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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of the date hereof, there were outstanding 30,000 shares of common stock, par
value $100 per share, of the registrant, all of which 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 H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
THE TRAVELERS LIFE AND ANNUITY COMPANY
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Statements of Income for the six
months ended June 30, 2003 and 2002 (unaudited)............................................................. 3
Condensed Balance Sheets as of June 30, 2003 and
December 31, 2002 (unaudited)............................................................................... 4
Condensed Statements of Changes in Shareholder's Equity
for the six months ended June 30, 2003 and 2002 (unaudited)................................................. 5
Condensed Statements of Cash Flows for the
six months ended June 30, 2003 and 2002 (unaudited)......................................................... 6
Notes to Condensed Financial Statements (unaudited)......................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................... 10
ITEM 4. CONTROLS AND PROCEDURES............................................................................. 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................... 15
Signatures.................................................................................................. 16
Exhibit 31.01............................................................................................... 17
Exhibit 31.02............................................................................................... 18
Exhibit 32.01............................................................................................... 19
2
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
($ in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- -----------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES
Premiums $ 9,425 $ 10,556 $ 20,744 $ 20,823
Net investment income 83,209 76,151 166,764 143,370
Realized investment losses (3,243) (19,699) (6,627) (15,636)
Fee income 56,463 50,398 107,657 100,563
Other revenues 4,975 5,186 10,516 9,322
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 150,829 122,592 299,054 258,442
- -----------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 21,263 21,410 43,786 46,790
Interest credited to contractholders 53,597 42,933 105,052 82,126
Amortization of deferred acquisition costs 33,759 22,295 65,508 13,675
General and administrative expenses 7,544 6,173 14,976 13,181
- -----------------------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 116,163 92,811 229,322 155,772
- -----------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes 34,666 29,781 69,732 102,670
Federal income taxes 9,461 10,422 15,572 35,961
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 25,205 $ 19,359 $ 54,160 $ 66,709
=============================================================================================================================
See Notes to Condensed Financial Statements.
3
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED BALANCE SHEETS
(UNAUDITED)
($ in thousands)
JUNE 30, 2003 DECEMBER 31, 2002
- -----------------------------------------------------------------------------------------------------
ASSETS
Investments (including $134,151 and $144,284 subject to
securities lending agreements) $ 6,215,717 $ 5,528,853
Separate and variable accounts 7,875,447 6,862,009
Deferred acquisition costs 1,134,945 1,064,118
Other assets 285,471 239,194
- -----------------------------------------------------------------------------------------------------
Total Assets $ 15,511,580 $ 13,694,174
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Future policy benefits and claims $ 1,142,741 $ 1,145,692
Contractholder funds 4,204,413 3,886,083
Separate and variable accounts 7,875,447 6,862,009
Deferred income taxes 265,952 199,350
Other liabilities 628,797 441,249
- -----------------------------------------------------------------------------------------------------
Total Liabilities 14,117,350 12,534,383
- -----------------------------------------------------------------------------------------------------
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 698,694 644,534
Accumulated other changes in equity from nonowner sources 275,220 94,941
- -----------------------------------------------------------------------------------------------------
Total Shareholder's Equity 1,394,230 1,159,791
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $ 15,511,580 $ 13,694,174
=====================================================================================================
See Notes to Condensed Financial Statements.
4
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
($ in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 3,000 $ 3,000 $ 3,000 $ 3,000
Changes in common stock - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 3,000 $ 3,000 $ 3,000 $ 3,000
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
- -----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 417,316 $ 417,316 $ 417,316 $ 417,316
Changes in additional paid-in capital - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 417,316 $ 417,316 $ 417,316 $ 417,316
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
- -----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 673,489 $ 588,514 $ 644,534 $ 541,164
Net income 25,205 19,359 54,160 66,709
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 698,694 $ 607,873 $ 698,694 $ 607,873
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- -----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 147,179 $ (21,942) $ 94,941 $ 16,084
Unrealized gains (losses), net of tax 125,864 16,848 177,304 (19,824)
Derivative instrument hedging activity gains,
net of tax 2,177 3,462 2,975 2,108
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 275,220 $ (1,632) $ 275,220 $ (1,632)
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 25,205 $ 19,359 $ 54,160 $ 66,709
Other changes in equity from nonowner sources 128,041 20,310 180,279 (17,716)
- -----------------------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 153,246 $ 39,669 $ 234,439 $ 48,993
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY
Balance, beginning of period $ 1,240,984 $ 986,888 $ 1,159,791 $ 977,564
Changes in equity from nonowner sources 153,246 39,669 234,439 48,993
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,394,230 $ 1,026,557 $ 1,394,230 $ 1,026,557
=============================================================================================================================
See Notes to Condensed Financial Statements.
5
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
($ in thousands)
SIX MONTHS ENDED
JUNE 30,
2003 2002
- ------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES $ (59,650) $ (88,223)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 236,662 112,820
Mortgage loans 4,358 13,189
Proceeds from sales of investments
Fixed maturities 566,208 917,057
Equity securities 6,382 1,044
Real Estate 794 -
Purchases of investments
Fixed maturities (1,185,131) (1,627,293)
Equity securities (3,017) (346)
Mortgage loans (23,789) (21,758)
Policy loans, net (2,201) (987)
Short-term securities sales, net 14,301 17,496
Other investment purchases, net (34,434) (9,312)
Securities transactions in course of settlement, net 146,794 68,232
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (273,073) (529,858)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 446,932 748,540
Contractholder fund withdrawals (128,602) (119,245)
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 318,330 629,295
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (14,393) 11,214
Cash at beginning of period 15,424 19,514
- ------------------------------------------------------------------------------------------------------
Cash at end of period $ 1,031 $ 30,728
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 91,987 $ 19,347
======================================================================================================
See Notes to Condensed Financial Statements.
6
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. 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). 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 condensed financial statements and
accompanying footnotes of the Company are prepared in conformity with
accounting principles generally accepted in the United States of
America (GAAP) and are unaudited. 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.
In the opinion of management, the interim financial statements reflect
all adjustments necessary (all of which were normal recurring
adjustments) for a fair presentation of results for the periods
reported. The accompanying condensed financial statements should be
read in conjunction with the financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. The condensed balance sheet as of December 31, 2002
was derived from the audited balance sheet included in the Form 10-K.
Certain financial information that is normally included in annual
financial statements prepared in accordance with GAAP, but is not
required for interim reporting purposes, has been condensed or omitted.
Certain prior year amounts have been reclassified to conform to the
2003 presentation.
2. ACCOUNTING STANDARDS
CHANGES IN ACCOUNTING PRINCIPLES
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
On January 1, 2003, the Company adopted the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) 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. The adoption of this
change in accounting principle did not have an impact on 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,
"Accounting for Stock-Based Compensation" (FAS 123), prospectively for
all awards granted, modified, or settled after January 1, 2003. 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.
7
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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 Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", the alternative method of
accounting, an offsetting increase to stockholder's equity under FAS
123 is recorded equal to the amount of compensation expense charged.
The adoption of FAS 123 did not have a significant impact on the
Company's financial statements.
ACCOUNTING STANDARDS NOT YET ADOPTED
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 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 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.
The Company has investments in entities that may be considered to be
variable interests. The carrying value of these investments is
approximately $158 million at June 30, 2003 and primarily consists of
interests in security investment funds in the amount of $79 million,
real estate investment funds of $21 million, and below investment grade
asset-backed and mortgage-backed securities and equity investments of
$58 million. 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. The Company continues to evaluate the impact
of applying FIN 46 to entities acquired before February 1, 2003;
however, at this time, it is anticipated that the effect on the
Company's consolidated balance sheets is not expected to be
significant. No entities were created between February 1, 2003 and June
30, 2003 that would require application of FIN 46.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" (FAS 149). FAS
149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for
8
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In particular, this Statement
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative and when a
derivative contains a financing component that warrants special
reporting in the statement of cash flows. This Statement is generally
effective for contracts entered into or modified after June 30, 2003
and is not expected to have a material impact on the Company's
financial statements.
ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS
In July 2003, Statement of Position 03-01 "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" (SOP 03-01) was released. SOP
03-01 provides guidance on accounting and reporting by insurance
enterprises for separate account presentation, accounting for an
insurer's interest in a separate account, transfers to a separate
account, valuation of certain liabilities, contracts with death or
other benefit features, contracts that provide annuitization benefits,
and sales inducements to contract holders. SOP 03-01 is effective for
financial statements for fiscal years beginning after December 15,
2003. The Company is currently evaluating the impact that SOP 03-01
will have on its financial statements.
3. INVESTMENTS
The Company participates in dollar roll repurchase transactions as a
way to generate investment income. These transactions involve the sale
of mortgage-backed securities with the agreement to repurchase
substantially the same securities from the same counterparty. Cash is
received from the sale, which is invested in the Company's short-term
money market pool. The cash is returned at the end of the roll period
when the mortgage-backed securities are repurchased. The Company will
generate additional investment income based upon the difference between
the sale and repurchase prices.
This transaction is recorded as a securitized borrowing. The
mortgage-backed securities remain recorded as assets. The cash proceeds
are reflected in short-term investments and a liability is established
to reflect the Company's obligation to repurchase the securities at the
end of the roll period. This liability is classified as other
liabilities in the condensed balance sheets and was $148.1 million and
$.5 million at June 30, 2003 and December 31, 2002, respectively.
4. SHAREHOLDER'S EQUITY
Statutory capital and surplus of the Company was $397 million at
December 31, 2002. The Company is currently subject to various
regulatory restrictions that limit the maximum amount of dividends
available to be paid to its parent without prior approval of insurance
regulatory authorities. The Company does not have surplus available to
pay dividends to TIC in 2003 without prior approval of the State of
Connecticut Insurance Department.
5. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is a defendant or
co-defendant in various litigation matters incidental to and typical of
the businesses in which it is engaged. In the opinion of the Company's
management, the ultimate resolution of these legal proceedings would
not be likely to have a material adverse effect on the Company's
results of operations, financial condition or liquidity.
9
THE TRAVELERS LIFE AND ANNUITY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction H(2)(a) of Form 10-Q.
The Company's Annual Report on Form 10-K, its quarterly reports on Form 10-Q and
any current reports on Form 8-K, and all amendments to these reports are
available on the Citigroup website at http://www.citigroup.com by selecting the
"Investor Relations" page and selecting "SEC Filings".
RESULTS OF OPERATIONS ($ in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenues $ 150.8 $ 122.6 $ 299.1 $ 258.4
Provisions for benefits and interest credited 74.9 64.3 148.9 128.9
Operating expenses 41.2 28.5 80.5 26.8
---------- ---------- ---------- ----------
Income before taxes 34.7 29.8 69.7 102.7
Income taxes 9.5 10.4 15.5 36.0
---------- ---------- ---------- ----------
Net income 25.2 19.4 54.2 66.7
Less: realized investment losses, after-tax 2.1 12.8 4.3 10.2
---------- ---------- ---------- ----------
Net income before realized investment
gains/(losses) (1) $ 27.3 $ 32.2 $ 58.5 $ 76.9
---------- ---------- ---------- ----------
- ------------------------------------------
(1) Net income before realized investment gains/(losses) is a non-GAAP measure.
The Company believes that this presentation of income, which management uses
internally to measure performance, is useful to investors because it
enhances the understanding of ongoing operations and the underlying trends
of the business. The timing of realized insurance investment portfolio gains
and losses can be significantly impacted by both discretionary and other
economic factors and therefore management believes it is important to
understand the impact of realized gains and losses in order to evaluate
current operating trends.
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). 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, Primerica Financial Services, 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., also affiliates of the
Company.
The Company'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. This statement is a
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 13.
10
THE TRAVELERS LIFE AND ANNUITY COMPANY
Net income for the second quarter 2003 was $25.2 million, up $5.8 million or
29.9% over the prior year quarter, and was $54.2 million for the six months
ended June 30, 2003, compared to $66.7 million in the same 2002 period. The
quarterly increase was primarily related to lower net-after-tax realized
investment losses, and a tax benefit related to an adjustment to the Dividends
Received Deduction (DRD) in 2003. Net income included realized investment losses
of $2.1 million and $12.8 million, for the three months ended June 30, 2003 and
2002, respectively, and included $4.3 million and $10.2 million for the six
months ended June 30, 2003 and 2002,respectively. The decreases in realized
losses were primarily the result of $19.9 million of after-tax impairments to
WorldCom Inc. investments during the 2002 second quarter. The DRD benefits of
$2.3 million and $8.8 million for the quarter and six months ended June 30, 2003
resulted in a 27% and 22% effective tax rate for the current year quarter and
six month period, respectively, compared to 35% in the prior year quarter and
six month period.
Net income before realized investment gains/(losses) was $27.3 million and $32.2
million for the second quarter, and was $58.5 million and $76.9 million for the
six months ended June 30, 2003 and 2002, respectively. These decreases were
driven by lower fixed income investment yields and higher amortization of
deferred acquisition costs (DAC), partially offset by increased business
volumes.
Revenue increases for both the quarter and six-month periods over prior year
were driven by net investment income (NII), which was $83.2 million in the
second quarter of 2003 compared to $76.2 million in the second quarter of 2002.
NII also increased $23.4 million or 16.3% to $166.8 million for the six months
ended June 30, 2003. The increases were due to a larger invested asset base
created from higher business volumes and favorable equity investment returns,
which were partially offset by investment yield deterioration in 2003 which
continued from already depressed 2002 levels. Fixed maturities returns suffered
from the lower rate environment and credit issues.
Insurance benefits and interest credited grew 16.5% to $74.9 million in the
second quarter of 2003, compared to $64.3 million in the prior year period. This
increase was primarily related to the volume growth in individual annuity and
universal life contractholder funds. The insurance benefits and interest
credited were also 15.5% higher for the six-month periods ended June 30, 2003
versus June 30, 2002.
Operating expenses increased in the three months ended June 30, 2003 over the
same period in 2002 due primarily to an $11.5 million increase in the
amortization of DAC. This DAC increase was the result of a higher amortization
rate implemented in fourth quarter 2002 resulting from the decrease in market
value of individual annuity account balances. Operating expenses were up 199.7%
for the six-month periods ended June 30, 2003 over June 30, 2002. This increase
was primarily related to the amortization of DAC, which was $65.5 million in
2003 versus $13.7 million in 2002. This DAC increase was related to the higher
amortization rate and a one-time $29.8 million reduction to DAC amortization in
the individual annuity business resulting from changes in underlying lapse and
interest rate assumptions during the first quarter of 2002.
The following table shows net written premiums and deposits by product line for
the quarters and six months ended June 30, 2003 and 2002. The majority of the
annuity business and a substantial portion of the life business written by the
Company are accounted for as investment contracts, such that the premiums are
considered deposits and are not included in revenues.
11
THE TRAVELERS LIFE AND ANNUITY COMPANY
PREMIUMS AND DEPOSITS ($ in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
------- -------- ------ -------
Premiums
Individual Life $ 9 $ 10 $ 19 $ 19
Other Annuity 1 1 2 2
------- -------- ------ -------
Total Premiums 10 11 21 21
------- -------- ------ -------
Deposits (1)
Individual Annuity 519 767 902 1,517
Individual Life 124 107 211 213
Other Annuity 1 1 2 2
------- -------- ------ -------
Total Deposits $ 644 $ 875 $1,115 $ 1,732
------- -------- ------ -------
(1) Represents an operating statistic used for measuring business volumes,
which management of the Company uses to manage the life insurance and
annuities operations, and may not be comparable to similarly captioned
measurements used by other life insurance companies.
Individual annuity deposits decreased 32% and 41% in the 2003 second quarter and
six month period, respectively, compared to the second quarter and six months of
2002. The decrease was driven by a decline in fixed annuity sales due to
competitive pressures and variable annuity sales due to current equity market
conditions. Individual annuity account balances were $11 billion and $10 billion
at June 30, 2003 and 2002, respectively. The increase over prior year June 30,
is reflective of good in-force policy retention.
The individual life deposits of $124 million increased $17 million in the second
quarter of 2003 over the prior year period, reflecting higher single premium
sales. These second quarter 2003 sales were offset by lower first quarter 2003
production creating level six-month results. Life insurance in force was $39
billion at June 30, 2003, up from $36 billion at December 31, 2002.
INSURANCE REGULATIONS
Risk-based capital requirements are used as minimum capital requirements by the
National Association of Insurance Commissioners (NAIC) and the states to
identify companies that merit further regulatory action. At December 31, 2002,
the Company had total adjusted capital in excess of amounts requiring any
regulatory action as defined by the NAIC.
The Company is 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 in the state of domicile. The Company does not
have surplus available to pay dividends to its parent in 2003 without prior
approval of the State of Connecticut Insurance Department. The Company did not
pay any dividends to its parent during the six months ended June 30, 2003 and
2002.
12
THE TRAVELERS LIFE AND ANNUITY COMPANY
OTHER DEVELOPMENTS
On May 28, 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 was
enacted into law. This act makes various changes in individual tax rates. Most
significantly, the legislation extends the 15% maximum capital gains tax rate to
corporate dividends received by individuals, including dividends received by
mutual funds and passed through to mutual fund shareholders. The legislation
also lowers the capital gains tax rate and accelerates the individual income tax
rate reductions enacted in 2001. These changes could have a negative impact on
the demand for life and annuity products. This statement is a forward-looking
statement within the meaning of the Private Securities Litigation Reform Act.
See "Forward-Looking Statements" on this page.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 2 of Notes to Condensed 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.
13
THE TRAVELERS LIFE AND ANNUITY COMPANY
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended ("Exchange Act")) as of the end of the period covered by this report.
Based on such evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
14
THE TRAVELERS LIFE AND ANNUITY COMPANY
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ---------- -----------
3.01 Charter of The Travelers Life and Annuity Company (the "Company"),
as amended on April 10, 1990, incorporated herein by reference to
Exhibit 6(a) to the Registration Statement on Form N-4, File No.
33-58131, filed on March 17, 1995.
3.02 By-laws of the Company, as amended on 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.
31.01+ Certification of chief financial officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.02+ Certification of chief executive officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.01+ Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K.
None.
- -------------------------------
+Filed herewith
15
THE TRAVELERS LIFE AND ANNUITY COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TRAVELERS LIFE AND ANNUITY COMPANY
--------------------------------------
(Registrant)
Date August 14, 2003 /s/ Glenn D. Lammey
----------------------------------------------
Glenn D. Lammey
Executive Vice President,
Chief Financial Officer and Chief
Accounting Officer
(Principal Financial Officer and Principal
Accounting Officer)
16