- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED 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: 33-03094
---------------------
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Exact name of registrant as specified in its charter)
<Table>
CONNECTICUT 06-0566090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At May 11, 2006, 40,000,000 shares of the registrant's common stock, $2.50
par value per share, were outstanding, all of which are owned by MetLife, Inc.
REDUCED DISCLOSURE FORMAT
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
H(1)(A) AND (B) OF FORM 10-Q AND IS, THEREFORE, FILING THIS FORM 10-Q WITH THE
REDUCED DISCLOSURE FORMAT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 2005 5
(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 (Unaudited)... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 32
RESULTS OF OPERATIONS...................................................
ITEM 4. CONTROLS AND PROCEDURES..................................... 39
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 39
ITEM 6. EXHIBITS.................................................... 41
SIGNATURES................................................................. 42
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 Insurance Company of Connecticut (formerly, "The Travelers
Insurance Company") and its subsidiaries, as well as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend"
and other similar expressions. Forward-looking statements are made based upon
management's current expectations and beliefs concerning future developments and
their potential effects on MetLife Insurance Company of Connecticut and its
subsidiaries. Such forward-looking statements are not guarantees of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
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, DECEMBER 31,
2006 2005
------------ ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $48,102 and $48,848, respectively).... $46,649 $48,162
Trading securities, at fair value (cost: $456 and $457,
respectively).......................................... 470 452
Equity securities available-for-sale, at fair value (cost:
$422 and
$424, respectively).................................... 418 421
Mortgage and consumer loans............................... 2,077 2,094
Policy loans.............................................. 885 881
Real estate and real estate joint ventures
held-for-investment.................................... 81 96
Other limited partnership interests....................... 1,179 1,248
Short-term investments.................................... 1,749 1,486
Other invested assets..................................... 1,068 1,029
------- -------
Total investments...................................... 54,576 55,869
Cash and cash equivalents................................... 918 521
Accrued investment income................................... 519 549
Premiums and other receivables.............................. 5,432 5,299
Deferred policy acquisition costs and value of business
acquired.................................................. 3,813 3,701
Goodwill.................................................... 856 856
Current income tax recoverable.............................. -- 1
Deferred income tax asset................................... 1,506 1,283
Other assets................................................ 146 154
Separate account assets..................................... 31,156 31,238
------- -------
Total assets........................................... $98,922 $99,471
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits.................................... $18,041 $18,077
Policyholder account balances............................. 32,101 32,986
Other policyholder funds.................................. 293 287
Current income taxes payable.............................. 22 --
Payables for collateral under securities loaned and other
transactions........................................... 9,290 8,750
Other liabilities......................................... 1,690 1,477
Separate account liabilities.............................. 31,156 31,238
------- -------
Total liabilities...................................... 92,593 92,815
------- -------
Stockholder's Equity:
Common stock, par value $2.50 per share; 40,000,000 shares
authorized, issued and outstanding........................ 100 100
Additional paid-in capital.................................. 6,684 6,684
Retained earnings........................................... 359 241
Accumulated other comprehensive income (loss)............... (814) (369)
------- -------
Total stockholder's equity............................. 6,329 6,656
------- -------
Total liabilities and stockholder's equity............. $98,922 $99,471
======= =======
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
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.......................................... $ 82 $ 153
Universal life and investment-type product policy
fees............................................ 225 201
Net investment income............................. 649 762
Other revenues.................................... 29 57
Net investment gains (losses)..................... (181) 54
------------------ ------------------
Total revenues.................................. 804 1,227
------------------ ------------------
EXPENSES
Policyholder benefits and claims.................. 201 285
Interest credited to policyholder account
balances........................................ 248 347
Other expenses.................................... 190 214
------------------ ------------------
Total expenses.................................. 639 846
------------------ ------------------
Income from continuing operations before provision
for income taxes................................ 165 381
Provision for income taxes........................ 47 111
------------------ ------------------
Income from continuing operations................. 118 270
Income from discontinued operations, net of income
taxes........................................... -- 122
------------------ ------------------
Net income........................................ $ 118 $ 392
================== ==================
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
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)
----------------------------
FOREIGN
ADDITIONAL NET UNREALIZED CURRENCY
COMMON PAID-IN RETAINED INVESTMENT TRANSLATION
STOCK CAPITAL EARNINGS GAINS (LOSSES) ADJUSTMENT TOTAL
------ ---------- -------- -------------- ----------- ------
Balance at January 1, 2006 (SUCCESSOR)..... $100 $6,684 $241 $(371) $2 $6,656
Comprehensive income (loss):
Net income............................... 118 118
Other comprehensive income (loss):
Unrealized gains (losses) on derivative
instruments, net of income taxes..... (1) (1)
Unrealized investment gains (losses),
net of related offsets and income
taxes................................ (444) (444)
------
Other comprehensive income (loss).... (445)
------
Comprehensive income (loss).............. (327)
---- ------ ---- ----- -- ------
Balance at March 31, 2006 (SUCCESSOR)...... $100 $6,684 $359 $(816) $2 $6,329
==== ====== ==== ===== == ======
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
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 PROVIDED BY OPERATING ACTIVITIES................... $ 361 $ 793
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities........................................ 9,688 3,799
Equity securities....................................... 77 85
Mortgage and consumer loans............................. 206 151
Real estate and real estate joint ventures.............. 23 24
Other limited partnership interests..................... 363 84
Purchases of:
Fixed maturities........................................ (9,036) (4,145)
Equity securities....................................... (66) (62)
Mortgage and consumer loans............................. (183) (262)
Real estate and real estate joint ventures.............. (2) (3)
Other limited partnership interests..................... (290) (44)
Net change in policy loans................................ (4) 192
Net change in short-term investments...................... (263) 126
Net change in other invested assets....................... (8) (51)
Other, net................................................ -- 35
------------------ ------------------
Net cash provided by (used in) investing activities......... 505 (71)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits................................................ 639 1,697
Withdrawals............................................. (1,648) (2,185)
Net change in payables for collateral under securities
loaned and other transactions........................... 540 264
Dividends on common stock................................. -- (450)
------------------ ------------------
Net cash used in financing activities....................... (469) (674)
------------------ ------------------
Change in cash and cash equivalents......................... 397 48
Cash and cash equivalents, beginning of period.............. 521 246
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 918 $ 294
================== ==================
Cash and cash equivalents, subsidiaries transferred,
beginning of period....................................... $ -- $ 31
================== ==================
CASH AND CASH EQUIVALENTS, SUBSIDIARIES TRANSFERRED, END OF
PERIOD.................................................... $ -- $ 19
================== ==================
Cash and cash equivalents, from continuing operations,
beginning of period....................................... $ 521 $ 215
================== ==================
CASH AND CASH EQUIVALENTS, FROM CONTINUING OPERATIONS, END
OF PERIOD................................................. $ 918 $ 275
================== ==================
Supplemental disclosures of cash flow information:
Net cash paid during the period for income taxes from
continuing operations................................. $ 8 $ 272
================== ==================
Net cash paid during the period for income taxes,
subsidiaries transferred.............................. $ -- $ 9
================== ==================
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES
BUSINESS
The "Company" refers to MetLife Insurance Company of Connecticut ("MICC,"
formerly, The Travelers Insurance Company), a Connecticut corporation
incorporated in 1863, together with its subsidiaries, including MetLife Life and
Annuity Company of Connecticut ("MLAC," formerly, The Travelers Life and Annuity
Company). The Company offers annuities and life insurance to individuals and
institutional protection and asset accumulation products in the United States
and Canada.
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 Insurance Company ("TIC") to MICC, effective May 1, 2006.
On July 1, 2005 (the "Acquisition Date"), MICC became a wholly-owned
subsidiary of MetLife, Inc. ("MetLife"). MICC, together with its subsidiaries,
including MLAC and other affiliated entities, including 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 from Citigroup (the
"Acquisition") for $12.0 billion. Prior to the Acquisition, MICC was a
wholly-owned subsidiary of Citigroup Insurance Holding Company ("CIHC").
Primerica was distributed via dividend from MICC to CIHC on June 30, 2005 in
contemplation of the Acquisition. Primerica is reported in discontinued
operations for all periods presented. See Note 9. 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 INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
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 $856 million
as follows:
<Table>
<Caption>
SUCCESSOR
-------------
AS OF JULY 1,
2005
-------------
(IN MILLIONS)
Total assets acquired....................................... $ 91,824
Total liabilities assumed................................... (85,896)
--------
Net assets acquired......................................... 5,928
Goodwill, resulting from acquisition........................ 856
--------
Total purchase price attributed to the Company.............. 6,784
Total purchase price attributed to other affiliates......... 5,182
--------
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 businesses and operations. Actual results could
differ from these estimates.
The accompanying unaudited interim condensed consolidated financial
statements include the accounts of (i) the Company; (ii) partnerships and joint
ventures in which the Company has control; and (iii) variable interest entities
("VIEs"), for which the Company is deemed to be the primary beneficiary.
Intercompany accounts and transactions have been eliminated.
Minority interest related to consolidated entities included in other
liabilities was $182 million and $180 million at March 31, 2006 and December 31,
2005, respectively.
9
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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. 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 presented 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
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
10
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 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
11
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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.
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 INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
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................. $16,007 $20 $ 654 $15,373 33.0%
Residential mortgage-backed securities.... 11,429 4 201 11,232 24.1
U.S. Treasury/agency securities........... 5,783 -- 242 5,541 11.8
Foreign corporate securities.............. 5,719 27 238 5,508 11.8
Commercial mortgage-backed securities..... 4,576 4 118 4,462 9.6
Asset-backed securities................... 3,408 9 25 3,392 7.2
State and political subdivision
securities.............................. 606 -- 47 559 1.2
Foreign government securities............. 537 18 9 546 1.2
------- --- ------ ------- -----
Total bonds............................. 48,065 82 1,534 46,613 99.9
Redeemable preferred stock................ 37 1 2 36 0.1
------- --- ------ ------- -----
Total fixed maturities.................. $48,102 $83 $1,536 $46,649 100.0%
======= === ====== ======= =====
Non-redeemable preferred stock............ $ 273 $ 1 $ 10 $ 264 63.2%
Common stock.............................. 149 6 1 154 36.8
------- --- ------ ------- -----
Total equity securities................. $ 422 $ 7 $ 11 $ 418 100.0%
======= === ====== ======= =====
Total number of securities in an
unrealized loss position............. 5,070
======
</Table>
13
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
SUCCESSOR
--------------------------------------------------
DECEMBER 31, 2005
--------------------------------------------------
COST OR GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ------ -------- ---------- -----
(IN MILLIONS, EXCEPT NUMBER OF SECURITIES)
U.S. corporate securities................ $16,788 $ 45 $ 393 $16,440 34.1%
Residential mortgage-backed securities... 11,304 14 121 11,197 23.2
U.S. Treasury/agency securities.......... 6,153 20 61 6,112 12.7
Foreign corporate securities............. 5,323 30 139 5,214 10.8
Commercial mortgage-backed securities.... 4,545 10 75 4,480 9.3
Asset-backed securities.................. 3,594 9 14 3,589 7.5
State and political subdivision
securities............................. 632 -- 25 607 1.3
Foreign government securities............ 472 17 2 487 1.0
------- ---- ------ ------- -----
Total bonds............................ 48,811 145 830 48,126 99.9
Redeemable preferred stock............... 37 1 2 36 0.1
------- ---- ------ ------- -----
Total fixed maturities................. $48,848 $146 $ 832 $48,162 100.0%
======= ==== ====== ======= =====
Non-redeemable preferred stock........... $ 327 $ 1 $ 5 $ 323 76.7%
Common stock............................. 97 4 3 98 23.3
------- ---- ------ ------- -----
Total equity securities................ $ 424 $ 5 $ 8 $ 421 100.0%
======= ==== ====== ======= =====
Total number of securities in an
unrealized loss position............ 4,711
======
</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 NUMBER OF
AMORTIZED COST UNREALIZED 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.................... $21,043 $142 $ 442 $47 2,278 35
Six months or greater but less than nine
months................................ 22,079 11 1,053 5 2,740 17
------- ---- ------ --- ----- --
Total................................. $43,122 $153 $1,495 $52 5,018 52
======= ==== ====== === ===== ==
</Table>
14
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
SUCCESSOR
------------------------------------------------------------
DECEMBER 31, 2005
------------------------------------------------------------
COST OR GROSS NUMBER OF
AMORITIZED COST UNREALIZED 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.................... $37,631 $69 $814 $26 4,663 48
------- --- ---- --- ----- --
Total................................. $37,631 $69 $814 $26 4,663 48
======= === ==== === ===== ==
</Table>
As of March 31, 2006 and December 31, 2005, the Company had $1,547 million
and $840 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........................................... 42% 47%
U.S. Treasury/agency securities........................... 16 7
Foreign corporates........................................ 15 17
Other..................................................... 27 29
--- ---
Total.................................................. 100% 100%
=== ===
INDUSTRY:
Industrial................................................ 22% 23%
Mortgage-backed........................................... 20 23
Governmental.............................................. 16 7
Finance................................................... 15 18
Utility................................................... 6 6
Other..................................................... 21 23
--- ---
Total.................................................. 100% 100%
=== ===
</Table>
As of March 31, 2006, $1,495 million of unrealized losses related to
securities with an unrealized loss position less than 20% of cost or amortized
cost, which represented 3% of the cost or amortized cost of such securities. As
of December 31, 2005, $814 million of unrealized losses related to securities
with an unrealized loss position less than 20% of cost or amortized cost, which
represented 2% of the cost or amortized cost of such securities.
As of March 31, 2006, $52 million of unrealized losses related to
securities with an unrealized loss position of 20% or more of cost or amortized
cost, which represented 34% of the cost or amortized cost of such securities. Of
such unrealized losses of $52 million, $47 million have been in an unrealized
loss position for a period of less than six months. As of December 31, 2005, $26
million of unrealized losses related to securities with an unrealized loss
position of 20% or more of cost or amortized cost, which represented 38% of the
cost or amortized cost of such securities. Of such unrealized losses of $26
million, all have been in an unrealized loss position for a period of less than
six months.
15
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
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................................. $629 $595
Equity securities................................ 1 10
Mortgage and consumer loans...................... 36 40
Real estate and real estate joint ventures....... 2 10
Policy loans..................................... 12 15
Other limited partnership interests.............. 46 58
Cash, cash equivalents and short-term
investments.................................... 23 10
Preferred stock of Citigroup..................... -- 46
---- ----
Total.......................................... 749 784
Less: Investment expenses........................ 100 22
---- ----
Net investment income.......................... $649 $762
==== ====
</Table>
16
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
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 THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
2006 2005
--------------- ---------------
(IN MILLIONS)
Fixed maturities....................................... $(177) $ 1
Equity securities...................................... 7 31
Mortgage and consumer loans............................ 6 --
Real estate and real estate joint ventures............. 7 5
Other limited partnership interests.................... -- 1
Derivatives............................................ 16 (121)
Other.................................................. (40) 137
----- -----
Net investment gains (losses)........................ $(181) $ 54
===== =====
</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.
TRADING SECURITIES
The Company's trading securities portfolio supports investment strategies
that involve the active frequent purchase and sale of securities and the
execution of repurchase agreements. Trading securities and repurchase agreement
liabilities are recorded at fair value with subsequent changes in fair value
recognized in net investment income related to fixed maturities.
The Company is the majority owner of Tribeca Citigroup Investments Ltd.
("Tribeca") and consolidates the fund within its consolidated financial
statements. Tribeca is a feeder fund investment structure whereby the feeder
fund invests substantially all of its assets in the master fund, Tribeca Global
Convertible Instruments, Ltd. The primary investment objective of the master
fund is to achieve enhanced risk-adjusted return by investing in domestic and
foreign equities and equity-related securities utilizing such strategies as
convertible securities arbitrage. At March 31, 2006 and December 31, 2005, the
Company held $470 million and $452 million, respectively, of trading securities
and $193 million and $190 million, respectively, of repurchase agreements
associated with the trading securities portfolio, which are included within
other liabilities. During the three months ended March 31, 2006 and 2005,
interest and dividends earned on trading securities in addition to the net
realized and unrealized gains (losses) recognized on the trading securities and
the related repurchase agreement liabilities totaled $11 million and ($13)
million, respectively.
17
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
VARIABLE INTEREST ENTITIES
The following table presents the total assets of and maximum exposure to
loss relating to VIEs for which the Company has concluded that it holds
significant variable interests but it is not the primary beneficiary and which
have not been consolidated:
<Table>
<Caption>
MARCH 31, 2006
-----------------------
MAXIMUM
TOTAL EXPOSURE TO
ASSETS(1) LOSS(2)
--------- -----------
(IN MILLIONS)
Asset-backed securitizations................................ $1,119 $ 60
Real estate joint ventures(3)............................... 37 16
Other limited partnerships(4)............................... 4,886 238
Other investments(5)........................................ 1,000 67
------ ----
Total..................................................... $7,042 $381
====== ====
</Table>
- ---------------
(1) The assets of the asset-backed securitizations are reflected at fair value
at March 31, 2006. The assets of the real estate joint ventures, other
limited partnerships and other investments are reflected at the carrying
amounts at which such assets would have been reflected on the Company's
consolidated balance sheet had the Company consolidated the VIE from the
date of its initial investment in the entity.
(2) The maximum exposure to loss of the asset-backed securitizations is equal to
the carrying amounts of participations. The maximum exposure to loss
relating to real estate joint ventures, other limited partnerships and other
investments is equal to the carrying amounts plus any unfunded commitments,
reduced by amounts guaranteed by other partners.
(3) Real estate joint ventures include partnerships and other ventures which
engage in the acquisition, development, management and disposal of real
estate investments.
(4) Other limited partnerships include partnerships established for the purpose
of investing in public and private debt and equity securities.
(5) Other investments include securities that are not asset-backed
securitizations.
18
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 CURRENT MARKET
OR FAIR VALUE OR FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Interest rate swaps................... $ 6,317 $ 412 $ 92 $ 6,540 $356 $ 49
Interest rate caps.................... 2,021 19 -- 2,020 16 --
Financial futures..................... 55 1 1 81 2 1
Foreign currency swaps................ 3,001 446 74 3,084 429 72
Foreign currency forwards............. 294 -- 3 488 18 2
Options............................... -- 133 4 -- 165 3
Financial forwards.................... 900 -- 7 -- -- 2
Credit default swaps.................. 857 1 1 957 2 2
------- ------ ---- ------- ---- ----
Total............................... $13,445 $1,012 $182 $13,170 $988 $131
======= ====== ==== ======= ==== ====
</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 409 and 587 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 73,500 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 1,153,650 and 1,420,650 equity options, respectively.
Equity options market values are included in options in the preceding table.
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)
Fair value............................ $ 66 $ -- $ 1 $ 66 $ -- $ --
Cash flow............................. 430 11 -- 430 2 --
Non-qualifying........................ 12,949 1,001 181 12,674 986 131
------- ------ ---- ------- ---- ----
Total............................... $13,445 $1,012 $182 $13,170 $988 $131
======= ====== ==== ======= ==== ====
</Table>
19
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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........ $(1) $ 18
Changes in the fair value of the items hedged... 4 (23)
--- ----
Net ineffectiveness of fair value hedging
activities.................................... $ 3 $ (5)
=== ====
</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 ($5) million.
There were no instances in which the Company discontinued fair value hedge
accounting due to a hedged firm commitment no longer qualifying as a fair value
hedge.
CASH FLOW HEDGES
The Company designates and accounts for the following as cash flow hedges,
when they have met the requirements of SFAS 133: (i) interest rate swaps to
convert floating rate investments to fixed rate investments; (ii) interest rate
swaps to convert floating rate liabilities into fixed rate liabilities; (iii)
foreign currency swaps to hedge the foreign currency cash flow exposure of
foreign-currency-denominated investments and liabilities; (iv) interest rate
futures to hedge against changes in value of securities to be acquired; and (v)
interest rate futures to hedge against changes in interest rates on liabilities
to be issued.
For the 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 ($4) 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.
20
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Presented below is a rollforward of the components of other comprehensive
income (loss), before income taxes, related to cash flow hedges:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------------------- -------------------------------------
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, END OF PREVIOUS
PERIOD..................... $ 1 $ 83 $(6) $(6)
Effect of purchase accounting
push down.................. -- (83) -- --
----- ---- --- ---
BALANCE, BEGINNING OF
PERIOD..................... 1 -- (6) (6)
Gains (losses) deferred in
other comprehensive income
(loss) on the effective
portion of cash flow
hedges..................... (1) 1 85 94
Amounts reclassified to net
investment income.......... -- -- 4 1
----- ---- --- ---
BALANCE, END OF PERIOD....... $ -- $ 1 $83 $89
===== ==== === ===
</Table>
HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS
The Company uses forward exchange contracts, foreign currency swaps and
options to hedge portions of its net investment in foreign operations against
adverse movements in exchange rates. The Company measures ineffectiveness on the
forward exchange contracts based upon the change in forward rates. There was no
ineffectiveness recorded for the three months ended March 31, 2006 and 2005.
At both March 31, 2006 and December 31, 2005, the cumulative foreign
currency translation loss recorded in accumulated other comprehensive income
related to hedges of net investments in foreign operations was $3 million. When
net investments in foreign operations are sold or substantially liquidated, the
amounts in accumulated other comprehensive income are reclassified to the
consolidated statement of income, while a pro rata portion will be reclassified
upon partial sale of the net investments in foreign operations.
NON-QUALIFYING DERIVATIVES AND DERIVATIVES FOR PURPOSES OTHER THAN HEDGING
The Company enters into the following derivatives that do not qualify for
hedge accounting under SFAS 133 or for purposes other than hedging: (i) interest
rate swaps, purchased caps, and interest rate futures to minimize its exposure
to interest rate volatility; (ii) foreign currency forwards, swaps and option
contracts to minimize its exposure to adverse movements in exchange rates; (iii)
credit default swaps to minimize its exposure to adverse movements in credit;
(iv) equity futures, equity index options and equity variance swaps to
economically hedge liabilities embedded in certain variable annuity products;
(v) replication synthetic asset transfers ("RSATs") to synthetically create
investments; and (vi) basis swaps to better match the cash flows from assets and
related liabilities.
For the three months ended March 31, 2006 and 2005, the Company recognized
as net investment gains (losses) changes in fair value of $4 million and ($6)
million, respectively, related to derivatives that do not qualify for hedge
accounting.
21
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 $40 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 (losses) of $43
million and ($1) million, respectively.
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 $137 million and $128
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
$423 million and $427 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.
22
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 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. MLAC and Travelers Equity Sales, Inc. intend to continue to
vigorously defend the matter.
A former registered representative of Tower Square Securities, Inc. ("Tower
Square"), a broker-dealer subsidiary of MICC, is alleged to have defrauded
individuals by diverting funds for his personal use. In June 2005, the SEC
issued a formal order of investigation with respect to Tower Square and served
Tower Square with a subpoena. The Securities and Business Investments Division
of the Connecticut Department of Banking and the NASD are also reviewing this
matter. On April 18, 2006, the Connecticut Department of Banking issued a notice
to Tower Square asking it to demonstrate its prior compliance with applicable
Connecticut securities laws and regulations. In the context of the above, two
arbitration matters were commenced in 2005 against Tower Square. In one of the
matters, defendants include other unaffiliated broker-dealers with whom the
registered representative was formerly registered. In May 2006, Tower Square
received a lawsuit filed by two claimants in Connecticut state court. It is
reasonably possible that other actions will be brought regarding this matter.
Tower Square intends to defend itself vigorously in all such cases. In another
matter, the NASD has made a preliminary determination that Tower Square violated
certain NASD rules relating to supervisory procedures, documentation and
compliance with the firm's anti-money laundering program. Tower Square intends
to fully cooperate with the SEC, the NASD and the Connecticut Department of
Banking.
23
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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, a broker and dealer in
securities or otherwise. Further, state insurance regulatory authorities and
other federal and state authorities may make inquiries and conduct
investigations concerning the Company's compliance with applicable insurance and
other laws and regulations.
In the opinion of the Company's management, the ultimate resolution of
these legal and regulatory proceedings would not be likely to have a material
adverse effect on the Company's consolidated financial condition or liquidity,
but, if involving monetary liability, may be material to the Company's operating
results for any particular period.
COMMITMENTS
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 $726 million
and $715 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 $361 million and $339 million at
March 31, 2006 and December 31, 2005, respectively.
OTHER COMMITMENTS
MICC is a member of the Federal Home Loan Bank of Boston (the "FHLB of
Boston") and holds $70 million of common stock of the FHLB of Boston, which is
included in equity securities on the Company's consolidated balance sheets. MICC
has also entered into several funding agreements with the FHLB of Boston whereby
MICC has issued such funding agreements in exchange for cash and for which the
FHLB of Boston has been granted a blanket lien on MICC's residential mortgages
and mortgage-backed securities to collateralize MICC's obligations under the
funding agreements. MICC maintains control over these pledged assets, and may
use, commingle, encumber or dispose of any portion of the collateral as long as
there is no event of default and the remaining qualified collateral is
sufficient to satisfy the collateral maintenance level. The funding agreements
and the related security agreement represented by this blanket lien, provide
that upon any event of default by MICC, the FHLB of Boston's recovery is limited
to the amount of MICC's liability under the outstanding funding agreements. The
amount of the Company's liability for funding agreements
24
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
with the FHLB of Boston is $926 million and $1.1 billion as of March 31, 2006
and December 31, 2005, respectively, which is included in policyholder account
balances.
GUARANTEES
In the normal course of its business, the Company has provided certain
indemnities, guarantees and commitments to third parties pursuant to which it
may be required to make payments now or in the future. In the context of
acquisition, disposition, investment and other transactions, the Company has
provided indemnities and guarantees, including those related to tax,
environmental and other specific liabilities, and other indemnities and
guarantees that are triggered by, among other things, breaches of
representations, warranties or covenants provided by the Company. In addition,
in the normal course of business, the Company provides indemnifications to
counterparties in contracts with triggers similar to the foregoing, as well as
for certain other liabilities, such as third party lawsuits. These obligations
are often subject to time limitations that vary in duration, including
contractual limitations and those that arise by operation of law, such as
applicable statutes of limitation. In some cases, the maximum potential
obligation under the indemnities and guarantees is subject to a contractual
limitation, such as in the case of MetLife International Insurance, Ltd.
("MLII") (formerly, Citicorp International Life Insurance Company, Ltd.), an
affiliate, discussed below, while in other cases such limitations are not
specified or applicable. Since certain of these obligations are not subject to
limitations, the Company does not believe that it is possible to determine the
maximum potential amount due under these guarantees in the future.
The Company has provided a guarantee on behalf of MLII. This guarantee is
triggered if MLII cannot pay claims because of insolvency, liquidation or
rehabilitation. The agreement was terminated as of December 31, 2004, but
termination does not affect policies previously guaranteed. Life insurance
coverage in-force under this guarantee is $445 million and $447 million at March
31, 2006 and December 31, 2005, respectively. The Company does not hold any
collateral related to this guarantee.
In addition, the Company indemnifies its directors and officers as provided
in its charters and by-laws. Also, the Company indemnifies its agents for
liabilities incurred as a result of their representation of the Company's
interests. Since these indemnities are generally not subject to limitation with
respect to duration or amount, the Company does not believe that it is possible
to determine the maximum potential amount due under these indemnities in the
future.
In connection with RSATs, the Company writes credit default swap
obligations requiring payment of principal due in exchange for the reference
credit obligation, depending on the nature or occurrence of specified credit
events for the referenced entities. In the event of a specified credit event,
the Company's maximum amount at risk, assuming the value of the referenced
credits becomes worthless, is $89 million at March 31, 2006. The credit default
swaps expire at various times during the next two years.
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 expense of $2 million related to the MetLife plans was
allocated to the Company for the three months ended March 31, 2006.
25
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Prior to the Acquisition, the Company participated in qualified and
non-qualified, noncontributory defined benefit pension plans and certain other
postretirement plans sponsored by Citigroup. The Company's share of expense for
these plans was $7 million 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, MICC and MLAC are each permitted,
without prior insurance regulatory clearance, to pay shareholder dividends to
its respective parents as long as the amount of such dividends, when aggregated
with all other dividends in the preceding twelve months, does not exceed the
greater of (i) 10% of its surplus to policyholders as of the immediately
preceding calendar year, or (ii) its statutory net gain from operations for the
immediately preceding calendar year. MICC and MLAC will each be permitted to pay
a cash dividend in excess of the greater of such two amounts only if it files
notice of its declaration of such a dividend and the amount thereof with the
Connecticut Commissioner of Insurance ("Commissioner") and the Commissioner does
not disapprove the payment within 30 days after notice or until the Commissioner
has approved the dividend, whichever is sooner. In addition, any dividend that
exceeds earned surplus (unassigned funds, reduced by 25% of unrealized
appreciation in value or revaluation of assets or unrealized profits on
investments) as of the last filed annual statutory statement requires insurance
regulatory approval. Under Connecticut State Insurance Law, the Commissioner has
broad discretion in determining whether the financial condition of a stock life
insurance company would support the payment of such dividends to its
shareholders. MICC paid cash dividends to its former parent, CIHC, of $302
million and $148 million on January 3, 2005 and March 30, 2005, respectively.
Due to the timing of the payment, the January 3, 2005 dividend required approval
by the State of Connecticut Insurance Department (the "Department"). The
Connecticut State Insurance Law requires prior approval for any dividends for a
period of two years following a change in control. As a result of the
Acquisition, under Connecticut State Insurance Law, all dividend payments by
MICC and MLAC through June 30, 2007 require prior approval of the Commissioner.
MICC and MLAC have 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...................................... $ 118 $ 392
Other comprehensive income (loss):
Unrealized gains (losses) on derivative
instruments, net of income taxes........... (1) 62
Unrealized investment gains (losses), net of
related offsets and income taxes........... (444) (558)
----- -----
Other comprehensive income (loss)............... (445) (496)
----- -----
Comprehensive income (loss)................ $(327) $(104)
===== =====
</Table>
26
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
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..................................... $ 32 $ 40
Commissions...................................... 80 160
Amortization of DAC and VOBA..................... 72 107
Capitalization of DAC............................ (96) (200)
Rent, net of sublease income..................... 3 2
Minority interest................................ 4 3
Other............................................ 95 102
---- -----
Total other expenses........................... $190 $ 214
==== =====
</Table>
8. BUSINESS SEGMENT INFORMATION
Prior to the Acquisition, the Company was organized into two operating
segments, Travelers Life and Annuity ("TL&A") and Primerica. On June 30, 2005,
in anticipation of the Acquisition, all of the Company's interests in Primerica
were distributed via dividend to CIHC. See Notes 1 and 9. As a result, at June
30, 2005, the operations of Primerica were reclassified into discontinued
operations and the segment was eliminated, leaving a single operating segment,
TL&A.
On the Acquisition Date, MetLife reorganized the Company's operations into
two operating segments, Institutional and Individual, as well as Corporate &
Other, so as to more closely align the acquired business with the manner in
which MetLife manages its existing businesses. The Institutional segment
includes group life insurance and retirement & savings products and services.
The Individual segment includes a wide variety of protection and asset
accumulation products, including life insurance, annuities and mutual funds.
These ]segments are managed separately because they either provide different
products and services, require different strategies or have different technology
requirements. Corporate & Other contains the excess capital not allocated to the
business segments and run-off businesses, as well as expenses associated with
certain legal proceedings. Corporate & Other also includes the elimination of
intersegment transactions.
Economic capital is an internally developed risk capital model, the purpose
of which is to measure the risk in the business and to provide a basis upon
which capital is deployed. The economic capital model accounts for the unique
and specific nature of the risks inherent in the Company's businesses. As part
of the economic capital process, a portion of net investment income is credited
to the segments based on the level of allocated equity.
The accounting policies of the segments are the same as those of the
Company, except for the method of capital allocation and the accounting for
gains (losses) from intercompany sales, which are eliminated in consolidation.
Subsequent to the Acquisition Date, the Company allocates capital to each
segment based upon an internal capital allocation system used by MetLife that
allows MetLife and the Company to effectively manage its capital. The Company
evaluates the performance of each operating segment based upon net income
excluding certain net investment gains (losses), net of income taxes, and
adjustments related to net investment gains (losses), net of income taxes.
27
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Set forth in the tables below is certain financial information with respect
to the Company's segments, as well as Corporate & Other, for the three months
ended March 31, 2006 and 2005. Segment results for periods prior to the
Acquisition Date have been restated to reflect segment results in conformity
with MetLife's segment presentation. The revised presentation conforms to the
manner in which the Company manages and assesses its business. While the prior
period presentations have been prepared using the classification of products in
conformity with MetLife's segment presentation, they do not reflect the segment
results using MetLife's method of capital allocation which allocates capital to
each segment based upon an internal capital allocation system as described in
the preceding paragraph. In periods prior to the Acquisition Date, earnings on
capital were allocated to segments based upon a statutory risk based capital
allocation method which resulted in less capital being allocated to the segments
and more being retained at Corporate & Other. As it was impracticable to
retroactively reflect the impact of applying MetLife's economic capital model on
periods prior to the Acquisition Date, they were not restated for this change.
<Table>
<Caption>
SUCCESSOR
------------------------------------------------
FOR THE THREE MONTHS ENDED CORPORATE &
MARCH 31, 2006 INSTITUTIONAL INDIVIDUAL OTHER TOTAL
- -------------------------- ------------- ---------- ----------- -----
(IN MILLIONS)
Premiums....................................... $ 37 $ 39 $ 6 $ 82
Universal life and investment-type product
policy fees.................................. 4 221 -- 225
Net investment income.......................... 365 205 79 649
Other revenues................................. 4 25 -- 29
Net investment gains (losses).................. (98) (67) (16) (181)
Policyholder benefits and claims............... 123 71 7 201
Interest credited to policyholder account
balances..................................... 164 84 -- 248
Other expenses................................. 7 173 10 190
Income from continuing operations before
provision for income taxes................... 18 95 52 165
Net income..................................... 12 62 44 118
</Table>
<Table>
<Caption>
PREDECESSOR
------------------------------------------------
FOR THE THREE MONTHS ENDED CORPORATE &
MARCH 31, 2005 INSTITUTIONAL INDIVIDUAL OTHER TOTAL
- -------------------------- ------------- ---------- ----------- -----
(IN MILLIONS)
Premiums........................................ $ 95 $ 50 $ 8 $153
Universal life and investment-type product
policy fees................................... 20 181 -- 201
Net investment income........................... 366 266 130 762
Other revenues.................................. -- 33 24 57
Net investment gains (losses)................... 4 1 49 54
Policyholder benefits and claims................ 216 61 8 285
Interest credited to policyholder account
balances...................................... 189 158 -- 347
Other expenses.................................. 12 186 16 214
Income from continuing operations before
provision for income taxes.................... 68 126 187 381
Income from discontinued operations, net of
income taxes.................................. -- -- 122 122
Net income...................................... 44 89 259 392
</Table>
28
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The following table presents assets with respect to the Company's segments,
as well as Corporate & Other, as of:
<Table>
<Caption>
SUCCESSOR
------------------------
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
(IN MILLIONS)
Institutional............................................ $35,582 $36,751
Individual............................................... 52,660 52,048
Corporate & Other........................................ 10,680 10,672
------- -------
Total.................................................. $98,922 $99,471
======= =======
</Table>
Net investment income and net investment gains (losses) are based upon the
actual results of each segment's specifically identifiable asset portfolio
adjusted for allocated capital. Other costs are allocated to each of the
segments based upon: (i) a review of the nature of such costs; (ii) time studies
analyzing the amount of employee compensation costs incurred by each segment;
and (iii) cost estimates included in the Company's product pricing.
Revenues derived from any customer did not exceed 10% of consolidated
revenues. Substantially all of the Company's revenues originated in the United
States.
9. DISCONTINUED OPERATIONS
As described in Note 1, and in accordance with the Acquisition Agreement,
Primerica, a former operating segment of the Company, was distributed in the
form of a dividend to CIHC on June 30, 2005. The distribution of Primerica by
dividend to CIHC qualifies as a disposal by means other than a sale. As such,
Primerica was treated as held-for-use (i.e., continuing operations) until the
date of disposal and, upon the date of disposal, the results from the operations
were reclassified as discontinued operations as follows:
<Table>
<Caption>
PREDECESSOR
------------------
THREE MONTHS ENDED
MARCH 31,
2005
------------------
(IN MILLIONS)
Revenues.................................................... $458
Expenses.................................................... 276
----
Income before provision for income taxes.................... 182
Provision for income taxes.................................. 60
----
Income from discontinued operations, net of income
taxes.................................................. $122
====
</Table>
Primerica Financial Services, Inc. ("PFS"), a former affiliate, was a
distributor of products for the Company. For the three months ended March 31,
2005, PFS and its affiliates sold $235 million of individual annuities resulting
in commissions and fees paid to PFS by the Company of $19 million.
10. 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
29
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
$25 million for services performed under the Master Service Agreement for the
three months ended March 31, 2006.
At March 31, 2006 and December 31, 2005, the Company had net payables to
affiliates of $55 million and $22 million, respectively.
During 1995, Metropolitan Life, a wholly-owned subsidiary of MetLife,
acquired 100% of the group life business of MICC. The Company's consolidated
balance sheet includes a reinsurance receivable related to this business of $383
million and $387 million as of March 31, 2006 and December 31, 2005,
respectively. Ceded premiums related to this business were less than $1 million
for the three months ended March 31, 2006 and 2005, respectively. Ceded benefits
related to this business were $6 million for both the three months ended March
31, 2006 and 2005.
In December 2004, MICC and 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 $50 million and $48 million, respectively, as of March
31, 2006 and December 31, 2005. Fees associated with this contract, included
within other expenses, were $9 million and $16 million for the three months
ended March 31, 2006 and March 31, 2005, respectively.
In addition, MICC's and 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 $36 million and $47 million as of March 31, 2006
and December 31, 2005, respectively. Ceded premiums earned, universal life fees
and benefits were $2 million, $10 million and $13 million, respectively, for the
three months ended March 31, 2006 and $2 million, $10 million and $21 million,
respectively, for the three months ended March 31, 2005.
Prior to the Acquisition, the Company had related party transactions with
its former parent and/or affiliates. These transactions are described as
follows:
Citigroup and certain of its subsidiaries provided investment management
and accounting services, payroll, internal auditing, benefit management and
administration, property management and investment technology services to the
Company. The Company paid Citigroup and its subsidiaries $10 million for the
three months ended March 31, 2005 for these services.
The Company has received reimbursements from Citigroup and its former
affiliates related to the Company's increased benefit and lease expenses after
the spin-off of Travelers Property and Casualty, a former affiliate of the
Company and Citigroup. These reimbursements totaled $4 million for the three
months ended March 31, 2005.
During 2005, the Company had an investment in Citigroup preferred stock
carried at cost. Dividends received on these investments were $51 million for
the three months ended March 31, 2005, of which $5 million was allocated to
Primerica which is recorded as discontinued operations. The dividends received
in 2005 were subsequently distributed back to Citigroup as part of the
restructuring transactions prior to the Acquisition.
The Company's investment in an affiliated joint venture, Tishman Speyer,
earned $10 million of income for the three months ended March 31, 2005.
In the ordinary course of business, the Company purchased and sold
securities through affiliated broker-dealers, including Smith Barney. These
transactions were conducted on an arm's-length basis. The Company
30
METLIFE INSURANCE COMPANY OF CONNECTICUT
(Formerly, The Travelers Insurance Company)
(A Wholly-Owned Subsidiary of MetLife, Inc.)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
marketed deferred annuity products and life insurance through its affiliate,
Smith Barney. Annuity products related to these products were $191 million for
the three months ended March 31, 2005. Life premiums were $23 million, for the
three months ended March 31, 2005. Commissions and fees paid to Smith Barney
were $17 million for the three months ended March 31, 2005. The Company also
marketed individual annuity and life insurance through its affiliated
broker-dealers. Deposits received from affiliated broker-dealers were $559
million for the three months ended March 31, 2005. Commissions and fees paid to
affiliated broker-dealers were $22 million for the three months ended March 31,
2005.
11. SUBSEQUENT EVENT
On February 14, 2006, TIC filed, with the State of Connecticut Office of
the Secretary of the State, a Certificate of Amendment to the Charter as Amended
and Restated of The Travelers Insurance Company (the "Charter Amendment"). The
Charter Amendment changed the name of TIC to MetLife Insurance Company of
Connecticut effective May 1, 2006.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of this discussion, the "Company" refers to MetLife Insurance
Company of Connecticut ("MICC," formerly, The Travelers Insurance Company), a
Connecticut corporation incorporated in 1863, together with its subsidiaries,
including MetLife Life and Annuity Company of Connecticut ("MLAC," formerly, The
Travelers Life and Annuity Company). The Company offers individual annuities,
individual life insurance, and institution protection and asset accumulation
products in the United States and Canada. Management's narrative analysis of the
results of operations of MICC 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 Insurance Company to MICC, 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) adverse results or other
consequences from litigation, arbitration or regulatory investigations; (v)
regulatory, accounting or tax changes that may affect the cost of, or demand
for, the Company's products or services; (vi) downgrades in the Company's and
its affiliates' claims paying ability or financial strength ratings; (vii)
changes in rating agency policies or practices; (viii) discrepancies between
actual claims experience and assumptions used in setting prices for the
Company's products and establishing the liabilities for the Company's
obligations for future policy benefits and claims; (ix) discrepancies between
actual experience and assumptions used in establishing liabilities related to
other contingencies or obligations; (x) the effects of business disruption or
economic contraction due to terrorism or other hostilities; (xi) changes in
results of the Company arising from the acquisition by MetLife, Inc. ("MetLife")
and integration of its businesses into MetLife's operations; and (xii) other
risks and uncertainties described from time to time in MICC'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.
MICC'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"), MICC became a wholly-owned
subsidiary of MetLife. On the Acquisition Date, MICC, together with its
subsidiaries, including MLAC and other affiliated entities, including
substantially all of Citigroup Inc.'s ("Citigroup") international insurance
businesses, and excluding Primerica Life Insurance Company and its subsidiaries
("Primerica") (collectively, "Travelers"), were acquired by MetLife from
Citigroup (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
32
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. The
accounting policies of the Company were conformed to those of MetLife upon the
Acquisition.
BUSINESS
The Company's core offerings include group retirement & savings products,
group life insurance and a wide variety of individual protection and asset
accumulation products. The group retirement & savings products include
institutional pensions, guaranteed interest contracts ("GICs"), payout annuities
and group annuities sold to employer sponsored retirement and savings plans,
structured settlements and funding agreements. Group life insurance is offered
through corporate-owned life insurance ("COLI"), a variable universal life
product. The individual protection and asset accumulation products include
traditional life, universal and variable life insurance, as well as fixed and
variable deferred annuities. The Company 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 values 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 businesses and operations. Actual results could
differ from these estimates.
33
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................................................. $ 82 $ 153
Universal life and investment-type product policy fees... 225 201
Net investment income.................................... 649 762
Other revenues........................................... 29 57
Net investment gains (losses)............................ (181) 54
----- ------
Total revenues......................................... 804 1,227
----- ------
EXPENSES
Policyholder benefits and claims......................... 201 285
Interest credited to policyholder account balances....... 248 347
Other expenses........................................... 190 214
----- ------
Total expenses......................................... 639 846
----- ------
Income from continuing operations before provision for
income taxes........................................... 165 381
Provision for income taxes............................... 47 111
----- ------
Income from continuing operations........................ 118 270
Income from discontinued operations, net of income
taxes.................................................. -- 122
----- ------
Net income............................................... $ 118 $ 392
===== ======
</Table>
Income from Continuing Operations
Income from continuing operations decreased by $152 million, or 56%, to
$118 million for the three months ended March 31, 2006 from $270 million in the
comparable 2005 period.
This decline is largely attributable to the increase in net investment
losses of $169 million, net of income taxes, in the current period versus net
investment gains in the prior period. These net investment losses are
attributable to losses on fixed maturity sales resulting principally from
continued portfolio repositioning, subsequent to the Acquisition, in a rising
interest rate environment.
Included in the decrease in income from continuing operations is lower net
investment income of $81 million, net of income taxes, due to the elimination of
the dividend on the Citigroup preferred stock, increased premium amortization
resulting from the application of the purchase method of accounting, lower
yields due to portfolio repositioning and a decrease in real estate joint
venture and corporate joint venture income, all partially offset by higher
securities lending activity as described below.
Net income from continuing operations also decreased due to a change in
policy for the capitalization of DAC, subsequent to the Acquisition, of $27
million, net of income taxes, and the elimination of the amortization of the
deferred gain on the sale of the long-term care business of $4 million, net of
income taxes.
Partially offsetting the decreases in income from continuing operations was
lower interest credited to policyholder account balances of $71 million, net of
income taxes, primarily resulting from the revaluation of the policyholder
balances through the application of the purchase method of accounting.
Lower amortization of DAC, as more fully described below, of $25 million,
net of income tax, and lower spending due to a decline in business activity of
$7 million, net of income tax, also partially offset the decrease in income from
continuing operations.
34
Also offsetting the decrease in income from continuing operations was
higher universal life and investment-type product policy fee income of $17
million, net of income taxes, largely due to favorable market conditions and an
increase in average account values.
Additionally, there were favorable underwriting results of $9 million, net
of income taxes, primarily due to favorable reserve refinements in the
Institutional products partially offset by unfavorable mortality in the
Individual life products.
Income tax expense for the three months ended March 31, 2006 was $47
million, or 28% of income from continuing operations before provision for income
taxes, compared with $111 million, or 29%, 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.
Income from Discontinued Operations
Income from discontinued operations is comprised of the operations of
Primerica which was distributed in the form of a dividend to Citigroup Insurance
Holding Company ("CIHC") on June 30, 2005. See "-- The Acquisition --."
Total Revenues
Total revenues, excluding net investment gains (losses), decreased by $188
million, or 16%, to $985 million for the period ended March 31, 2006, from
$1,173 million in the comparable 2005 period.
Premiums decreased $71 million primarily in the Institutional segment which
contributed $58 million to the decrease as a result of lower sales of structured
settlements and payout annuities. Premiums from Institutional retirement &
savings products are significantly influenced by large transactions and, as a
result, can fluctuate from period to period. Additionally, there was a decrease
in premiums in the Individual segment of $11 million primarily as a result of
lower sales of income annuities.
Universal life and investment-type product fees for universal life and
variable annuity products increased $24 million. This increase is largely
attributable to the Individual segment which contributed $40 million to the
increase primarily driven by the impact of favorable market performance and an
increase in average account values. The increase was partially offset by a
decline in fee income in the Institutional segment of $16 million primarily due
to the surrender of a large COLI policy in the first quarter of 2005.
Net investment income declined by $113 million. The prior period includes a
dividend on the Citigroup preferred stock of $46 million which was transferred
to CIHC just prior to the Acquisition. Also contributing to the decline was the
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. Additionally, there was a decrease in
real estate joint venture and corporate joint venture income associated with
lower sales of underlying investments during the 2005 period compared with the
2006 period. Partially offsetting these decreases was increased income from the
expansion of the securities lending program. The increase in investment expenses
also results from this increase in the securities lending program.
Other revenues declined by $28 million primarily due to lower volumes from
the Company's broker-dealer subsidiaries of $17 million and the elimination of
the amortization of the deferred gain on the sale of the long-term care business
of $5 million. Such amortization benefited periods prior to the Acquisition
Date, but was eliminated upon the application of purchase accounting.
Total Expenses
Total expenses decreased by $207 million, or 24%, to $639 million for the
period ended March 31, 2006 from $846 million for the comparable 2005 period.
Policyholder benefits and claims decreased $84 million primarily due to a
decrease in future policyholder benefits of $71 million associated with the
premium decline discussed above. Structured settlement underwriting results were
favorably impacted by a $33 million reserve refinement in the current period
which
35
decreased policyholder benefits. These decreases are partially offset by
unfavorable mortality in the life insurance products of $20 million.
Interest credited to policyholder account balances decreased by $99 million
primarily attributable 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
account balances. The decrease is partially offset by higher rates on retirement
and savings products which are tied to short term interest rates.
Other expenses decreased $24 million primarily due to lower amortization of
DAC of $35 million driven by net investment losses in the current period versus
net investment gains in the prior period. Also contributing to the decrease were
lower expenses of $17 million from the Company's broker-dealer subsidiaries
commensurate with lower volume, as noted above, and lower other expenses of $10
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 $104 million is due to a decline
in deferrable expenses, principally commissions, of approximately $66 million
and $38 million of a decrease which can be attributed to a change in the DAC
capitalization policy.
SUBSEQUENT EVENTS
On February 14, 2006, TIC filed, with the State of Connecticut Office of
the Secretary of the State, a Certificate of Amendment to the Charter as Amended
and Restated of The Travelers Insurance Company (the "Charter Amendment"). The
Charter Amendment changed the name of TIC to MetLife Insurance Company of
Connecticut effective May 1, 2006.
On May 2, 2006, C. Robert Henrikson ceased serving as MICC's Chairman of
the Board, President and Chief Executive Officer. On May 2, 2006, MICC'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, MICC's Board of Directors elected Michael K. Farrell as a director.
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, MICC and MLAC are each permitted,
without prior insurance regulatory clearance, to pay shareholder dividends to
their respective parents as long as the amount of such dividends, when
aggregated with all other dividends in the preceding twelve months, does not
exceed the greater of (i) 10% of its surplus to policyholders as of the
immediately preceding calendar year, or (ii) its statutory net gain from
operations for the immediately preceding calendar year. MICC and MLAC will each
be permitted to pay a cash dividend in excess of the greater of such two amounts
only if it files notice of its declaration of such a dividend and the amount
thereof with the Connecticut Commissioner of Insurance ("Commissioner") and the
Commissioner does not disapprove the payment within 30 days after notice or
until the Commissioner has approved the dividend, whichever is sooner. In
addition, any dividend that exceeds earned surplus (unassigned funds, reduced by
25% of unrealized appreciation in value or revaluation of assets or unrealized
profits on investments) as of the last filed annual statutory statement requires
insurance regulatory approval. Under Connecticut State Insurance Law, the
Commissioner has broad discretion in determining whether the financial condition
of a stock life insurance company would support the payment of such dividends to
its shareholders. MICC paid cash dividends to its former parent, CIHC, of $302
million and $148 million on January 3, 2005 and March 30, 2005 respectively. Due
to the timing of the payment, the January 3, 2005 dividend required approval by
the Connecticut Insurance Department (the "Department"). The Connecticut State
Insurance Law requires prior approval for any dividends for a period of two
years following a change in control. As a result of the acquisition of MICC and
MLAC by MetLife, under
36
Connecticut State Insurance Law, all dividend payments by MICC and MLAC through
June 30, 2007 require prior approval of the Commissioner. MICC and MLAC have not
paid dividends since the Acquisition Date.
In connection with the Acquisition Agreement, several restructuring
transactions requiring regulatory approval were completed prior to the sale.
MICC received regulatory approval from the Commissioner to complete the
restructuring transactions via dividend, and to pay its dividends. The total
amount of these dividends, made on June 30, 2005, was $4.5 billion on a
statutory accounting basis.
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 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 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
37
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.
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,
38
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
MICC's management, with the participation of MICC's Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the design and
operation of MICC'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, MICC's Chief Executive Officer and Chief Financial Officer have
concluded that MICC's disclosure controls and procedures are effective.
INTERNAL CONTROL OVER FINANCING 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.
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.
39
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. MLAC and Travelers Equity Sales, Inc. intend to continue to
vigorously defend the matter.
A former registered representative of Tower Square Securities, Inc. ("Tower
Square"), a broker-dealer subsidiary of MICC, is alleged to have defrauded
individuals by diverting funds for his personal use. In June 2005, the SEC
issued a formal order of investigation with respect to Tower Square and served
Tower Square with a subpoena. The Securities and Business Investments Division
of the Connecticut Department of Banking and the NASD are also reviewing this
matter. On April 18, 2006, the Connecticut Department of Banking issued a notice
to Tower Square asking it to demonstrate its prior compliance with applicable
Connecticut securities laws and regulations. In the context of the above, two
arbitration matters were commenced in 2005 against Tower Square. In one of the
matters, defendants include other unaffiliated broker-dealers with whom the
registered representative was formerly registered. In May 2006, Tower Square
received a lawsuit filed by two claimants in Connecticut state court. It is
reasonably possible that other actions will be brought regarding this matter.
Tower Square intends to defend itself vigorously in all such cases. In another
matter, the NASD has made a preliminary determination that Tower Square violated
certain NASD rules relating to supervisory procedures, documentation and
compliance with the firm's anti-money laundering program. Tower Square intends
to fully cooperate with the SEC, the NASD and the Connecticut Department of
Banking.
40
ITEM 6. EXHIBITS
<Table>
3.1 Charter of The Travelers Insurance Company ("TIC," now
MetLife Insurance Company of Connecticut), as effective
October 19, 1994 (Incorporated by reference to Exhibit 3.1
of TIC'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 TIC, as effective May 1, 2006 (Incorporated by
reference to Exhibit 3.2 of the Annual Report)
3.3 By-laws of TIC, as effective October 20, 1994 (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>
41
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 INSURANCE 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
42
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT NAME
------- ------------
3.1 Charter of The Travelers Insurance Company ("TIC," now
MetLife Insurance Company of Connecticut), as effective
October 19, 1994 (Incorporated by reference to Exhibit 3.1
of TIC'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 TIC, as effective May 1, 2006 (Incorporated by
reference to Exhibit 3.2 of the Annual Report)
3.3 By-laws of TIC, as effective October 20, 1994 (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