensed consolidated
financial statements.
In June 2005, the Emerging Issues Task Force ("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. For all other limited partnerships, EITF 04-5
required adoption by January 1, 2006 through a cumulative effect of a change in
accounting principle recorded in opening equity or applied retrospectively by
adjusting prior period financial statements. The adoption of the provisions of
EITF 04-5 did not have a material impact on the Company's unaudited interim
condensed consolidated financial statements.
Effective November 9, 2005, the Company prospectively adopted the guidance
in FASB Staff Position ("FSP") FAS 140-2, Clarification of the Application of
Paragraphs 40(b) and 40(c) of FAS 140 ("FSP 140-2"). FSP 140-2 clarified certain
criteria relating to derivatives and beneficial interests when considering
whether an entity qualifies as a QSPE. Under FSP 140-2, the criteria must only
be met at the date the QSPE issues beneficial interests or when a derivative
financial instrument needs to be replaced upon the occurrence of a specified
event outside the control of the transferor. The adoption of FSP 140-2 did not
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 APB Opinion No. 29 ("SFAS 153"). SFAS 153
amended prior guidance to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaced it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The provisions of
SFAS 153 were required to be applied prospectively for fiscal periods beginning
after June 15, 2005. The adoption of SFAS 153 did not have a material impact on
the Company's unaudited interim condensed consolidated financial statements.
In June 2005, the FASB completed its review of 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, that are
impaired at the balance sheet date but for which an other-than-temporary
impairment has not been recognized. The FASB decided not to provide additional
guidance on the meaning of other-than-temporary impairment but has issued FSP
115-1, The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments ("FSP 115-1"), which nullifies the accounting guidance on
the determination of whether an investment is other-than-temporarily impaired as
set forth in EITF 03-1. As required by FSP 115-1, the Company adopted this
guidance on a prospective basis, which had no material impact on the Company's
unaudited interim condensed consolidated financial statements, and has provided
the required disclosures.
31
FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets -- an amendment of FASB Statement No. 140 ("SFAS 156"). SFAS
156 amends the guidance in SFAS 140. Among other requirements, SFAS 156 requires
an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in certain situations. SFAS 156 will be applied prospectively
and is effective for fiscal years beginning after September 15, 2006. SFAS 156
is not expected to have a material impact on the Company's consolidated
financial statements.
In September 2005, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 05-1, Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with Modifications or
Exchanges of Insurance Contracts ("SOP 05-1"). SOP 05-1 provides guidance on
accounting by insurance enterprises for deferred acquisition costs on internal
replacements of insurance and investment contracts other than those specifically
described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and For Realized Gains and Losses from the Sale
of Investments. SOP 05-1 defines an internal replacement as a modification in
product benefits, features, rights, or coverages that occurs by the exchange of
a contract for a new contract, or by amendment, endorsement, or rider to a
contract, or by the election of a feature or coverage within a contract. Under
SOP 05-1, modifications that result in a substantially unchanged contract will
be accounted for as a continuation of the replaced contract. A replacement
contract that is substantially changed will be accounted for as an
extinguishment of the replaced contract resulting in a release of unamortized
deferred acquisition costs, unearned revenue and deferred sales inducements
associated with the replaced contract. The guidance in SOP 05-1 will be applied
prospectively and is effective for internal replacements occurring in fiscal
years beginning after December 15, 2006. The Company is currently evaluating the
impact of SOP 05-1 and does not expect that the pronouncement will have a
material impact on the Company's unaudited interim condensed consolidated
financial statements.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
MLAC's management, with the participation of MLAC's Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the design and
operation of MLAC'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, MLAC's Chief Executive Officer and Chief Financial Officer have
concluded that MLAC's disclosure controls and procedures are effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING
On July 1, 2005, MetLife completed the Acquisition of the Company. MetLife
is in the process of completing its post-merger integration plan which includes
migrating certain data, applications and processes into MetLife's internal
control environment. Management believes that the migrations which have already
occurred, and future migrations, have been, or will be, adequately controlled
and tested. Migrations which have occurred have resulted in changes that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting for the quarter ended March
31, 2006. Further, future migrations will continue to materially affect, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting in the future until such time as the post-merger integration
plans have been fully completed. Except as set forth above, there were no
changes to the Company's internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f) during the quarter ended March 31, 2006 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
32
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 4 to the unaudited
condensed consolidated financial statements in Part I of this report.
The Company is a defendant in a number of litigation matters. In some of
the matters, large and/or 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.
The Company is a party to a number of legal actions and is and/or has been
involved in regulatory investigations. Given the inherent unpredictability of
these matters, it is difficult to estimate the impact on the Company's
consolidated financial position. On a quarterly and annual basis, the Company
reviews relevant information with respect to liabilities for litigation,
regulatory investigations and litigation-related contingencies to be reflected
in the Company's consolidated financial statements. The review includes senior
legal and financial personnel. Unless stated below, estimates of possible
additional losses or ranges of loss for particular matters cannot in the
ordinary course be made with a reasonable degree of certainty. The limitations
of available data and uncertainty regarding numerous variables make it difficult
to estimate liabilities. Liabilities are established when it is probable that a
loss has been incurred and the amount of the loss can be reasonably estimated.
It is possible that some of the matters could require the Company to pay damages
or make other expenditures or establish accruals in amounts that could not be
estimated as of March 31, 2006. Furthermore, it is possible that an adverse
outcome in certain of the Company's litigation and regulatory investigations, or
the use of different assumptions in the determination of amounts recorded, could
have a material effect upon the Company's consolidated net income or cash flows
in particular quarterly or annual periods.
In August 1999, an amended putative class action complaint was filed in
Connecticut state court against MLAC, Travelers Equity Sales, Inc. and certain
former affiliates. The amended complaint alleges Travelers Property Casualty
Corporation, a former MLAC affiliate, purchased structured settlement annuities
from MLAC 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 MLAC, 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 MLAC: violation of the Connecticut Unfair Trade
Practice Statute; unjust enrichment; and civil conspiracy. On June 15, 2004, the
defendants appealed the class certification order. In March 2006, the
Connecticut Supreme Court reversed the trial court's certification of a class.
Plaintiff may seek upon remand to the trial court to file another motion for
class certification. The Company and Travelers Equity Sales, Inc. intend to
continue to vigorously defend the matter.
33
ITEM 6. EXHIBITS
<Table>
3.1 Charter of The Travelers Life and Annuity Company ("TLAC,"
now MetLife Life and Annuity Company of Connecticut), as
effective April 10, 1990 (Incorporated by reference to
Exhibit 3.1 of TLAC's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005 (the "Annual Report"))
3.2 Certificate of Amendment of the Charter as Amended and
Restated of TLAC, as effective May 1, 2006 (Incorporated by
reference to Exhibit 3.2 of the Annual Report)
3.3 By-laws of TLAC, as effective April 10, 1990 (Incorporated
by reference to Exhibit 3.3 of the Annual Report)
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>
34
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.
METLIFE LIFE AND ANNUITY COMPANY
OF CONNECTICUT
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: May 15, 2006
35
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT NAME
------- ------------
3.1 Charter of The Travelers Life and Annuity Company ("TLAC,"
now MetLife Life and Annuity Company of Connecticut), as
effective April 10, 1990 (Incorporated by reference to
Exhibit 3.1 of TLAC's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005 (the "Annual Report"))
3.2 Certificate of Amendment of the Charter as Amended and
Restated of TLAC, as effective May 1, 2006 (Incorporated by
reference to Exhibit 3.2 of the Annual Report)
3.3 By-laws of TLAC, as effective April 10, 1990 (Incorporated
by reference to Exhibit 3.3 of the Annual Report)
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>
E-1