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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO __________
-------------------------------
COMMISSION FILE NUMBER 33-58677
-------------------------------
THE TRAVELERS LIFE AND ANNUITY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-0904249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE CITYPLACE, HARTFORD, CONNECTICUT 06103-3415
(Address of principal executive offices) (Zip Code)
(860) 308-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2).
Yes [ ] No [X]
As of the date hereof, there were outstanding 30,000 shares of common stock, par
value $100 per share, of the registrant, all of which were owned by The
Travelers Insurance Company, an indirect wholly owned subsidiary of Citigroup
Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
THE TRAVELERS LIFE AND ANNUITY COMPANY
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER PAGE
- ----------- ----
PART I
1. Business............................................................................................. 2
2. Properties........................................................................................... 4
3. Legal Proceedings.................................................................................... 4
4. Submission of Matters to a Vote of Security Holders.................................................. 5
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 5
6. Selected Financial Data.............................................................................. 5
7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 5
7A. Quantitative and Qualitative Disclosures About Market Risk........................................... 10
8. Financial Statements and Supplementary Data.......................................................... 12
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 40
PART III
10. Directors and Executive Officers of the Registrant................................................... 41
11. Executive Compensation............................................................................... 41
12. Security Ownership of Certain Beneficial Owners and Management....................................... 41
13. Certain Relationships and Related Transactions....................................................... 41
14. Controls and Procedures.............................................................................. 41
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................... 42
Exhibit Index........................................................................................ 43
Signatures and Certifications........................................................................ 44
Index to Financial Statements and Financial Statement Schedules...................................... 48
Exhibit 14.01........................................................................................ 53
Exhibit 99.01........................................................................................ 55
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS.
GENERAL
The Travelers Life and Annuity Company (the Company) is a wholly owned
subsidiary of The Travelers Insurance Company (TIC), an indirect wholly owned
subsidiary of Citigroup Inc. (Citigroup). Citigroup is a diversified global
financial services holding company whose businesses provide a broad range of
financial services to consumer and corporate customers around the world. The
periodic reports of Citigroup and TIC provide additional business and financial
information concerning those companies and their consolidated subsidiaries. On
March 27, 2002, Travelers Property Casualty Corp. (TPC), TIC's parent at
December 31, 2001, completed its initial public offering (IPO). On August 20,
2002, Citigroup made a tax-free distribution of the majority of its remaining
interest in TPC to Citigroup's stockholders. Prior to the IPO, the common stock
of TIC was distributed by TPC to Citigroup Insurance Holding Corporation (CIHC)
so that TIC and the Company would remain indirect wholly owned subsidiaries of
Citigroup.
The Company is a stock insurance company chartered in 1973 in the State of
Connecticut and has been continuously engaged in the insurance business since
that time. The Company is licensed to conduct life and annuity insurance
business in all the states except New York. The Company is also licensed to
conduct life and annuity insurance business in the District of Columbia and
Puerto Rico.
The Company offers fixed and variable deferred annuities and individual life
insurance to individuals and small businesses. These products are distributed
primarily through, Salomon Smith Barney (SSB), Primerica Financial Services
(PFS), affiliates of the Company, a nationwide network of independent financial
professionals and non-affiliated broker-dealers. In addition, the Company
distributes these products through CitiStreet Retirement Services and Citibank,
N.A. (Citibank), also affiliates of the Company. The majority of the annuity
business and a substantial portion of the individual life business written by
the Company are accounted for as investment contracts, with the result that the
deposits collected from contractholders are reported as liabilities and are not
included in revenues.
The Company has assets held in a separate account related to reserves on
structured settlement contracts that provide guarantees for the contractholders
independent of the investment performance of the separate account assets. The
assets held in this separate account are owned by the Company and
contractholders do not share in their investment performance. These contracts
were purchased by TPC in connection with the settlement of certain of their
policyholder obligations. Effective April 1998, the Company no longer writes
structured settlement contracts.
Additional information about the Company is available on Citigroup's website at
http://www.citigroup.com by selecting the "Investor Relations" page and
selecting "SEC Filings".
INSURANCE REGULATIONS
Insurance Regulatory Information System
The National Association of Insurance Commissioners (NAIC) Insurance Regulatory
Information System ("IRIS") was developed to help state regulators identify
companies that may require special attention. The IRIS system consists of a
statistical phase and an analytical phase whereby financial examiners review
annual statements and financial ratios. The statistical phase consists of 12 key
financial ratios based on year-end data that are generated from the NAIC
database annually; each ratio has an established
2
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
"usual range" of results. These ratios assist state insurance departments in
executing their statutory mandate to oversee the financial condition of
insurance companies.
A ratio result falling outside the usual range of IRIS ratios is not considered
a failing result; rather, unusual values are viewed as part of the regulatory
early monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges for four or more of the ratios. Prior to
codification of statutory accounting principles effective in 2001, 15% of the
companies included in the IRIS system were expected by the NAIC, in normal
years, to be outside the usual range on four or more ratios.
In 2001, four of the Company's IRIS ratios had fallen outside of the usual range
due to growth in sales of deferred annuities. For 2001, the regulators have been
satisfied upon follow-up that there was no solvency problem. In 2002, three
ratios have fallen outside of the usual range. No regulatory action has been
taken by any state insurance department or the NAIC with respect to IRIS ratios
of the Company during the two years ended December 31, 2002.
Risk-Based Capital (RBC) Requirements
In order to enhance the regulation of insurer solvency, the NAIC adopted a
formula and model law to implement RBC requirements for most life and annuity
insurance companies, which are designed to determine minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. For this purpose, an insurer's total
adjusted capital is measured in relation to its specific asset and liability
profiles. A company's risk-based capital is calculated by applying factors to
various asset, premium and reserve items, where the factor is higher for those
items with greater underlying risk and lower for less risky items.
The RBC formula for life insurers measures four major areas of risk:
- asset risk (i.e., the risk of asset default),
- insurance risk (i.e., the risk of adverse mortality and
morbidity experience),
- interest rate risk (i.e., the risk of loss due to changes in
interest rates) and
- business risk (i.e., normal business and management risk).
Under laws adopted by the states, insurers having less total adjusted capital
than that required by the RBC calculation will be subject to varying degrees of
regulatory action, depending upon the level of capital inadequacy.
The RBC law provides for four levels of regulatory action as defined by the
NAIC. The extent of regulatory intervention and action increases as the level of
total adjusted capital to RBC falls. The first level, the company action level,
requires an insurer to submit a plan of corrective actions to the regulator if
total adjusted capital falls below 200% of the RBC amount. The second level, the
regulatory action level, requires an insurer to submit a plan containing
corrective actions and requires the relevant insurance commissioner to perform
an examination or other analysis and issue a corrective order if total adjusted
capital falls below 150% of the RBC amount. The third level, the authorized
control level, authorizes the relevant commissioner to take whatever regulatory
actions are considered necessary to protect the best interest of the
policyholders and creditors of the insurer which may include the actions
necessary to cause the insurer to be placed under regulatory control, i.e.,
rehabilitation or liquidation, if total adjusted capital falls below 100% of the
RBC amount. The fourth level, the mandatory control
3
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
level, requires the relevant insurance commissioner to place the insurer under
regulatory control if total adjusted capital falls below 70% or the RBC amount.
The formulas have not been designed to differentiate among adequately
capitalized companies, which operate with higher levels of capital. Therefore,
it is inappropriate and ineffective to use the formula to rate or rank
companies. At December 31, 2002, the Company had total adjusted capital in
excess of amounts requiring company action or any level of regulatory action at
any prescribed RBC level.
Insurance Regulation Concerning Dividends
The Company is domiciled in the State of Connecticut. The insurance holding
company law of Connecticut requires notice to, and approval by, the State of
Connecticut Insurance Department for the declaration or payment of any dividend
which, together with other distributions made within the preceding twelve
months, exceeds the greater of (i) 10% of the insurer's surplus or (ii) the
insurer's net gain from operations for the twelve-month period ending on the
preceding December 31st, in each case determined in accordance with statutory
accounting practices. Such declaration or payment is further limited by adjusted
unassigned funds (surplus), as determined in accordance with statutory
accounting practices. The Company does not have surplus available to pay
dividends to TIC in 2003 without prior approval of the State of Connecticut
Insurance Department.
Code of Ethics
The Company has adopted a code of ethics for financial professionals which
applies to the Company's principal executive officer and principal financial and
accounting officer. The code of ethics for financial professionals has been
included as an exhibit to this Form 10-K.
ITEM 2. PROPERTIES.
The Company's executive offices are located in Hartford, Connecticut. At
December 31, 2002 TIC leased approximately 284,000 square feet from Travelers
Property Casualty Corp (TPC) at One Tower Square, Hartford, Connecticut under a
lease that runs through March 31, 2003. The Company also occupies this space
leased by TIC and is allocated expense according to cost sharing agreements. TIC
previously owned this building complex and sold it, as well as a building in
Norcross, Georgia housing TPC's information systems department, to TPC for $68
million as part of the TPC spin-off from Citigroup on February 28, 2002.
The Company and TIC are moving their executive offices to One Cityplace in
Hartford, Connecticut, during the first quarter of 2003. The Company and TIC,
will occupy 373,000 square feet at this location under an operating lease that
runs through October 31, 2008.
Management believes that these facilities are suitable and adequate for the
Company's current needs.
The foregoing discussion does not include information on investment properties.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, the Company is a defendant or co-defendant
in various litigation matters incidental to and typical of the businesses in
which it is engaged. In the opinion of the Company's management, the ultimate
resolution of these legal proceedings would not be likely to have a material
adverse effect on the Company's results of operations, financial condition or
liquidity. This
4
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" included in
Item 7.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company has 100,000 authorized shares of common stock, of which 30,000 are
issued and outstanding as of December 31, 2002. All outstanding shares of the
Company's common stock are held by TIC, and there exists no established public
trading market for the common stock of the Company. The Company did not pay
dividends in 2002 or 2001. See Note 7 of Notes to Financial Statements for
dividend restrictions.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction I(2)(a) of Form 10-K.
The Travelers Life and Annuity Company (the Company), is a wholly owned
subsidiary of The Travelers Insurance Company (TIC). On March 27, 2002,
Travelers Property Casualty Corp. (TPC), TIC's parent at December 31, 2001,
completed its initial public offering (IPO). On August 20, 2002, Citigroup made
a tax-free distribution of the majority of its remaining interest in TPC to
Citigroup's stockholders. Prior to the IPO, the common stock of TIC was
distributed by TPC to Citigroup Insurance Holding Corporation (CIHC) so that TIC
and the Company would remain an indirect wholly owned subsidiary of Citigroup.
The Company offers fixed and variable deferred annuities and individual life
insurance to individuals and small businesses. These products are distributed
primarily through Salomon Smith Barney (SSB), Primerica Financial Services
(PFS), affiliates of the Company, a nationwide network of independent financial
professionals and non-affiliated broker-dealers. In addition, the Company
distributes these products through CitiStreet Retirement Services and Citibank,
N.A. (Citibank), also affiliates of the Company.
CRITICAL ACCOUNTING POLICIES
The Notes to the Financial Statements contain a summary of the Company's
significant accounting policies, including a discussion of recently issued
accounting pronouncements. Certain of these policies, as well as estimates made
by management, are considered to be critical to the portrayal of the Company's
financial condition since they require management to make difficult, complex or
subjective judgments and estimates, some of which may relate to matters that are
inherently uncertain.
5
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks. Fixed
maturities, including instruments subject to securities lending agreements (see
Note 2 of Notes to Financial Statements), are classified as "available for sale"
and are reported at fair value, with unrealized investment gains and losses, net
of income taxes, credited or charged directly to shareholder's equity. Fair
values of investments in fixed maturities are based on quoted market prices or
dealer quotes. If these are not available, discounted expected cash flows using
market rates commensurate with the credit quality and maturity of the investment
are used to record fair value. Changes in the assumptions could affect the fair
values of investments. Impairments are realized when investment losses in value
are deemed other-than-temporary. The Company conducts regular reviews to assess
whether other-than-temporary impairments exist. Changing economic conditions -
global, regional, or related to specific issuers or industries - could adversely
affect these investments.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits. The annuity payout reserves are calculated using the mortality and
interest assumptions used in the actual pricing of the benefit. Mortality
assumptions are based on Company experience and are adjusted to reflect
deviations such as substandard mortality in structured settlement benefits. The
interest rates range from 2.1% to 7.9% for these annuity products with a
weighted average interest rate of 7.2%, including adverse deviation. Traditional
life products include whole life and term insurance. Future policy benefits for
traditional life products are estimated on the basis of actuarial assumptions as
to mortality, persistency and interest, established at policy issue. Interest
assumptions applicable to traditional life products range from 3.0% to 7.0%,
with a weighted average of 6.0%. Assumptions established at policy issue as to
mortality and persistency are based on the Company's experience, which, together
with interest assumptions, include a margin for adverse deviation. Appropriate
recognition has been given to experience rating and reinsurance.
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life, universal life, deferred annuities and
payout annuities are deferred. These deferred acquisition costs (DAC) costs
include principally commissions and certain expenses related to policy issuance,
underwriting and marketing, all of which vary with and are primarily related to
the production of new business. The method for determining amortization of
deferred acquisition costs varies by product type based upon three different
accounting pronouncements: Statement of Financial Accounting Standards No. 60,
"Accounting and Reporting by Insurance Enterprises" (FAS 60), Statement of
Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases" (FAS 91) and Statement of Financial Accounting Standards No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long Duration
Contracts and for Realized Gains and Losses from the Sale of Investments" (FAS
97).
DAC for deferred annuities, both fixed and variable, and payout annuities are
amortized employing a level effective yield methodology per FAS 91 as permitted
by AICPA Practice Bulletin 8. An amortization rate is developed using the
outstanding DAC balance and projected account balances and is applied to actual
account balances to determine the amount of DAC amortization. The projected
account balances are derived using a model that contains assumptions related to
investment returns and persistency. The model rate is evaluated periodically, at
least annually, and the actual rate is reset in the following quarter and
applied prospectively. A new amortization pattern is developed so that the DAC
6
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
balances will be amortized over the remaining estimated life of the business.
DAC for these products is currently being amortized over 10-15 years.
DAC for universal life is amortized in relation to estimated gross profits from
surrender charges, investment, mortality, and expense margins per FAS 97. Actual
profits can vary from management's estimates, resulting in increases or
decreases in the rate of amortization. Re-estimates of gross profits result in
retrospective adjustments to earnings by a cumulative charge or credit to
income. DAC for this product is currently being amortized over 16-25 years.
DAC relating to traditional life, including term insurance, is amortized in
relation to anticipated premiums per FAS 60. Assumptions as to the anticipated
premiums are made at the date of policy issuance or acquisition and are
consistently applied over the life of the policy. DAC for this product is
currently being amortized over 5-20 years.
DAC is reviewed to determine if it is recoverable from future income, including
investment income, and, if not recoverable, is charged to expense. All other
acquisition expenses are charged to operations as incurred.
PREMIUMS
Premiums are recognized as revenues when due. Premiums for contracts with a
limited number of premium payments, due over a significantly shorter period than
the period over which benefits are provided, are considered income when due. The
portion of premium which is not required to provide for benefits and expenses is
deferred and recognized in income in a constant relationship to insurance
benefits in force.
RESULTS OF OPERATIONS ($ in millions)
FOR THE YEARS ENDED DECEMBER 31, 2002 2001
- -------------------------------- ---- ----
Revenues $ 533.5 $ 503.9
======= =======
Net income $ 103.4 $ 115.1
Realized gains/(losses), net of tax (19.9) 16.9
------- -------
Operating Income $ 123.3 $ 98.2
======= =======
Net income decreased $11.7 million for the year ended December 31, 2002 versus
the prior year period. This decrease in net income was driven by a $36.8 million
decrease in realized investment activity. Net realized investment losses were
$19.9 million in 2002, compared to $16.9 million of gains in 2001. These 2002
losses were driven primarily by impairments to fixed maturity holdings,
including $12.9 million of WorldCom Inc. and other impairments of fixed maturity
holdings in the energy sector. The decrease from realized investment activity
was partially offset by operating income growth.
Operating income was $123.3 million and $98.2 million in 2002 and 2001,
respectively. This increase in operating income was driven by revenues from
individual annuity and individual life business volume growth, a one-time real
estate transaction and a $19.4 million after-tax reduction to the amortization
of DAC in the individual annuity product line resulting from changes in
underlying lapse and interest rate assumptions during the first quarter of 2002.
These increases were partially offset by lower yields in the fixed income
investment portfolio related to the declining interest rate environment in
2002 versus 2001.
7
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
Interest credited grew 44% to $181 million in 2002 primarily due to growth in
individual annuity contractholder funds balances. Increased business volumes
also caused increases in insurance benefits and operating expenses over the
prior year twelve-month period.
The amortization of capitalized DAC is a significant component of the Company's
expenses. Recording of DAC varies based upon product type. DAC for deferred
annuities, both fixed and variable, and payout annuities employs a level yield
methodology as per FAS 91. DAC for universal life (UL) is amortized in relation
to estimated gross profits as per FAS 97, with traditional life, including term
insurance and other products amortized in relation to anticipated premiums as
per FAS 60.
The following is a summary of capitalized DAC by type:
Traditional Deferred
($ in millions) Life Annuity UL Total
- -------------------------------------------------------------------------
Beginning balance
December 31, 2000 $ 36.8 $ 384.4 $ 158.3 $ 579.5
Commissions and expenses
deferred 18.4 202.9 103.0 324.3
Amortization expense (7.5) (75.8) (6.1) (89.4)
- -------------------------------------------------------------------------
Balance December 31, 2001 47.7 511.5 255.2 814.4
Commissions and expenses
deferred 16.5 169.4 130.8 316.7
Amortization expense (8.9) (48.8) (9.3) (67.0)
- -------------------------------------------------------------------------
Balance December 31, 2002 $ 55.3 $ 632.1 $ 376.7 $ 1,064.1
- -------------------------------------------------------------------------
BUSINESS VOLUME ($ IN MILLIONS)
AT AND FOR THE
TWELVE MONTHS ENDED
DECEMBER 31,
2002 2001
---- ----
Individual Annuity Account Balances $ 10,019 $ 9,701
Individual Life Net Premiums and Deposits $ 471 $ 335
The growth in December 31, 2002 individual annuity account balances over
December 31, 2001 reflects strong sales and good in-force policy retention,
which were partially offset by declining equity market values. Individual life
volumes continued to grow, reflecting strong universal life and traditional life
sales through the independent financial professionals channel and SSB.
PREMIUMS AND DEPOSITS ($ in millions)
FOR THE YEARS ENDED DECEMBER 31, 2002 2001
- -------------------------------- ---- ----
Deposits
Individual Annuity $ 2,587 $ 3,138
Individual Life 433 299
Other Annuity 4 3
------- -------
Total Deposits 3,024 3,440
------- -------
Total Premiums 43 39
------- -------
Total Premiums and Deposits $ 3,067 $ 3,479
======= =======
8
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
The majority of the annuity business and a substantial portion of the individual
life business written by the Company are accounted for as investment contracts,
with the result that the deposits collected from contractholders are reported as
liabilities and are not included in revenues. Declining variable annuity sales,
which resulted from lower yields in the investment portfolio related to the
declining interest rate environment in 2002 versus 2001, were partially offset
by increased fixed annuity deposits.
The individual life premiums and deposits grew 40% to $471 million in 2002
versus $335 million in 2001, reflecting strong traditional agency universal and
life production. Of the December 31, 2002 and 2001 premiums, 17% and 21% were
attributable to sales by SSB, respectively.
OUTLOOK
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on the following page.
The Company is included in the Travelers Life & Annuity (TLA) segment of TIC and
its outlook should be considered within that context. TLA should benefit from
growth in the aging population which is becoming more focused on the need to
accumulate adequate savings for retirement, to protect these savings and to plan
for the transfer of wealth to the next generation. TLA is well positioned to
take advantage of the favorable long-term demographic trends through its strong
financial position, widespread brand name recognition and broad array of
competitive life, annuity and retirement, and estate planning products sold
through established distribution channels.
However, competition in both product pricing and customer service is
intensifying. While there has been some consolidation within the industry, other
financial services organizations are increasingly involved in the sale and/or
distribution of insurance products. Also, the annuities business is interest
rate and market sensitive. TLA's business is significantly affected by movements
in the U.S. equity and fixed income credit markets. U.S. equity and credit
market events can have both positive and negative effects on the deposit,
revenue and policy retention performance of the business. A sustained weakness
in the equity markets will decrease revenues and earnings in variable products.
Declines in credit quality of issuers will have a negative effect on earnings.
In order to strengthen its competitive position, TLA expects to maintain a
current product portfolio, further diversify its distribution channels, and
retain its financial position through strong sales growth and maintenance of an
efficient cost structure.
In July 2002, the Accounting Standards Executive Committee (AcSEC) issued a
Proposed Statement of Position (PSOP) on Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts. This PSOP includes accounting and disclosure for separate account
assets, liabilities, gains and losses transferred from the separate account, as
well as accounting and reserving for nontraditional contracts that contain death
and other insurance features. The contracts containing death and other insurance
features are generally referred to as Guaranteed Minimum Death Benefits (GMDB).
The Company reports GMDB reserves in future policy benefits. These reserves are
currently sufficient to cover the reserves required by this PSOP. The effective
date of this PSOP is for fiscal years beginning after December 15, 2003, with
earlier adoption encouraged. The adoption of this PSOP will not have a
significant effect on the Company's results of operations, financial condition
or liquidity.
9
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
President Bush's recent budget proposal (the Budget Proposal) contains a number
of provisions that could impact the Company, including provisions to eliminate
the double taxation of corporate dividends and to create new types of savings
accounts with tax-free earnings. The Budget Proposal is in its early stages of
consideration.
It is not possible to predict whether the Budget Proposal will be enacted, what
form such legislation might take when enacted or the potential effects of such
legislation on the Company and its competitors. The Company does not expect the
Budget Proposal to have a material impact on its financial condition or
liquidity.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Financial Statements for a discussion of recently issued
accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "may increase," "may fluctuate," and similar expressions or future
or conditional verbs such as "will," "should," "would," and "could." These
forward-looking statements involve risks and uncertainties including, but not
limited to, the resolution of legal proceedings and the Company's market risk as
well as the discussions of the Company's prospects under "Outlook" on the
previous page.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 2002.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.
The primary market risk to the Company's investment portfolio is interest rate
risk. The Company's exposure to equity price risk and foreign exchange risk is
not significant. The Company has no direct commodity risk.
The interest rate risk taken in the investment portfolio is managed relative to
the duration of the liabilities. The portfolio is differentiated by business
unit, with each unit's portfolio structured to meet its particular needs.
Potential liquidity needs of the business are also key factors in managing the
investment portfolio. The portfolio duration relative to the liabilities'
duration is primarily managed through cash market transactions. For additional
information regarding the Company's investment portfolio see Note 2 of Notes to
Financial Statements.
10
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
There were no significant changes in the Company's primary market risk exposures
or in how those exposures are managed compared to the year ended December 31,
2001. The Company does not anticipate significant changes in the Company's
primary market risk exposures or in how those exposures are managed in future
reporting periods based upon what is known or expected to be in effect in future
reporting periods. The statements above are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" on the previous page.
Sensitivity Analysis
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near-term" means a period of time going forward up to one year from the
date of the financial statements. Actual results may differ from the
hypothetical change in market rates assumed in this report, especially since
this sensitivity analysis does not reflect the results of any actions that would
be taken by the Company to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, mortgage loans, short-term securities, cash,
investment income accrued, policy loans, contractholder funds, and derivative
financial instruments. In addition, certain non-financial instrument liabilities
have been included in the sensitivity analysis model. These non-financial
instruments include future policy benefits and policy and contract claims. The
primary market risk to the Company's market sensitive instruments is interest
rate risk. The sensitivity analysis model uses a 100 basis point change in
interest rates to measure the hypothetical change in fair value of financial
instruments and the non-financial instruments included in the model.
For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and reset
features. Portfolio durations are calculated on a market value weighted basis,
including accrued investment income, using trade date holdings as of December
31, 2002 and 2001. The sensitivity analysis model used by the Company produces a
loss in fair value of interest rate sensitive invested assets of approximately
$262 million and $204 million based on a 100 basis point increase in interest
rates as of December 31, 2002 and 2001, respectively.
Liability durations are determined consistently with the determination of
liability fair values. Where fair values are determined by discounting expected
cash flows, the duration is the percentage change in the fair value for a 100
basis point change in the discount rate. Where liability fair values are set
equal to surrender values, option-adjusted duration techniques are used to
calculate changes in fair values. The sensitivity analysis model used by the
Company produces a decrease in fair value of interest rate sensitive insurance
policy and claims reserves of approximately $242 million and $176 million based
on a 100 basis point increase in interest rates as of December 31, 2002 and
2001, respectively.
Based on the sensitivity analysis model used by the Company, the net loss in
fair value of market sensitive instruments as a result of a 100 basis point
increase in interest rates as of December 31, 2002 and 2001 is not material.
11
THE TRAVELERS LIFE AND ANNUITY COMPANY
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................................................................ 13
Financial Statements:
Statements of Income for the years ended
December 31, 2002, 2001 and 2000........................................................................ 14
Balance Sheets as of December 31, 2002 and 2001......................................................... 15
Statements of Changes in Shareholder's Equity for the years
ended December 31, 2002, 2001 and 2000.................................................................. 16
Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000........................................................................ 17
Notes to Financial Statements........................................................................... 18
12
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Life and Annuity Company:
We have audited the accompanying balance sheets of The Travelers Life and
Annuity Company as of December 31, 2002 and 2001, and the related statements of
income, changes in shareholder's equity and cash flows for each of the years in
the three-year period ended December 31, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Travelers Life and Annuity
Company as of December 31, 2002 and 2001, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for goodwill and other intangible assets in 2002, and its
methods of accounting for derivative instruments and hedging activities and for
securitized financial assets in 2001.
/s/ KPMG LLP
Hartford, Connecticut
January 21, 2003
13
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF INCOME
($ in thousands)
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000
---- ---- ----
REVENUES
Premiums $ 42,893 $ 39,222 $ 33,941
Net investment income 311,946 251,054 214,174
Realized investment gains (losses) (30,584) 26,144 (7,396)
Fee income 189,686 173,113 127,378
Other revenues 19,530 14,317 9,625
- ---------------------------------------------------------------------------------------------------------------------------
Total Revenues 533,471 503,850 377,722
- ---------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 94,513 88,842 78,403
Interest credited to contractholders 180,610 125,880 77,579
Amortization of deferred acquisition costs 66,972 89,475 68,254
Operating expenses 32,352 23,404 14,095
- ---------------------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 374,447 327,601 238,331
- ---------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes and cumulative effect of
change in accounting principle 159,024 176,249 139,391
Federal income taxes
Current (31,143) (19,007) 11,738
Deferred 86,797 80,096 36,748
- ---------------------------------------------------------------------------------------------------------------------------
Total Federal Income Taxes 55,654 61,089 48,486
- ---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting principle 103,370 115,160 90,905
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of tax - (62) -
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 103,370 $ 115,098 $ 90,905
===========================================================================================================================
See Notes to Financial Statements.
14
THE TRAVELERS LIFE AND ANNUITY COMPANY
BALANCE SHEETS
($ in thousands)
AT DECEMBER 31, 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value (including $144,284 and
$102,347 subject to securities lending agreements) (cost $4,385,801
and $3,308,142) $ 4,520,299 $ 3,352,227
Equity securities, at fair value (cost $14,939 and $16,251) 14,495 15,738
Mortgage loans 134,078 125,629
Short-term securities 475,365 206,759
Other invested assets 384,616 238,429
- --------------------------------------------------------------------------------------------------------------------------
Total Investments 5,528,853 3,938,782
- --------------------------------------------------------------------------------------------------------------------------
Separate accounts 6,862,009 7,681,791
Deferred acquisition costs 1,064,118 814,369
Premiums and fees receivable 59,636 56,207
Other assets 179,558 165,118
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $ 13,694,174 $ 12,656,267
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Future policy benefits and claims $ 1,145,692 $ 1,040,856
Contractholder funds 3,886,083 2,624,570
Separate accounts 6,862,009 7,681,791
Other liabilities 441,249 261,395
Deferred federal income taxes 199,350 70,091
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities 12,534,383 11,678,703
- --------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $100; 100,000 shares authorized,
30,000 issued and outstanding 3,000 3,000
Additional paid-in capital 417,316 417,316
Retained earnings 644,534 541,164
Accumulated other changes in equity from nonowner sources 94,941 16,084
- --------------------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 1,159,791 977,564
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $ 13,694,174 $ 12,656,267
==========================================================================================================================
See Notes to Financial Statements.
15
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
($ in thousands)
FOR THE YEAR ENDED
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 3,000 $ 3,000 $ 3,000
Changes in common stock - - -
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 3,000 $ 3,000 $ 3,000
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
- -------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 417,316 $ 417,316 $ 167,316
Contribution from Parent Company - - 250,000
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 417,316 $ 417,316 $ 417,316
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
- -------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 541,164 $ 426,066 $ 335,161
Net income 103,370 115,098 90,905
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 644,534 $ 541,164 $ 426,066
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- -------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 16,084 $ 13,622 $ (39,312)
Cumulative effect of change in accounting principle for
derivative instruments and hedging activities, net of tax - 62 -
Unrealized gains (losses), net of tax 73,750 (924) 52,934
Derivative instrument hedging activity gains,
net of tax 5,107 3,324 -
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 94,941 $ 16,084 $ 13,622
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- -------------------------------------------------------------------------------------------------------------------
Net income $ 103,370 $ 115,098 $ 90,905
Other changes in equity from nonowner sources 78,857 2,462 52,934
- -------------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 182,227 $ 117,560 $ 143,839
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Changes in total shareholder's equity $ 182,227 $ 117,560 $ 393,839
Balance, beginning of year 977,564 860,004 466,165
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,159,791 $ 977,564 $ 860,004
===================================================================================================================
See Notes to Financial Statements.
16
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ in thousands)
FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 43,490 $ 37,915 $ 33,609
Net investment income received 276,813 211,179 186,362
Fee and other income received 238,970 211,885 136,194
Benefits and claims paid (103,513) (103,224) (96,890)
Interest credited to contractholders (180,610) (125,880) (77,579)
Operating expenses paid (343,932) (354,506) (325,180)
Income taxes (paid) received 88,888 45,257 (38,548)
Other (21,047) (31,175) 40,628
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (941) (108,549) (141,404)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 255,009 97,712 220,841
Mortgage loans 36,193 20,941 28,477
Proceeds from sales of investments
Fixed maturities 1,689,931 938,987 843,856
Equity securities 35,556 6,363 30,772
Mortgage loans - - 15,260
Real estate held for sale - (36) 2,115
Purchases of investments
Fixed maturities (3,018,069) (2,022,618) (1,564,237)
Equity securities (35,735) (2,274) (20,361)
Mortgage loans (44,632) (14,494) (17,016)
Policy loans, net (11,201) (3,395) (2,675)
Short-term securities (purchases) sales, net (268,606) 40,618 (166,259)
Other investment (purchases) sales, net (20,915) (6,334) 327
Securities transactions in course of settlement, net 117,806 64,698 21,372
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,264,663) (879,832) (607,528)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 1,486,056 1,178,421 629,138
Contractholder fund withdrawals (224,542) (185,464) (115,289)
Contribution from parent company - - 250,000
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,261,514 992,957 763,849
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (4,090) 4,576 14,917
Cash at beginning of year 19,514 14,938 21
- ----------------------------------------------------------------------------------------------------------------------------
Cash at December 31, $ 15,424 $ 19,514 $ 14,938
============================================================================================================================
See Notes to Financial Statements.
17
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the
accompanying financial statements follow.
BASIS OF PRESENTATION
The Travelers Life and Annuity Company (the Company) is a wholly owned
subsidiary of The Travelers Insurance Company (TIC), an indirect wholly
owned subsidiary of Citigroup Inc. (Citigroup). On March 27, 2002,
Travelers Property Casualty Corp. (TPC), TIC's parent at December 31,
2001, completed its initial public offering (IPO). On August 20, 2002,
Citigroup made a tax-free distribution to its stockholders of the
majority of its remaining interest in TPC. Prior to the IPO, the common
stock of TIC was distributed by TPC to Citigroup Insurance Holding
Corporation (CIHC) so that TIC and the Company would remain indirect
wholly owned subsidiaries of Citigroup.
The financial statements and accompanying footnotes of the Company are
prepared in conformity with accounting principles generally accepted in
the United States of America (GAAP). The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and benefits and expenses during the reporting period. Actual
results could differ from those estimates.
The Company offers a variety of variable annuity products where the
investment risk is borne by the contractholder, not the Company, and
the benefits are not guaranteed. The premiums and deposits related to
these products are reported in separate accounts. The Company considers
it necessary to differentiate, for financial statement purposes, the
results of the risks it has assumed from those it has not.
Certain prior year amounts have been reclassified to conform to the
2002 presentation.
ACCOUNTING CHANGES
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the Financial Accounting
Standards Board (FASB) Statements of Financial Accounting Standards No.
141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). These standards change the accounting for
business combinations by, among other things, prohibiting the
prospective use of pooling-of-interests accounting and requiring
companies to stop amortizing goodwill and certain intangible assets
with an indefinite useful life created by business combinations
accounted for using the purchase method of accounting. Instead,
goodwill and intangible assets deemed to have an indefinite useful life
will be subject to an annual review for impairment. All goodwill was
fully amortized at December 31, 2001 and the Company did not have any
other intangible assets with an indefinite useful life. Other
intangible assets that are not deemed to have an indefinite useful life
will continue to be amortized over their useful lives. See Note 4.
18
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Effective January 1, 2002, the Company adopted FASB Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (FAS 144). FAS 144 establishes a
single accounting model for long-lived assets to be disposed of by
sale. A long-lived asset classified as held for sale is to be measured
at the lower of its carrying amount or fair value less cost to sell.
Depreciation (amortization) is to cease. Impairment is recognized only
if the carrying amount of a long-lived asset is not recoverable from
its undiscounted cash flows and is measured as the difference between
the carrying amount and fair value of the asset. Long-lived assets to
be abandoned, exchanged for a similar productive asset, or distributed
to owners in a spin-off are considered held and used until disposed of.
Accordingly, discontinued operations are no longer to be measured on a
net realizable value basis, and future operating losses are no longer
recognized before they occur. The provisions of the new standard are to
be applied prospectively. There has been no impact as of December 31,
2002 on the Company's results of operations, financial condition or
liquidity due to this standard. The Company does not expect the impact
of this standard to be significant in future reporting periods.
ACCOUNTING STANDARDS NOT YET ADOPTED
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
On January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (FAS 146). FAS 146 requires that a
liability for costs associated with exit or disposal activities, other
than in a business combination, be recognized when the liability is
incurred. Previous generally accepted accounting principles provided
for the recognition of such costs at the date of management's
commitment to an exit plan. In addition, FAS 146 requires that the
liability be measured at fair value and be adjusted for changes in
estimated cash flows. The provisions of the new standard are effective
for exit or disposal activities initiated after December 31, 2002. It
is not expected that FAS 146 will materially affect the Company's
financial statements.
STOCK-BASED COMPENSATION
On January 1, 2003, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123 (FAS
123), prospectively for all awards granted, modified, or settled after
December 31, 2002. The prospective method is one of the adoption
methods provided for under FAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", issued in December 2002. FAS
123 requires that compensation cost for all stock awards be calculated
and recognized over the service period (generally equal to the vesting
period). This compensation cost is determined using option pricing
models, intended to estimate the fair value of the awards at the grant
date. Similar to APB 25, the alternative method of accounting, an
offsetting increase to stockholders' equity under FAS 123 is recorded
equal to the amount of compensation expense charged. The adoption of
this change in accounting principle will not have a significant impact
on the Company's results of operations, financial condition or
liquidity.
19
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). This
Interpretation changes the method of determining whether certain
entities should be included in the Company's Consolidated Financial
Statements. An entity is subject to FIN 46 and is called a variable
interest entity (VIE) if it has (1) equity that is insufficient to
permit the entity to finance its activities without additional
subordinated financial support from other parties, or (2) equity
investors that cannot make significant decisions about the entity's
operations, or that do not absorb the expected losses or receive the
expected returns of the entity. All other entities are evaluated for
consolidation under FAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries." A VIE is consolidated by its primary beneficiary, which
is the party involved with the VIE that has a majority of the expected
losses or a majority of the expected residual returns or both.
The provisions of FIN 46 are to be applied immediately to VIEs created
after January 31, 2003, and to VIEs in which an enterprise obtains an
interest after that date. For VIEs in which an enterprise holds a
variable interest that it acquired before February 1, 2003, FIN 46
applies in the first fiscal period beginning after June 15, 2003. For
any VIEs that must be consolidated under FIN 46 that were created
before February 1, 2003, the assets, liabilities and noncontrolling
interest of the VIE would be initially measured at their carrying
amounts with any difference between the net amount added to the balance
sheet and any previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the carrying
amounts is not practicable, fair value at the date FIN 46 first applies
may be used to measure the assets, liabilities and noncontrolling
interest of the VIE. FIN 46 also mandates new disclosures about VIEs,
some of which are required to be presented in financial statements
issued after January 31, 2003.
The Company has investments in entities that may be considered to be
variable interests. The carrying value of these investments is
approximately $121.9 million and primarily consists of interests in
security and real estate investment funds and below investment grade
asset-backed and mortgage-backed securities. The Company is evaluating
the impact of applying FIN 46 to existing VIEs in which it has variable
interests and has not yet completed this analysis. However, at this
time, it is anticipated that the effect on the Company's Balance Sheets
would be insignificant. As the Company continues to evaluate the impact
of applying FIN 46, additional entities may be identified that would
need to be consolidated.
20
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING POLICIES
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities, including instruments subject to securities lending
agreements (see Note 2), are classified as "available for sale" and are
reported at fair value, with unrealized investment gains and losses,
net of income taxes, credited or charged directly to shareholder's
equity. Fair values of investments in fixed maturities are based on
quoted market prices or dealer quotes. If these are not available,
discounted expected cash flows using market rates commensurate with the
credit quality and maturity of the investment are used to record fair
value. Changes in the assumptions could affect the fair values of
investments. Impairments are realized when investment losses in value
are deemed other-than-temporary. The Company conducts regular reviews
to assess whether other-than-temporary impairments exist. Changing
economic conditions - global, regional, or related to specific issuers
or industries - could adversely affect these investments.
Also included in fixed maturities are loan-backed and structured
securities, which are amortized using the retrospective method. The
effective yield used to determine amortization is calculated based upon
actual historical and projected future cash flows, which are obtained
from a widely accepted securities data provider.
Equity securities, which include common and non-redeemable preferred
stocks, are classified as "available-for-sale" and are carried at fair
value based primarily on quoted market prices. Changes in fair values
of equity securities are charged or credited directly to shareholder's
equity, net of income taxes.
Mortgage loans are carried at amortized cost. A mortgage loan is
considered impaired when it is probable that the Company will be unable
to collect principal and interest amounts due. For mortgage loans that
are determined to be impaired, a reserve is established for the
difference between the amortized cost and fair market value of the
underlying collateral. In estimating fair value, the Company uses
interest rates reflecting the current real estate financing market.
Short-term securities, consisting primarily of money market instruments
and other debt issues purchased with a maturity of less than one year,
are carried at amortized cost, which approximates fair value.
Other invested assets include partnership investments and real estate
joint ventures which are accounted for on the equity method of
accounting. Undistributed income of these investments is reported in
net investment income. Also included in other invested assets are
policy loans which are carried at the amount of the unpaid balances
that are not in excess of the net cash surrender values of the related
insurance policies. The carrying value of policy loans, which have no
defined maturities, is considered to be fair value.
Accrual of investment income, included in other assets, is suspended on
fixed maturities or mortgage loans that are in default, or on which it
is likely that future payments will not be made as scheduled. Interest
income on investments in default is recognized only as payment is
received.
21
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, swaps, options and forward contracts as a means of
hedging exposure to interest rate changes, equity price change and
foreign currency risk. The Company does not hold or issue derivative
instruments for trading purposes. (See Note 9 for a more detailed
description of the Company's derivative use.) Derivative financial
instruments in a gain position are reported in the balance sheet in
other assets, derivative financial instruments in a loss position are
reported in the balance sheet in other liabilities and derivatives
purchased to offset embedded derivatives on variable annuity contracts
reported in other invested assets.
To qualify for hedge accounting, the hedge relationship is designated
and formally documented at inception detailing the particular risk
management objective and strategy for the hedge which includes the item
and risk that is being hedged, the derivative that is being used, as
well as how effectiveness is being assessed. A derivative has to be
highly effective in accomplishing the objective of offsetting either
changes in fair value or cash flows for the risk being hedged.
For fair value hedges, in which derivatives hedge the fair value of
assets and liabilities, changes in the fair value of derivatives are
reflected in realized investment gains and losses, together with
changes in the fair value of the related hedged item. The net amount is
reflected in current earnings. The Company's fair value hedges are
primarily of available-for-sale securities.
For cash flow hedges, the accounting treatment depends on the
effectiveness of the hedge. To the extent that derivatives are
effective in offsetting the variability of the hedged cash flows,
changes in the derivatives' fair value will not be included in current
earnings but are reported in the accumulated other changes in equity
from nonowner sources. These changes in fair value will be included in
earnings of future periods when earnings are also affected by the
variability of the hedged cash flows. To the extent these derivatives
are not effective, changes in their fair values are immediately
included in realized investment gains and losses. The Company's cash
flow hedges primarily include hedges of foreign denominated funding
agreements and floating rate available-for-sale securities. Derivatives
that are either hedging instruments that are carried at fair value or
do not qualify as hedges under the new rules are also carried at fair
value with changes in value reflected in realized investment gains and
losses.
For those hedge relationships that are terminated, hedge designations
removed, or forecasted transactions that are no longer expected to
occur, the hedge accounting treatment described in the paragraphs above
will no longer apply. For fair value hedges, any changes to the hedged
item remain as part of the basis of the asset or liability and are
ultimately reflected as an element of the yield. For cash flow hedges,
any changes in fair value of the end-user derivative remain in the
accumulated other changes in equity from nonowner sources and are
included in earnings of future periods when earnings are also affected
by the variability of the hedged cash flow. If the hedged relationship
is discontinued because a forecasted transaction will not occur when
scheduled, any changes in fair value of the end-user derivative are
immediately reflected in realized investment gains and losses.
The Company also purchases investments that have embedded derivatives,
primarily convertible debt securities. These embedded derivatives are
carried at fair value with changes in value reflected in realized gains
and losses. The Company bifurcates an embedded derivative where the
economic characteristics and risks of the embedded instrument are not
clearly and closely related to the economic characteristics and risk of
the host contract, the entire instrument would not otherwise
22
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
be re-measured at fair value and a separate instrument with the same
terms of the embedded instrument would meet the definition of a
derivative under FAS 133. Derivatives embedded in convertible debt
securities are classified as fixed maturity securities, consistent with
the host instruments.
Prior to the adoption of FAS 133 on January 1, 2001, end-user
derivatives designated as qualifying hedges were accounted for
consistently with the risk management strategy as follows. Hedge
accounting was generally used to account for derivatives. To qualify
for hedge accounting the change in value of the derivative was expected
to substantially offset the changes in value of the hedged item. Hedges
were monitored to ensure that there was a high correlation between the
derivative instruments and the hedged investment. Derivatives that did
not qualify for hedge accounting were marked to market with changes in
market value reflected in the statement of income.
Payments to be received or made under interest rate swaps were accrued
and recognized in net investment income. Swaps hedging investments were
carried at fair value with unrealized gains and losses, net of taxes,
charged directly to shareholder's equity. Interest rate and currency
swaps hedging liabilities were treated as off-balance sheet
instruments.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of
pre-tax revenues based upon specific identification of the investments
sold on the trade date. Impairments are realized when investment losses
in value are deemed other-than-temporary. The Company conducts regular
reviews to assess whether other-than-temporary impairments exist.
Changing economic conditions-global, regional, or related to specific
issuers or industries-could adversely affect these investments. Also
included are gains and losses arising from the remeasurement of the
local currency value of foreign investments to U.S. dollars, the
functional currency of the Company.
SEPARATE ACCOUNTS
The Company has separate accounts that primarily represent funds for
which investment income and investment gains and losses accrue directly
to, and investment risk is borne by, the contractholders. Each of these
accounts has specific investment objectives. The assets of each account
are legally segregated and are not subject to claims that arise out of
any other business of the Company. The assets of these accounts are
carried at fair value.
Amounts assessed to the separate account contractholders for management
services are included in revenues. Deposits, net investment income and
realized investment gains and losses for these accounts are excluded
from revenues, and related liability increases are excluded from
benefits and expenses.
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life, universal life, deferred annuities
and payout annuities are deferred. These deferred acquisition costs
(DAC) include principally commissions and certain expenses related to
policy issuance, underwriting and marketing, all of which vary with and
are primarily related to the production of new business. The method
for determining amortization of DAC varies by product
23
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
type based upon three different accounting pronouncements:
Statement of Financial Accounting Standards No. 60, "Accounting and
Reporting by Insurance Enterprises" (FAS 60), Statement of Financial
Accounting Standards No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases" (FAS 91) and Statement of Financial Accounting
Standards No. 97, "Accounting and Reporting by Insurance Enterprises
for Certain Long Duration Contracts and for Realized Gains and Losses
from the Sale of Investments" (FAS 97).
DAC for deferred annuities, both fixed and variable, and payout
annuities are amortized employing a level effective yield methodology
per FAS 91 as permitted by AICPA Practice Bulletin 8. An amortization
rate is developed using the outstanding DAC balance and projected
account balances and is applied to actual account balances to determine
the amount of DAC amortization. The projected account balances are
derived using a model that contains assumptions related to investment
returns and persistency. The model rate is evaluated periodically, at
least annually, and the actual rate is reset in the following quarter
and applied prospectively. A new amortization pattern is developed so
that the DAC balances will be amortized over the remaining estimated
life of the business. DAC for these products is currently being
amortized over 10-15 years.
DAC for universal life is amortized in relation to estimated gross
profits from surrender charges, investment, mortality, and expense
margins per FAS 97. Actual profits can vary from management's estimates
resulting in increases or decreases in the rate of amortization.
Re-estimates of gross profits result in retrospective adjustments to
earnings by a cumulative charge or credit to income. DAC for this
product is currently being amortized over 16-25 years.
DAC relating to traditional life, including term insurance, is
amortized in relation to anticipated premiums per FAS 60. Assumptions
as to the anticipated premiums are made at the date of policy issuance
or acquisition and are consistently applied over the life of the
policy. DAC for this product is currently being amortized over 5-20
years.
DAC is reviewed to determine if it is recoverable from future income,
including investment income, and, if not recoverable, is charged to
expense. All other acquisition expenses are charged to operations as
incurred. See Note 4.
VALUE OF INSURANCE IN FORCE
The value of insurance in force, reported in other assets, is an asset
that was recorded in 1993 at the time of acquisition of TIC and the
Company by Citigroup's predecessor. It represents the actuarially
determined present value of anticipated profits to be realized from
annuity contracts at the date of acquisition using the same assumptions
that were used for computing related liabilities, where appropriate.
The value of insurance in force was the actuarially determined present
value of the projected future profits discounted at an interest rate of
16% for the annuity business acquired. The annuity contracts are
amortized employing a level yield method. The value of insurance in
force is reviewed periodically for recoverability to determine if any
adjustment is required. Adjustments, if any, are charged to income. See
Note 4.
24
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance
policy benefits. The annuity payout reserves are calculated using the
mortality and interest assumptions used in the actual pricing of the
benefit. Mortality assumptions are based on Company experience and are
adjusted to reflect deviations such as substandard mortality in
structured settlement benefits. The interest rates range from 2.1% to
7.9% for these annuity products with a weighted average interest rate
of 7.2%, including adverse deviation. Traditional life products include
whole life and term insurance. Future policy benefits for traditional
life products are estimated on the basis of actuarial assumptions as to
mortality, persistency and interest, established at policy issue.
Interest assumptions applicable to traditional life products range from
3.0% to 7.0%, with a weighted average of 6.0%. Assumptions established
at policy issue as to mortality and persistency are based on the
Company's experience, which, together with interest assumptions,
include a margin for adverse deviation. Appropriate recognition has
been given to experience rating and reinsurance.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal
life, certain deferred annuity contracts and structured settlement
contracts. For universal life contracts, contractholder fund balances
are increased by receipts for mortality coverage, contract
administration, surrender charges and interest accrued where one or
more elements are not fixed or guaranteed. These balances are decreased
by withdrawals, mortality charges and administrative expenses charged
to the contractholder. Interest rates credited to contractholder funds
related to universal life range from 4.1% to 6.5%, with a weighted
average interest rate of 5.7%.
Pension investment and certain annuity contracts do not contain
significant insurance risk and are considered investment type
contracts. Contractholder fund balances are increased by receipts and
credited interest, and reduced by withdrawals and administrative
expenses charged to the contractholder. Interest rates credited to
these investment-type contracts range from 3.0% to 10.0% with a
weighted average interest rate of 5.8%.
GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS
Included in other liabilities is the Company's estimate of its
liability for guaranty fund and other insurance-related assessments.
State guaranty fund assessments are based upon the Company's share of
premiums written or received in one or more years prior to an
insolvency occurring in the industry. Once an insolvency has occurred,
the Company recognizes a liability for such assessments if it is
probable that an assessment will be imposed and the amount of the
assessment can be reasonably estimated. At December 31, 2002 and 2001,
the Company's liability for guaranty fund assessments was not
significant.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company, domiciled in the State of Connecticut, prepares statutory
financial statements in accordance with the accounting practices
prescribed or permitted by the State of Connecticut Insurance
Department. Prescribed statutory accounting practices are those
practices that are incorporated directly or by reference in state laws,
regulations, and general administrative rules applicable to all
insurance enterprises domiciled in a particular state. Permitted
statutory accounting
25
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
practices include practices not prescribed by the domiciliary state,
but allowed by the domiciliary state regulatory authority. The Company
does not have any permitted statutory accounting practices.
PREMIUMS
Premiums are recognized as revenues when due. Premiums for contracts
with a limited number of premium payments, due over a significantly
shorter period than the period over which benefits are provided, are
considered income when due. The portion of premium which is not
required to provide for benefits and expenses is deferred and
recognized in income in a constant relationship to insurance benefits
in force.
FEE INCOME
Fee income is recognized on deferred annuity and universal life
contracts for mortality, administrative and equity protection charges
according to contract due dates. Fee income is recognized on variable
annuity and universal life separate accounts either daily, monthly,
quarterly or annually as per contract terms.
OTHER REVENUES
Other revenues include surrender penalties collected at the time of a
contract surrender, and other miscellaneous charges related to annuity
and universal life contracts recognized when received.
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by
universal life, pension investment and certain deferred annuity
contracts in accordance with contract provisions.
FEDERAL INCOME TAXES
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income
taxes arise from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and
liabilities.
26
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
2. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair values of investments in fixed maturities
were as follows:
GROSS GROSS
DECEMBER 31, 2002 AMORTIZED UNREALIZED UNREALIZED FAIR
($ in thousands) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 423,318 $ 21,809 $ 90 $ 445,037
U.S. Treasury securities and
obligations of U.S. Government and
government agencies and authorities 217,602 5,958 2,115 221,445
Obligations of states and political
subdivisions 49,472 7,170 0 56,642
Debt securities issued by foreign
governments 21,530 2,146 296 23,380
All other corporate bonds 2,932,069 157,225 82,175 3,007,119
All other debt securities 737,215 35,255 10,926 761,544
Redeemable preferred stock 4,595 1,785 1,248 5,132
- ----------------------------------------------------------------------------------------------------------------
Total Available For Sale $ 4,385,801 $ 231,348 $ 96,850 $ 4,520,299
- ----------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2001 AMORTIZED UNREALIZED UNREALIZED FAIR
($ in thousands) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs
and pass-through securities $ 281,583 $ 4,744 $ 3,577 $ 282,750
U.S. Treasury securities and obligations
of U.S. Government and government agencies
and authorities 197,703 2,310 10,883 189,130
Obligations of states and political
subdivisions 44,587 1,903 355 46,135
Debt securities issued by foreign
governments 53,207 2,454 716 54,945
All other corporate bonds 2,112,121 62,649 25,784 2,148,986
All other debt securities 613,451 21,378 10,109 624,720
Redeemable preferred stock 6,090 365 894 5,561
- ----------------------------------------------------------------------------------------------------------------
Total Available For Sale $ 3,308,742 $ 95,803 $ 52,318 $ 3,352,227
- ----------------------------------------------------------------------------------------------------------------
Proceeds from sales of fixed maturities classified as available for
sale were $1.7 billion, $939 million and $844 million in 2002, 2001 and
2000, respectively. Gross gains of $85.6 million, $67.0 million
27
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
and $22.4 million and gross losses of $29.9 million, $22.4 million and
$31.2 million in 2002, 2001 and 2000, respectively, were realized on
those sales. Additional losses of $66.9 million, $11.5 million and $2.9
million were realized due to other-than-temporary losses in value in
2002, 2001 and 2000, respectively. Impairment activity increased
significantly beginning the fourth quarter of 2001 and continued
through 2002. Impairments were concentrated in telecommunication and
energy company investments.
Fair values of investments in fixed maturities are based on quoted
market prices or dealer quotes or, if these are not available,
discounted expected cash flows using market rates commensurate with the
credit quality and maturity of the investment. The fair value of
investments for which a quoted market price or dealer quote is not
available amounted to $840.4 million and $628.2 million at December 31,
2002 and 2001, respectively.
The amortized cost and fair value of fixed maturities available for
sale at December 31, 2002, by contractual maturity, are shown below.
Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
AMORTIZED FAIR
($ in thousands) COST VALUE
- ---------------------------------------------------------------------------------------
MATURITY:
Due in one year or less $ 178,198 $ 180,542
Due after 1 year through 5 years 1,239,752 1,275,526
Due after 5 years through 10 years 1,689,810 1,731,046
Due after 10 years 856,436 888,148
- ---------------------------------------------------------------------------------------
3,964,196 4,075,262
- ---------------------------------------------------------------------------------------
Mortgage-backed securities 423,318 445,037
- ---------------------------------------------------------------------------------------
Total Maturity $ 4,387,514 $ 4,520,229
- ---------------------------------------------------------------------------------------
The Company makes significant investments in collateralized mortgage
obligations (CMOs). CMOs typically have high credit quality, offer good
liquidity, and provide a significant advantage in yield and total
return compared to U.S. Treasury securities. The Company's investment
strategy is to purchase CMO tranches, which are protected against
prepayment risk, including planned amortization class tranches and last
cash flow tranches. Prepayment protected tranches are preferred because
they provide stable cash flows in a variety of interest rate scenarios.
The Company does invest in other types of CMO tranches if an assessment
indicates a favorable risk/return tradeoff. The Company does not
purchase residual interests in CMOs.
At December 31, 2002 and 2001, the Company held CMOs with a fair value
of $265.5 million and $212.5 million, respectively. The Company's CMO
holdings were 33.4% and 49.5% collateralized by GNMA, FNMA or FHLMC
securities at December 31, 2002 and 2001, respectively. In addition,
the Company held $177.8 million and $64.8 million of GNMA, FNMA or
FHLMC mortgage-backed pass-through securities at December 31, 2002 and
2001, respectively. All of these securities are rated AAA.
28
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The Company engages in securities lending whereby certain securities
from its portfolio are loaned to other institutions for short periods
of time. The Company generally receives cash collateral from the
borrower, equal to at least the market value of the loaned securities
plus accrued interest, and reinvests in a short-term investment pool.
See Note 10. The loaned securities remain a recorded asset of the
Company, however, the Company records a liability for the amount of the
cash collateral held, representing its obligation to return the cash
collateral related to these loaned securities, and reports that
liability as part of other liabilities in the consolidated balance
sheet. At December 31, 2002 and 2001, the Company held cash collateral
of $149.0 million and $104.3 million, respectively.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as
follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
($ in thousands) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002
Common stocks $ 2,599 $ 37 $ 699 $ 1,937
Non-redeemable preferred stocks 12,340 394 176 12,558
- ----------------------------------------------------------------------------------------------------------------
Total Equity Securities $ 14,939 $ 431 $ 875 $ 14,495
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
Common stocks $ 2,643 $ 97 $ 671 $ 2,069
Non-redeemable preferred stocks 13,608 439 378 13,669
- ----------------------------------------------------------------------------------------------------------------
Total Equity Securities $ 16,251 $ 536 $ 1,049 $ 15,738
- ----------------------------------------------------------------------------------------------------------------
Proceeds from sales of equity securities were $35.6 million, $6.4
million and $30.8 million in 2002, 2001 and 2000, respectively. Gross
gains and losses on sales and impairments were insignificant.
MORTGAGE LOANS
Underperforming assets include delinquent mortgage loans over 90 days
past due, loans in the process of foreclosure and loans modified at
interest rates below market.
At December 31, 2002 and 2001, the Company's mortgage loan portfolios
consisted of the following:
($ in thousands) 2002 2001
- --------------------------------------------------------------------------------
Current Mortgage Loans $ 130,303 $ 125,131
Underperforming Mortgage Loans 3,775 498
- --------------------------------------------------------------------------------
Total $ 134,078 $ 125,629
- --------------------------------------------------------------------------------
29
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 2002 are
as shown below. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations
with or without prepayment penalties.
($ in thousands)
2003 $ 5,017
2004 8,690
2005 6,380
2006 15,892
2007 6,049
Thereafter 92,050
- --------------------------------------------------------------
Total $ 134,078
==============================================================
CONCENTRATIONS
The Company participates in a short-term investment pool maintained by
TIC. See Note 11.
The Company's industry concentrations of investments (primarily fixed
maturities), excluding those in federal and government agencies, were
as follows at fair value:
($ in thousands) 2002 2001
- ------------------------------------------------------------------
Finance $ 562,179 $ 286,824
Electric Utilities 512,950 447,355
Media 324,008 235,790
Telecommunications 304,171 213,644
Banking 265,442 222,581
- ------------------------------------------------------------------
The Company held investments in foreign banks in the amount of $147
million and $144 million at December 31, 2002 and 2001, respectively,
which are included in the table above. The Company defines its below
investment grade assets as those securities rated Ba1 by Moody's
Investor Services (or its equivalent) or below by external rating
agencies, or the equivalent by internal analysts when a public rating
does not exist. Such assets include publicly traded below investment
grade bonds and certain other privately issued bonds and notes that are
classified as below investment grade. Below investment grade assets
included in the preceding table include $109 million and $38 million in
Electric Utilities, $35 million and $21 million in Media, and $53
million and $5 million in telecommunications at December 31, 2002 and
2001, respectively; and total below investment grade assets were $413.7
million and $182.3 million at December 31, 2002 and 2001, respectively.
30
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Included in mortgage loans were the following group concentrations:
($ in thousands)
At December 31, 2002 2001
- --------------------------------------------------------------------
STATE
California $ 42,169 $ 43,700
New York 22,636 23,129
- --------------------------------------------------------------------
PROPERTY TYPE
Agricultural $ 79,075 $ 66,459
Office 44,094 37,243
- --------------------------------------------------------------------
The Company monitors creditworthiness of counterparties to all
financial instruments by using controls that include credit approvals,
credit limits and other monitoring procedures. Collateral for fixed
maturities often includes pledges of assets, including stock and other
assets, guarantees and letters of credit. The Company's underwriting
standards with respect to new mortgage loans generally require loan to
value ratios of 75% or less at the time of mortgage origination.
RESTRUCTURED INVESTMENTS
Mortgage loan and debt securities which were restructured at below
market terms at December 31, 2002 and 2001 were insignificant. The new
terms of restructured investments typically defer a portion of contract
interest payments to varying future periods. Gross interest income on
restructured assets that would have been recorded in accordance with
the original terms of such assets was insignificant. Interest on these
assets, included in net investment income, was insignificant.
NET INVESTMENT INCOME
FOR THE YEAR ENDED DECEMBER 31,
($ in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $ 276,818 $ 217,813 $ 163,091
Joint ventures and partnerships 25,746 21,481 34,574
Mortgage loans 10,578 11,327 14,776
Other 3,542 3,288 4,398
- -----------------------------------------------------------------------------------------------------------
Total gross investment income 316,684 253,909 216,839
- -----------------------------------------------------------------------------------------------------------
Investment expenses 4,738 2,855 2,665
- -----------------------------------------------------------------------------------------------------------
Net investment income $ 311,946 $ 251,054 $ 214,174
- -----------------------------------------------------------------------------------------------------------
31
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the periods were as follows:
FOR THE YEAR ENDED DECEMBER 31,
($ in thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
REALIZED
Fixed maturities $ (11,185) $ 33,061 $ (11,742)
Joint ventures and partnerships (19,423) (4,980) (1,909)
Mortgage Loans (61) (707) 3,825
Other 85 (1,230) 2,430
- -------------------------------------------------------------------------------------------------------------
Total realized investment gains (losses) $ (30,584) $ 26,144 $ (7,396)
- -------------------------------------------------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are included
as accumulated other changes in equity from nonowner sources in
shareholder's equity were as follows:
FOR THE YEAR ENDED DECEMBER 31,
($ in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
UNREALIZED
Fixed maturities $ 91,013 $ 14,761 $ 78,278
Other invested assets 22,449 (16,182) 3,159
- --------------------------------------------------------------------------------------------------------------
Total unrealized investment gains (losses) 113,462 (1,421) 81,437
Related taxes 39,712 (497) 28,503
- --------------------------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) 73,750 (924) 52,934
Balance beginning of year 12,698 13,622 (39,312)
- --------------------------------------------------------------------------------------------------------------
Balance end of year $ 86,448 $ 12,698 $ 13,622
- --------------------------------------------------------------------------------------------------------------
3. REINSURANCE
The Company uses reinsurance in order to limit losses, minimize
exposure to large risks, provide additional capacity for future growth
and to effect business-sharing arrangements. Reinsurance is
accomplished through various plans of reinsurance, primarily yearly
renewable term coinsurance and modified coinsurance. The Company
remains primarily liable as the direct insurer on all risks reinsured.
Since 1997 universal life business has been reinsured under an 80%/20%
quota share reinsurance program and term life business has been
reinsured under a 90%/10% quota share reinsurance program. Maximum
retention of $2.5 million for universal life, and in excess of $25.0
million for term insurance is generally reached on policies in excess
of $12.5 million. For other plans of insurance, it is the policy of the
Company to obtain reinsurance for amounts above certain retention
limits on individual life policies, which limits vary with age and
underwriting classification. Generally, the maximum retention on an
ordinary life risk is $2.5 million.
32
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Total life insurance in-force ceded under reinsurance contracts was
$29.3 billion and $23.8 billion at December 31, 2002 and 2001,
including $6.0 million and $8.8 million, respectively to TIC. Total
life insurance premiums ceded were $14.9 million, $11.9 million and
$8.9 million in 2002, 2001 and 2000, respectively. Ceded premiums paid
to TIC were immaterial for these same periods.
The Company also reinsures the guaranteed minimum death benefit (GMDB)
on its variable annuity product. Total variable annuity account
balances with GMDB is $7.1 billion, of which $4.9 billion or 69% is
reinsured at December 31, 2002. GMDB is payable upon the death of a
contractholder. When the benefit payable is greater than the account
value of the variable annuity, the difference is called the net amount
at risk (NAR). NAR totals $2.2 billion at December 31, 2002, of which
$1.9 billion or 86% is reinsured. During 2002, substantially all new
contracts written were not reinsured.
4. DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE
The Company has two intangible, amortizable assets, DAC and the value
of insurance in force. A summary of DAC follows:
Traditional Deferred
($ in millions) Life Annuity UL Total
- -----------------------------------------------------------------------
Beginning balance
December 31, 2000 $ 36.8 $ 384.4 $ 158.3 $ 579.5
Commissions and expenses
deferred 18.4 202.9 103.0 324.3
Amortization expense (7.5) (75.8) (6.1) (89.4)
- -----------------------------------------------------------------------
Balance December 31, 2001 47.7 511.5 255.2 814.4
Commissions and expenses
deferred 16.5 169.4 130.8 316.7
Amortization expense (8.9) (48.8) (9.3) (67.0)
- -----------------------------------------------------------------------
Balance December 31, 2002 $ 55.3 $ 632.1 $ 376.7 $ 1,064.1
- -----------------------------------------------------------------------
The value of insurance in force totaled $12.5 million and $13.4 million
at December 31, 2002 and 2001, respectively, and was reported in other
assets. Amortization expense of value of insurance in force was
insignificant for 2002 and 2001.
5. DEPOSIT FUNDS AND RESERVES
At December 31, 2002 and 2001, the Company had $5.0 billion and $3.7
billion of life and annuity deposit funds and reserves, respectively.
Of that total, $1.6 billion and $1.5 billion, respectively, were not
subject to discretionary withdrawal based on contract terms. The
remaining amounts were life and annuity products that were subject to
discretionary withdrawal by the contractholders. Included in the
amounts that are subject to discretionary withdrawal were $2.4 billion
and $1.6 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $.9 billion and $.6
billion of life insurance and individual annuity liabilities which are
subject to discretionary withdrawals with an average surrender charge
of 4.2% and 4.9%, respectively. In the payout stage these funds are
credited at significantly reduced credited rates. The remaining $.1
billion in 2002 is surrenderable without charge. The life insurance
risks would have to be underwritten again if transferred to another
carrier, which is considered a significant deterrent for
33
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
long-term policyholders. Insurance liabilities that are surrendered or
withdrawn from the Company are reduced by outstanding policy loans and
related accrued interest prior to payout.
6. FEDERAL INCOME TAXES
The net deferred tax liabilities at December 31, 2002 and 2001 were
comprised of the tax effects of temporary differences related to the
following assets and liabilities:
($ in thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 151,454 $ 180,468
Other 2,286 1,904
- --------------------------------------------------------------------------------------------------------------
Total 153,740 182,372
- --------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Investments, net (48,363) (19,938)
Deferred acquisition costs and value of insurance in force (303,652) (231,454)
Other (1,075) (1,071)
- --------------------------------------------------------------------------------------------------------------
Total (353,090) (252,463)
- --------------------------------------------------------------------------------------------------------------
Net Deferred Tax Liability $(199,350) $ (70,091)
- --------------------------------------------------------------------------------------------------------------
TIC and its subsidiaries, including the Company, file a consolidated
federal income tax return with Citigroup Inc. Federal income taxes are
allocated to each member of the consolidated group, according to the
Tax Sharing Agreement, on a separate return basis adjusted for credits
and other amounts required by the Agreement.
At December 31, 2002 and 2001, the Company had no ordinary or capital
loss carryforwards.
The policyholders' surplus account, which arose under prior tax law, is
generally that portion of the gain from operations that has not been
subjected to tax, plus certain deductions. The balance of this account
is approximately $2.1 million. Income taxes are not provided for on
this amount because under current U.S. tax rules such taxes will become
payable only to the extent such amounts are distributed as a dividend
or exceed limits prescribed by federal law. Distributions are not
contemplated from this account. At current rates the maximum amount of
such tax would be approximately $700 thousand.
7. SHAREHOLDER'S EQUITY
SHAREHOLDER'S EQUITY AND DIVIDEND AVAILABILITY
The Company's statutory net loss was $133.9 million, $73.4 million and
$66.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
Statutory capital and surplus was $397 million and $407 million at
December 31, 2002 and 2001, respectively.
34
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Effective January 1, 2001, the Company began preparing its statutory
basis financial statements in accordance with the National Association
of Insurance Commissioners' Accounting Practices and Procedures Manual
- version effective January 1, 2001, subject to any deviations
prescribed or permitted by its domicilary insurance commissioner (see
Note 1, Summary of Significant Accounting Policies, Permitted Statutory
Accounting Practices). The impact of this change on statutory capital
and surplus was not significant.
The Company is currently subject to various regulatory restrictions
that limit the maximum amount of dividends available to be paid to its
parent without prior approval of insurance regulatory authorities. The
Company does not have surplus available to pay dividends to TIC in 2003
without prior approval of the State of Connecticut Insurance
Department.
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX
Changes in each component of Accumulated Other Changes in Equity from Nonowner
Sources were as follows:
NET ACCUMULATED
UNREALIZED OTHER CHANGES
GAIN (LOSS) ON DERIVATIVE IN EQUITY FROM
INVESTMENT INSTRUMENTS & NONOWNER
($ in thousands) SECURITIES HEDGING ACTIVITIES SOURCES
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ (39,312) $ - $ (39,312)
Unrealized gains on investment securities,
net of tax of $25,914 48,127 - 48,127
Reclassification adjustment for losses
included in net income, net of tax of $2,589 4,807 - 4,807
- -----------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 52,934 - 52,934
- -----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 13,622 - 13,622
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of tax of $33 - 62 62
Unrealized gains on investment securities,
net of tax of $8,653 16,070 - 16,070
Reclassification adjustment for gains
included in net income, net of tax of $(9,150) (16,994) - (16,994)
Derivative instrument hedging activity gains, net of tax
of $1,789 - 3,324 3,324
- -----------------------------------------------------------------------------------------------------------------
PERIOD CHANGE (924) 3,386 2,462
- -----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 12,698 3,386 16,084
Unrealized gains on investment securities,
net of tax of $29,008 53,871 - 53,871
Reclassification adjustment for losses
included in net income, net of tax of $10,704 19,879 - 19,879
Derivative instrument hedging activity gains, net of tax
of $2,750 - 5,107 5,107
- -----------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 73,750 5,107 78,857
- -----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ 86,448 $ 8,493 $ 94,941
=================================================================================================================
35
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
8. BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company participates in a qualified, noncontributory defined
benefit pension plan, a non-qualified pension plan and other
postretirement benefits to retired employees through plans sponsored by
Citigroup. The Company's share of net expense for these plans was not
significant for 2002, 2001 and 2000.
401(k) SAVINGS PLAN
Substantially all of the Company's employees are eligible to
participate in a 401(k) savings plan sponsored by Citigroup. See Note
11. The Company's expenses in connection with the 401(k) savings plan
were not significant in 2002, 2001 and 2000.
9. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures, interest rate swaps, options and forward contracts, as a means
of hedging exposure to foreign currency, equity price changes and/or
interest rate risk on anticipated transactions or existing assets and
liabilities. The Company does not hold or issue derivative instruments
for trading purposes.
The Company uses exchange traded financial futures contracts to manage
its exposure to changes in interest rates that arise from the sale of
certain insurance and investment products, or the need to reinvest
proceeds from the sale or maturity of investments. To hedge against
adverse changes in interest rates, the Company enters long or short
positions in financial futures contracts, which offset asset price
changes resulting from changes in market interest rates until an
investment is purchased, or a product is sold. Futures contracts are
commitments to buy or sell at a future date a financial instrument, at
a contracted price, and may be settled in cash or through delivery.
The Company uses equity option contracts to manage its exposure to
changes in equity market prices that arise from the sale of certain
insurance products. To hedge against adverse changes in the equity
market prices, the Company enters long positions in equity option
contracts with major financial institutions. These contracts allow the
Company, for a fee, the right to receive a payment if the Standard and
Poor's 500 Index falls below agreed upon strike prices.
The Company enters into interest rate swaps in connection with other
financial instruments to provide greater risk diversification and
better match assets and liabilities. Under interest rate swaps, the
Company agrees with other parties to exchange, at specified intervals,
the difference between fixed rate and floating rate interest amounts
calculated by reference to an agreed notional principal amount.
Generally, no cash is exchanged at the outset of the contract and no
principal payments are made by either party. A single net payment is
usually made by one counterparty at each due date.
36
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Forward contracts are used on an ongoing basis to hedge the Company's
exposure to foreign currency exchange rates that result from the net
investment in the Company's direct foreign currency investments. To
hedge against adverse changes in exchange rates, the Company enters
contracts to exchange foreign currency for U.S. Dollars with major
financial institutions. These contracts cannot be settled prior to
maturity. At the maturity date the Company must purchase the foreign
currency necessary to settle the contracts.
The Company monitors creditworthiness of counterparties to these
financial instruments by using criteria of acceptable risk that are
consistent with on-balance-sheet financial instruments. The controls
include credit approvals, limits and other monitoring procedures.
The following table summarizes certain information related to the
Company's hedging activities for the years ended December 31, 2002 and
2001:
Year Ended Year Ended
($in millions) December 31, 2002 December 31, 2001
- ---------------------------------------------------------------------------------
Hedge ineffectiveness recognized
related to fair value hedges $ (5.2) $ 1.9
Hedge ineffectiveness recognized
related to cash flow hedges 1.1 (.4)
During the year ended December 31, 2002 the Company recorded a gain of
$.3 million from discontinued forecasted transactions. During the year
ended December 31, 2001 there were no discontinued forecasted
transactions.
Cash flow transaction amounts expected to be reclassified from
accumulated other changes in equity from nonowner sources into pre-tax
earnings within twelve months from December 31, 2002 is not
significant.
In 2000, these derivative financial instruments were treated as
off-balance sheet instruments. Financial instruments with off-balance
sheet risk involve, to varying degrees, elements of credit and market
risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of these instruments reflect the extent of
involvement the Company has in a particular class of financial
instrument. However, the maximum loss of cash flow associated with
these instruments can be less than these amounts. For swaps, options
and forward contracts, credit risk is limited to the amount that it
would cost the Company to replace the contacts. Financial futures
contracts and purchased listed option contracts have very little credit
risk since organized exchanges are the counterparties.
The Company had interest rate and equity options, net of intercompany
balances, with fair values of $161.7 million and $67.4 million, at
December 31, 2002 and 2001, respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company issues fixed and variable
rate loan commitments and has unfunded commitments to partnerships and
joint ventures. All of these commitments are to unaffiliated entities.
The notional values of loan commitments at December 31, 2002 and 2001
were $23.9 million and $0 respectively. The notional values of unfunded
commitments were $35.5 million and $43.8 million at December 31, 2002
and 2001, respectively.
37
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS
The Company uses various financial instruments in the normal course of
its business. Fair values of financial instruments that are considered
insurance contracts are not required to be disclosed and are not
included in the amounts discussed.
At December 31, 2002, investments in fixed maturities had a carrying
value and a fair value of $4.5 billion compared with a carrying value
and a fair value of $3.4 billion at December 31, 2001. See Notes 1 and
2.
At December 31, 2002, mortgage loans had a carrying value of $134.1
million and a fair value of $148.0 million and at December 31, 2001 had
a carrying value of $125.6 million and a fair value of $131.6 million.
In estimating fair value, the Company used interest rates reflecting
the current real estate financing market.
The carrying values of short-term securities were $475.4 million and
$206.8 million in 2002 and 2001, respectively, which approximated their
fair values. Policy loans which are included in other invested assets
had carrying values of $27.4 million and $16.3 million in 2002 and
2001, respectively, which also approximated their fair values.
The carrying values of $151.5 million and $133.7 million of financial
instruments classified as other assets approximated their fair values
at December 31, 2002 and 2001, respectively. The carrying values of
$319.8 million and $208.1 million of financial instruments classified
as other liabilities also approximated their fair values at December
31, 2002 and 2001, respectively. Fair value is determined using various
methods, including discounted cash flows, as appropriate for the
various financial instruments.
At December 31, 2002, contractholder funds with defined maturities had
a carrying value of $2.7 billion and a fair value of $2.9 billion,
compared with a carrying value of $1.9 billion and a fair value of $1.9
billion at December 31, 2001. The fair value of these contracts is
determined by discounting expected cash flows at an interest rate
commensurate with the Company's credit risk and the expected timing of
cash flows. Contractholder funds without defined maturities had a
carrying value of $1.1 billion and a fair value of $926 million at
December 31, 2002, compared with a carrying value of $806 million and a
fair value of $675 million at December 31, 2001. These contracts
generally are valued at surrender value.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
In the ordinary course of business, the Company is a defendant or
co-defendant in various litigation matters incidental to and typical of
the businesses in which it is engaged. In the opinion of the Company's
management, the ultimate resolution of these legal proceedings would
not be likely to have a material adverse effect on the Company's
results of operations, financial condition or liquidity.
38
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
11. RELATED PARTY TRANSACTIONS
TIC handles banking functions, including payment of salaries and
expenses for the Company and some of its non-insurance affiliates. In
addition, Citigroup and certain of its subsidiaries provide investment
management and accounting services, data processing services, benefit
management and administration, property management and investment
technology services to the Company as of December 31, 2002. At December
31, 2001 the majority of these services were provided by either
Citigroup and its subsidiaries or TPC. Charges for these services are
shared by the Company and TIC on cost allocation methods, based
generally on estimated usage by department and were insignificant in
2002, 2001 and 2000.
TIC maintains a short-term investment pool in which the Company
participates. The position of each company participating in the pool is
calculated and adjusted daily. At December 31, 2002 and 2001, the pool
totaled approximately $4.2 billion and $5.6 billion, respectively. The
Company's share of the pool amounted to $356.0 million and $90.6
million at December 31, 2002 and 2001, respectively, and is included in
short-term securities in the balance sheet.
At December 31, 2002 and 2001, the Company had investments in Tribeca
Citigroup Investments Ltd., an affiliate of the Company, in the amounts
of $26.7 million and $34.0 million, respectively. Income of $1.9
million, $4.5 million and $7.2 million was earned on these investments
in 2002, 2001 and 2000, respectively. The Company also had investments
in an affiliated joint venture, Tishman Speyer, in the amount of $24.1
million and $40.1 million at December 31, 2002 and 2001, respectively.
Income of $19.8 million, $8.5 million and $6.8 million was earned on
these investments in 2002, 2001 and 2000, respectively.
In the ordinary course of business, the Company purchases and sells
securities through affiliated broker-dealers. These transactions are
conducted on an arm's length basis.
At December 31, 2002 and 2001 the Company had outstanding loaned
securities to SSB in the amount of $10.2 million and $6.5 million,
respectively.
The Company has other affiliated investments. The individual investment
with any one affiliate was insignificant at December 31, 2002 and 2001.
The Company's Travelers Target Maturity (TTM) Modified Guaranteed
Annuity Contracts are subject to a limited guarantee agreement by TIC
in a principal amount of up to $450 million. TIC's obligation is to pay
in full to any owner or beneficiary of the TTM Modified Guaranteed
Annuity Contracts principal and interest as and when due under the
annuity contract to the extent that the Company fails to make such
payment. In addition, TIC guarantees that the Company will maintain a
minimum statutory capital and surplus level.
The Company sold structured settlement annuities to its former property
casualty insurance affiliates. Policy reserves and contractholder fund
liabilities associated with these structured settlements were $607
million at December 31, 2001.
The Company distributes fixed and variable annuity products through its
affiliate, Salomon Smith Barney (SSB). Premiums and deposits related to
these products were $.8 billion, $1.2 billion and $1.6 billion in 2002,
2001 and 2000, respectively. The Company also markets term and
universal life products through SSB. Premiums related to such products
were $87.2 million, $74.5 million and $59.3 million in 2002, 2001 and
2000, respectively.
39
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The Company also distributes deferred annuity products through its
affiliates Primerica Financial Services (PFS), CitiStreet Retirement
Services and Citibank, N.A. (Citibank). Deposits received from PFS were
$662 million, $738 million and $844 million in 2002, 2001 and 2000,
respectively. Deposits from Citibank and CitiStreet Retirement Services
were $117 million and $184 million respectively for 2002, $166 million
and $136 million, respectively, for 2001, and $131 million and $220
million, respectively, for 2000.
The Company participates in a stock option plan sponsored by Citigroup
that provides for the granting of stock options in Citigroup common
stock to officers and other employees. To further encourage employee
stock ownership, Citigroup introduced the WealthBuilder stock option
program during 1997 and the Citigroup Ownership Program in 2001. Under
these programs, all employees meeting established requirements have
been granted Citigroup stock options. During 2000 and 2001, Citigroup
introduced the Citigroup 2000 Stock Purchase Plan and Citigroup 2001
Stock Purchase Program for new employees, which allowed eligible
employees of Citigroup, including the Company's employees, to enter
into fixed subscription agreements to purchase shares at the market
value on the date of the agreements. Enrolled employees are permitted
to make one purchase prior to the expiration date. The Company's charge
to income was insignificant in 2002, 2001 and 2000.
Prior to the IPO of TPC, most leasing functions for TIC and its
subsidiaries, including the Company, were handled by its property
casualty insurance subsidiaries. Rent expense related to these leases
was shared by the companies on a cost allocation method based generally
on estimated usage by department. In 2002, TIC sold its home office
buildings in Hartford, Connecticut and now leases space from a third
party. The Company's rent expense was insignificant in 2002, 2001 and
2000.
12. RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES
The following table reconciles net income to net cash used in operating
activities:
FOR THE YEAR ENDED DECEMBER 31,
($ in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 103,370 $ 115,160 $ 90,905
Adjustments to reconcile net income to cash used in
operating activities:
Realized (gains) losses 30,584 (26,144) 7,396
Deferred federal income taxes 86,797 80,096 36,748
Amortization of deferred policy acquisition costs 66,972 89,475 68,254
Additions to deferred policy acquisition costs (316,721) (324,277) (297,733)
Investment income accrued (35,133) (39,875) (27,812)
Insurance reserves (9,000) (14,382) (18,487)
Other 72,190 11,398 (675)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operations $ (941) $ (108,549) $ (141,404)
- ------------------------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c)
under the Exchange Act) as of a date within 90 days prior to the filing
date of this annual report (the Evaluation Date). Based on such
evaluation, such officers have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to the
Company required to be included in the Company's reports filed or
submitted under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
Since the Evaluation Date, there have not been any significant changes
in the Company's internal controls or in other factors that could
significantly affect such controls.
41
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) Documents filed:
(1) Financial Statements. See index on page 12 of this report.
(2) Financial Statement Schedules. See index on page 48 of this
report.
(3) Exhibits. See Exhibit Index on page 43.
(b) Reports on Form 8-K:
None.
42
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ---------- -----------
3. Articles of Incorporation and By-Laws
a.) Charter of The Travelers Life and Annuity Company (the
"Company"), as amended on April 10, 1990, incorporated
herein by reference to Exhibit 6(a) to the Registration
Statement on Form N-4, File No. 33-58131, filed on March
17, 1995.
b.) By-laws of the Company as amended October 20, 1994,
incorporated herein by reference to Exhibit 6(b) to
the Registration Statement on Form N-4, File No.
33-58131, filed on March 17, 1995.
14.01* Citigroup Code of Ethics for Financial Professionals.
99.01* Certification Pursuant to 18 U.S.C. Section 1350.
- --------------------------------------------------------------------------------
*Filed herewith
43
THE TRAVELERS LIFE AND ANNUITY COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on the 21st day of March,
2003.
THE TRAVELERS LIFE AND ANNUITY COMPANY
(Registrant)
By: /s/ Glenn D. Lammey
--------------------------------------------
Glenn D. Lammey
Executive Vice President,
Chief Financial Officer and Chief Accounting Officer
(Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on the 21st day of March, 2003.
SIGNATURE CAPACITY
- --------- --------
/s/ George C. Kokulis Director, Chief Executive Officer
- -------------------------------- (Principal Executive Officer)
(George C. Kokulis)
/s/ Glenn D. Lammey Director, Chief Financial Officer and Chief Accounting Officer
- ------------------- (Principal Financial Officer and Principal Accounting Officer)
(Glenn D. Lammey)
/s/ Kathleen Lynch Preston Director
- --------------------------
(Kathleen Lynch Preston)
/s/ Marla Berman Lewitus Director
- ------------------------
(Marla Berman Lewitus)
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities pursuant to
Section 12 of the Act: NONE
No Annual Report to Security Holders covering the registrant's last fiscal year
or proxy material with respect to any meeting of security holders has been sent,
or will be sent, to security holders.
CERTIFICATIONS
I, Glenn D. Lammey, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of The Travelers Life
and Annuity Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
44
THE TRAVELERS LIFE AND ANNUITY COMPANY
CERTIFICATIONS
(continued)
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date March 21, 2003 /s/ Glenn D. Lammey
---------------------------------------------------------
Glenn D. Lammey
Executive Vice President,
Chief Financial Officer and Chief Accounting Officer
(Principal Financial Officer/Principal Accounting Officer)
45
THE TRAVELERS LIFE AND ANNUITY COMPANY
CERTIFICATIONS
(continued)
I, George C. Kokulis, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of The Travelers Life
and Annuity Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
46
THE TRAVELERS LIFE AND ANNUITY COMPANY
CERTIFICATIONS
(continued)
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date March 21, 2003 /s/ George C. Kokulis
-------------------------------
George C. Kokulis
Chief Executive Officer
47
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
----
The Travelers Life and Annuity Company
Independent Auditors' Report *
Statements of Income *
Balance Sheets *
Statements of Changes in Shareholder's Equity *
Statements of Cash Flows *
Notes to Financial Statements *
Independent Auditors' Report 49
Schedule I - Summary of Investments - Other than Investments in Related Parties 2002 50
Schedule III - Supplementary Insurance Information 2000-2002 51
Schedule IV - Reinsurance 2000-2002 52
All other schedules are inapplicable for this filing.
* See index on page 12.
48
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Life and Annuity Company:
Under date of January 21, 2003, we reported on the balance sheets of The
Travelers Life and Annuity Company as of December 31, 2002 and 2001, and the
related statements of income, changes in shareholder's equity and cash flows
for each of the years in the three-year period ended December 31, 2002, which
are included in this Form 10-K. In connection with our audits of the
aforementioned financial statements, we also audited the related financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for goodwill and other intangible assets in 2002, and its
methods of accounting for derivative instruments and hedging activities and for
securitized financial assets in 2001.
/s/ KPMG LLP
Hartford, Connecticut
January 21, 2003
49
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2002
($ in thousands)
AMOUNT SHOWN IN
TYPE OF INVESTMENT COST VALUE BALANCE SHEET(1)
- ----------------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and authorities $ 470,768 $ 486,651 $ 486,651
States, municipalities and political subdivisions 49,472 56,642 56,642
Foreign governments 21,530 23,380 23,380
Public utilities 425,661 398,706 398,706
Convertible bonds and bonds with warrants attached 30,170 31,063 31,063
All other corporate bonds 3,381,892 3,518,725 3,518,725
- --------------------------------------------------------------------------------------------------------------------
Total Bonds 4,379,493 4,515,167 4,515,167
Redeemable Preferred Stocks 4,595 5,132 5,132
- --------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 4,384,088 4,520,299 4,520,299
- --------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Industrial, miscellaneous and all other 2,599 1,937 1,937
- --------------------------------------------------------------------------------------------------------------------
Total Common Stocks 2,599 1,937 1,937
Non-Redeemable Preferred Stocks 12,340 12,558 12,558
- --------------------------------------------------------------------------------------------------------------------
Total Equity Securities 14,939 14,495 14,495
- --------------------------------------------------------------------------------------------------------------------
Mortgage Loans 134,078 134,078
Policy Loans 27,491 27,491
Short-Term Securities 475,365 475,365
Other Investments (2) (3) 303,621 302,996
- --------------------------------------------------------------------------------------------------------------------
Total Investments $ 5,339,582 $ 5,474,724
====================================================================================================================
(1) Determined in accordance with methods described in Notes 1 and 2 of Notes to
Financial Statements.
(2) Excludes cost and carrying value of investments in related parties of
$53,106 and $54,129, respectively.
(3) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
50
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
2000-2002
($ in thousands)
FUTURE POLICY BENEFITS,
DEFERRED POLICY BENEFITS, LOSSES, CLAIMS, LOSSES
ACQUISITION CLAIMS AND LOSS PREMIUM NET INVESTMENT AND SETTLEMENT AMORTIZATION OF DEFERRED
COSTS EXPENSES(1) REVENUE INCOME EXPENSES(2) POLICY ACQUISITION COSTS
- -----------------------------------------------------------------------------------------------------------------------------------
2002 $ 1,064,118 $ 5,031,775 $ 42,893 $ 311,946 $ 275,123 $ 66,972
2001 $ 814,369 $ 3,665,426 $ 39,222 $ 251,054 $ 214,722 $ 89,475
2000 $ 579,567 $ 2,621,187 $ 33,941 $ 214,174 $ 155,982 $ 68,254
OTHER
OPERATING PREMIUMS
EXPENSES WRITTEN
- ----------------------------------------
2002 $ 32,352 $ 42,893
2001 $ 23,404 $ 39,222
2000 $ 14,095 $ 33,941
(1) Includes contractholder funds.
(2) Includes interest credited on contractholder funds.
51
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE IV
REINSURANCE
($ in thousands)
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED TO
GROSS AMOUNT COMPANIES COMPANIES AMOUNT NET
- ----------------------------------------------------------------------------------------------------------------------------
2002
Life Insurance In Force $ 35,807,212 $ 29,261,075 $ - $ 6,546,137 -%
Premiums:
Annuity $ 4,515 $ - $ - $ 4,515
Individual life 53,310 14,932 - 38,378
------------ ------------ ---------- -----------
Total Premiums $ 57,825 $ 14,932 $ - $ 42,893 -%
============ ============ ========== ===========
2001
Life Insurance In Force $ 28,793,622 $ 23,818,768 $ - $ 4,974,854 -%
Premiums:
Annuity $ 3,319 $ - $ - $ 3,319
Individual Life 47,826 11,923 - 35,903
------------ ------------ ---------- -----------
Total Premiums $ 51,145 $ 11,923 $ - $ 39,222 -%
============ ============ ========== ===========
2000
Life Insurance In Force $ 21,637,160 $ 17,355,206 $ - $ 4,281,954 -%
Premiums:
Annuity $ 6,034 $ - $ - $ 6,034
Individual life 36,770 8,863 - 27,907
------------ ------------ ---------- -----------
Total Premiums $ 42,804 $ 8,863 $ - $ 33,941 -%
============ ============ ========== ===========
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