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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, 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
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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....................................................................... 5
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.............................. 11
8. Financial Statements and Supplementary Data............................................. 13
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 46
9A. Controls and Procedures................................................................. 46
PART III
10. Directors and Executive Officers of the Registrant...................................... 47
11. Executive Compensation.................................................................. 47
12. Security Ownership of Certain Beneficial Owners and Management.......................... 47
13. Certain Relationships and Related Transactions.......................................... 47
14. Principal Accountant Fees and Services.................................................. 47
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 49
Exhibit Index........................................................................... 50
Signatures ............................................................................. 51
Index to Financial Statements and Financial Statement Schedules......................... 52
Exhibit 31.01........................................................................... 57
Exhibit 31.02........................................................................... 58
Exhibit 32.01........................................................................... 59
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. TIC has a license from TPC to use the names "Travelers Life &
Annuity," "The Travelers Insurance Company," "The Travelers Life and Annuity
Company" and related names in connection with the Company's business.
The 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 individual annuity and life insurance products to individuals
and small businesses. Among the range of individual annuity products offered are
deferred fixed and variable annuities and payout annuities. Individual life
insurance products include term, universal and variable life insurance. These
products are distributed primarily through Smith Barney (SB), a division of
Citigroup Global Markets Inc., and Primerica Financial Services (PFS), both
affiliates of the Company. Individual annuity sales by SB accounted for 32% of
total individual annuity sales in 2003 and 2002. Sales by PFS accounted for 29%
and 26% in 2003 and 2002, respectively. In addition, the Company distributes
these products through CitiStreet Retirement Services, a division of CitiStreet
LLC, (CitiStreet) and Citibank, N.A. (Citibank), also affiliates of the Company,
a nationwide network of independent agents and the outside broker-dealer
channel.
In the past, the Company offered group pension close-out business. The Company
no longer actively markets this product and all new sales are reported in TIC.
Periodically, premiums are collected from the business that remains on the
books. Reserves related to this block of business remain recorded in the
Company's balance sheets.
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. The assets,
liabilities and earnings related to the structured settlements are classified
consistently with general account assets, liabilities and earnings. 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.
2
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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".
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 "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. No regulatory
action has been taken by any state insurance department or the NAIC with respect
to IRIS ratios of the Company during the years ended December 31, 2003 and 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
3
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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 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, 2003, 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), reduced by 25% of the change in net unrealized
capital gains, as determined in accordance with statutory accounting practices.
In accordance with the Connecticut statute, after reducing the Company's
unassigned funds (surplus) by 25% of the change in net unrealized capital gains,
the Company may not pay dividends during 2004 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 and can be found on the Citigroup
website by selecting the "Corporate Governance" page.
ITEM 2. PROPERTIES.
The Company's executive offices are located in Hartford, Connecticut. The
Company and TIC moved their executive offices to One Cityplace, Hartford,
Connecticut, during the first quarter of 2003. The Company and TIC occupy
373,000 square feet at this location under an operating lease (in which TIC is
the lessee) that runs through October 31, 2008.
At December 31, 2002 TIC leased approximately 284,000 square feet from TPC at
One Tower Square, Hartford, Connecticut under a lease that ran through March 31,
2003. The Company also occupied this space leased by TIC and was allocated
expense according to cost sharing agreements. Management believes that these
facilities are suitable and adequate for the Company's current needs.
The preceding discussion does not include information on investment properties.
4
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
ITEM 3. LEGAL PROCEEDINGS.
In 2003, several issues in the mutual fund and variable insurance product
industries have come under the scrutiny of federal and state regulators. Like
many other companies in our industry, the Company has received a request for
information from the Securities and Exchange Commission (SEC) and a subpoena
from the New York Attorney General regarding market timing and late trading. In
March 2004 the SEC requested additional information about the Company's variable
product operations on market timing, late trading and revenue sharing. The
Company is cooperating fully with all of these reviews and is not able to
predict their outcomes.
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 statement is a forward-looking statement within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 10.
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, 2003. 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 2003 or 2002. 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.
CRITICAL ACCOUNTING POLICIES
The Notes to Financial Statements contain a summary of the Company's significant
accounting policies, including a discussion of recently issued accounting
pronouncements. Certain of these policies 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, some of which may relate to
matters that are inherently uncertain, which are discussed below.
5
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life, universal life (UL) and deferred 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 deferred acquisition
costs varies by product type based upon three different accounting
pronouncements: Statement of Financial Accounting Standards (SFAS) No. 60,
"Accounting and Reporting by Insurance Enterprises" (SFAS 60), SFAS No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long Duration
Contracts and for Realized Gains and Losses from the Sale of Investments" (SFAS
97).
DAC for deferred annuities, both fixed and variable, is amortized employing a
level effective yield methodology per SFAS 91 as indicated by AICPA Practice
Bulletin 8. An amortization rate is developed using the outstanding DAC balance
and projected account balances. This rate 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 at least annually, and changes in
underlying lapse and interest rate assumptions are to be treated
retrospectively. Variances in expected equity market returns versus actual
returns are treated prospectively and 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 UL is amortized in relation to estimated gross profits from surrender
charges, investment, mortality, and expense margins per SFAS 97. Actual profits
can vary from management's estimates, resulting in increases or decreases in the
rate of amortization. Re-estimates of gross profits, performed at least
annually, 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 and other
products, is amortized in relation to anticipated premiums per SFAS 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.
All DAC is reviewed, at least annually, 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.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life products. 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 2.07% to 7.85%
for these annuity products with a weighted average interest rate of 6.6%,
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
6
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
actuarial assumptions as to mortality, persistency and interest, established at
policy issue and 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. Interest
assumptions applicable to traditional life products range from 3.0% to 7.0%,
with a weighted average of 5.8%.
INVESTMENTS IN FIXED MATURITIES
Fixed maturities, which comprise 88% and 82% of total investments at December
31, 2003 and 2002, respectively, include bonds, notes and redeemable preferred
stocks. Fixed maturities, including financial 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 quoted market prices are not
available, discounted expected cash flows using market rates commensurate with
the credit quality and maturity of the investment are used to determine fair
value. Changes in the assumptions could affect the fair values of investments of
fixed maturities. Impairments are realized when investment losses in value are
deemed other-than-temporary. The Company conducts a rigorous review each quarter
to identify and evaluate investments that have possible indications of
impairment. An investment in a debt or equity security is impaired if its fair
value falls below its cost and the decline is considered other-than-temporary.
Factors considered in determining whether a loss is temporary include the length
of time and extent to which fair value has been below cost; the financial
condition and near-term prospects of the issuer; and the Company's ability and
intent to hold the investment for a period of time sufficient to allow for any
anticipated recovery. Changing economic conditions - global, regional, or
related to specific issuers or industries - could result in other-than-temporary
losses.
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 revenue when due.
The portion of premium which is not required to provide for benefits and
expenses is deferred and recognized in revenues in a constant relationship to
insurance benefits in force.
RESULTS OF OPERATIONS ($ in millions)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002
- ------------------------------- ------- -------
Revenues $ 646.3 $ 533.5
Benefits and interest credited 306.7 275.1
Operating expenses 185.6 99.4
------- -------
Income before taxes 154.0 159.0
Income taxes 34.6 55.6
------- -------
Net income $ 119.4 $ 103.4
======= =======
Net income was $119.4 million for the year ended December 31, 2003, compared to
$103.4 million for the year ended December 31, 2002. This 15% increase resulted
from lower realized investment
7
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
losses, higher business volumes and favorable income taxes, partially offset by
an 87% increase in operating expenses, due to an increase in amortization of DAC
and lower fixed income yields. Net income included net realized investment
losses of $4.7 million and $19.9 million for the years ended December 31, 2003
and 2002, respectively. This decrease was primarily the result of the absence of
prior-year impairments on WorldCom Inc. investments of $12.9 million. A tax
benefit related to an adjustment to the Dividends Received Deduction in 2003 of
$13.1 million for the year ended December 31, 2003 contributed to a 22.5%
effective tax rate for the year compared to 35% in the prior year period.
Revenues increased 21% in 2003 over prior year. This increase was driven by net
investment income (NII) and fee income. NII was $356.5 million in 2003 compared
to $311.9 million in 2002. This increase was primarily due to a larger invested
asset base created from higher business volumes. Fee income in the individual
annuity and individual life product lines together increased $47.7 million, or
25%, in the current year compared to that of 2002, reflecting increased business
volumes from in-force policy retention related to lower surrender rates,
positive net sales and variable annuity equity market growth.
Insurance benefits and interest credited were 11.5% higher in 2003 versus 2002,
primarily related to the volume growth in individual annuity and universal life
contractholder funds. Operating expenses in 2003 were up $86.2 million, or 87%,
over the prior year due to an increase in the amortization of DAC, which was
$136.3 million in 2003 versus $67.0 million in 2002 and other expenses related
to business volume.
The amortization of capitalized DAC is a significant component of the Company's
expenses. The Company's recording of DAC amortization varies based upon product
type. DAC for deferred annuities, both fixed and variable employs a level yield
methodology. DAC for UL is amortized in relation to estimated gross profits,
with traditional life, including term insurance and other products, amortized in
relation to anticipated premiums.
The following is a summary of capitalized DAC by type:
Traditional Deferred
($ in millions) Life Annuity UL Total
- ----------------------------------- ------------ ----------- ----------- -----------
Beginning balance
January 1, 2002 $ 47.7 $ 511.5 $ 255.2 $ 814.4
Commissions and expenses deferred 16.5 169.4 130.8 316.7
Amortization expense (8.9) (72.6) (9.3) (90.8)
Underlying lapse and interest rate
assumptions - 29.8 - 29.8
Amortization related to SFAS 91
reassessment - (6.0) - (6.0)
------------ ----------- ----------- -----------
Balance December 31, 2002 55.3 632.1 376.7 1,064.1
Commissions and expenses deferred 14.3 172.1 164.9 351.3
Amortization expense (10.2) (107.6) (18.5) (136.3)
------------ ----------- ----------- -----------
Balance December 31, 2003 $ 59.4 $ 696.6 $ 523.1 $ 1,279.1
------------ ----------- ----------- -----------
DAC capitalization increased 11% in 2003 versus 2002. The 2003 growth was driven
by a 26% increase in universal life capitalization related to a significant
increase in production. During the first quarter of 2002 there was a one-time
decrease in deferred annuity DAC amortization of $29.8 million due to changes in
underlying lapse and interest rate assumptions. These adjustments are to be
treated
8
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
retrospectively as per SFAS 91 by adjusting the DAC asset through amortization
expense and employing the new assumptions prospectively. In the fourth quarter
of 2002, the Company increased its deferred annuity DAC amortization by $6.0
million due to a significant decline in its individual annuities account
balances and benefit reserves, largely resulting from decreases in the stock
market which caused account balances to decline. In contrast to lapse and
interest rate assumptions, variances in expected versus actual market returns
are treated prospectively, resulting in a new amortization pattern over the
remaining estimated life of the business. The new amortization pattern is the
primary reason for the increase in deferred annuity DAC amortization in 2003
over 2002.
The following table shows net written premiums and deposits by product line for
the years ended December 31, 2003 and 2002. The majority of the annuity business
and a substantial portion of the life business written by the Company are
accounted for as investment contracts, with the result that the deposits
collected are reported as liabilities and are not included in revenues. Deposits
represent a statistic used for measuring business volumes, which management of
the Company uses to manage the life insurance and annuities operations, and may
not be comparable to similarly captioned measurements used by other life
insurance companies.
PREMIUMS AND DEPOSITS ($ in millions)
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
- -------------------------------- ------- --------
Premiums
Individual Life $ 37 $ 38
Other Annuity 4 5
------- --------
Total Premiums $ 41 $ 43
------- --------
Deposits
Individual Annuity - Fixed $ 606 $ 1,244
Individual Annuity - Variable 1,581 1,343
Individual Life 599 433
Other Annuity 4 4
------- --------
Total Deposits $ 2,790 $ 3,024
------- --------
Individual annuity deposits collected for the year ended December 31, 2003
decreased 15% from the prior year primarily driven by a 51% decline in fixed
annuity sales due to competitive pressures and current market perception of
fixed rate products. This decrease was offset by an increase in variable annuity
sales which improved as equity market conditions improved. Individual annuity
account balances were $13.0 billion and $10.0 billion at December 31, 2003 and
2002, respectively. This increase is reflective of market appreciation over the
past year and in-force retention related to lower surrender rates and positive
net sales.
The 38% increase in individual life deposits for the twelve months ended
December 31, 2003 versus 2002 was the result of record universal life production
in the third and fourth quarters of 2003. Life insurance in force was $44
billion at December 31, 2003, up from $36 billion at December 31, 2002.
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.
9
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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, retirement and estate planning products sold through
established distribution channels.
However, competition in both product pricing and customer service is
intensifying. There has been consolidation within the industry, and among other
financial services organizations that 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 annuity
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. Federal and state regulators have focused on, and
continue to devote substantial attention to, the mutual fund and variable
insurance product industries. As a result of publicity relating to widespread
perceptions of industry abuses, there have been numerous proposals for
legislative and regulatory reforms, including mutual fund governance, new
disclosure requirements concerning mutual fund share classes, commission
breakpoints, revenue sharing, advisory fees, market timing, late trading,
portfolio pricing, annuity products, hedge funds, and other issues. It is
difficult to predict at this time whether changes resulting from new laws and
regulations will affect the industries or the Company's businesses, and, if so,
to what degree.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Financial Statements for Future Application of Accounting
Standards.
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,"
10
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
"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, regulatory matters, the
resolution of legal proceedings, the impact that the adoption of recent
legislation may have on the demand for life and annuity products, the potential
impact of a decline in credit quality of investments on earnings; the Company's
market risk and the discussions of the Company's prospects under "Outlook" on
page 9.
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, 2003.
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.
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,
2002. 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
11
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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, 2003 and 2002. The sensitivity analysis model used by the Company produces a
loss in fair value of interest rate sensitive invested assets of approximately
$299 million and $262 million based on a 100 basis point increase in interest
rates as of December 31, 2003 and 2002, 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 $254 million and $242 million based
on a 100 basis point increase in interest rates as of December 31, 2003 and
2002, 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, 2003 and 2002 is not
material.
12
THE TRAVELERS LIFE AND ANNUITY COMPANY
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report...................................... 14
Financial Statements:
Statements of Income for the years ended
December 31, 2003, 2002 and 2001.............................. 15
Balance Sheets as of December 31, 2003 and 2002............... 16
Statements of Changes in Shareholder's Equity for the years
ended December 31, 2003, 2002 and 2001........................ 17
Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.............................. 18
Notes to Financial Statements................................. 19
13
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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
2003, 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 intangible assets in 2002 and for
derivative instruments and hedging activities and for securitized financial
assets in 2001.
/s/KPMG LLP
Hartford, Connecticut
February 26, 2004
14
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF INCOME
($ in thousands)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
- ------------------------------------------------------------ --------- --------- ---------
REVENUES
Premiums $ 40,866 $ 42,893 $ 39,222
Net investment income 356,463 311,946 251,054
Realized investment gains (losses) (7,202) (30,584) 26,144
Fee income 237,366 189,686 173,113
Other revenues 18,834 19,530 14,317
--------- --------- ---------
Total Revenues 646,327 533,471 503,850
--------- --------- ---------
BENEFITS AND EXPENSES
Current and future insurance benefits 89,729 94,513 88,842
Interest credited to contractholders 216,952 180,610 125,880
Amortization of deferred acquisition costs 136,310 66,972 89,475
General and administrative expenses 49,288 32,352 23,404
--------- --------- ---------
Total Benefits and Expenses 492,279 374,447 327,601
--------- --------- ---------
Income before federal income taxes and cumulative effect
of change in accounting principle 154,048 159,024 176,249
--------- --------- ---------
Federal income taxes
Current 73,423 (31,143) (19,007)
Deferred (38,835) 86,797 80,096
--------- --------- ---------
Total Federal Income Taxes 34,588 55,654 61,089
--------- --------- ---------
Income before cumulative effect of change in accounting
principle 119,460 103,370 115,160
Cumulative effect of change in accounting for
derivative instruments and hedging activities, net of tax - - (62)
--------- --------- ---------
Net Income $ 119,460 $ 103,370 $ 115,098
========= ========= =========
See Notes to Financial Statements.
15
THE TRAVELERS LIFE AND ANNUITY COMPANY
BALANCE SHEETS
($ in thousands)
AT DECEMBER 31, 2003 2002
- -------------------------------------------------------------------------- ----------- -----------
ASSETS
Fixed maturities, available for sale at fair value (including $130,895 and
$144,284 subject to securities lending agreements) (cost $5,033,778
and $4,385,801) $ 5,357,225 $ 4,520,299
Equity securities, at fair value (cost $8,253 and $14,939) 8,307 14,495
Mortgage loans 135,347 134,078
Short-term securities 195,279 475,365
Other invested assets 392,638 384,616
----------- -----------
Total Investments 6,088,796 5,528,853
----------- -----------
Separate and variable accounts 9,690,455 6,862,009
Deferred acquisition costs 1,279,118 1,064,118
Premiums and fees receivable 67,272 59,636
Other assets 312,546 179,558
----------- -----------
Total Assets $17,438,187 $13,694,174
----------- -----------
LIABILITIES
Future policy benefits and claims $ 1,097,704 $ 1,145,692
Contractholder funds 4,511,813 3,886,083
Separate and variable accounts 9,690,455 6,862,009
Deferred federal income taxes 224,821 199,350
Other liabilities 514,718 441,249
----------- -----------
Total Liabilities 16,039,511 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 763,994 644,534
Accumulated other changes in equity from nonowner sources 214,366 94,941
----------- -----------
Total Shareholder's Equity 1,398,676 1,159,791
----------- -----------
Total Liabilities and Shareholder's Equity $17,438,187 $13,694,174
=========== ===========
See Notes to Financial Statements.
16
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
($ in thousands)
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
COMMON STOCK 2003 2002 2001
- ------------------------------------------------------------ ------------ ------------ ------------
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 $ 417,316
Capital contributed by parent - - -
------------ ------------ ------------
Balance, end of year $ 417,316 $ 417,316 $ 417,316
============ ============ ============
RETAINED EARNINGS
Balance, beginning of year $ 644,534 $ 541,164 $ 426,066
Net income 119,460 103,370 115,098
------------ ------------ ------------
Balance, end of year $ 763,994 $ 644,534 $ 541,164
============ ============ ============
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
Balance, beginning of year $ 94,941 $ 16,084 $ 13,622
Cumulative effect of change in accounting principle for
derivative instruments and hedging activities, net of tax - - 62
Unrealized gains (losses), net of tax 120,993 73,750 (924)
Derivative instrument hedging activity gains (losses),
net of tax (1,568) 5,107 3,324
------------ ------------ ------------
Balance, end of year $ 214,366 $ 94,941 $ 16,084
============ ============ ============
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
Net income $ 119,460 $ 103,370 $ 115,098
Other changes in equity from nonowner sources 119,425 78,857 2,462
------------ ------------ ------------
Total changes in equity from nonowner sources $ 238,885 $ 182,227 $ 117,560
============ ============ ============
TOTAL SHAREHOLDER'S EQUITY
Balance, beginning of year $ 1,159,791 $ 977,564 $ 860,004
Changes in total shareholder's equity 238,885 182,227 117,560
------------ ------------ ------------
Balance, end of year $ 1,398,676 $ 1,159,791 $ 977,564
============ ============ ============
See Notes to Financial Statements.
17
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ in thousands)
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001
- ---------------------------------------------------------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 43,903 $ 43,490 $ 37,915
Net investment income received 319,629 276,813 211,179
Fee and other income received 265,410 238,970 211,885
Benefits and claims paid (105,867) (103,513) (103,224)
Interest paid to contractholders (216,952) (180,610) (125,880)
Operating expenses paid (437,335) (343,932) (354,506)
Income taxes (paid) received (134,927) 88,888 45,257
Other 41,239 (21,047) (31,175)
------------ ------------ ------------
Net Cash Used in Operating Activities (224,900) (941) (108,549)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 519,960 255,009 97,712
Mortgage loans 22,628 36,193 20,941
Proceeds from sales of investments
Fixed maturities 1,657,663 1,689,931 938,987
Equity securities 7,769 35,556 6,363
Real estate held for sale 794 - (36)
Purchases of investments
Fixed maturities (2,823,940) (3,018,069) (2,022,618)
Equity securities (3,506) (35,735) (2,274)
Mortgage loans (27,456) (44,632) (14,494)
Policy loans, net 665 (11,201) (3,395)
Short-term securities (purchases) sales, net 280,086 (268,606) 40,618
Other investment (purchases) sales, net (45,906) (20,915) (6,334)
Securities transactions in course of settlement, net (3,561) 117,806 64,698
------------ ------------ ------------
Net Cash Used in Investing Activities (414,804) (1,264,663) (879,832)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 913,546 1,486,056 1,178,421
Contractholder fund withdrawals (287,816) (224,542) (185,464)
------------ ------------ ------------
Net Cash Provided by Financing Activities 625,730 1,261,514 992,957
------------ ------------ ------------
Net increase (decrease) in cash (13,974) (4,090) 4,576
Cash at beginning of year 15,424 19,514 14,938
------------ ------------ ------------
Cash at December 31, $ 1,450 $ 15,424 $ 19,514
============ ============ ============
See Notes to Financial Statements.
18
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), a diversified global
financial services holding company whose businesses provide a broad
range of financial services to consumer and corporate customers around
the world. 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 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. TIC has a license from TPC to use the names
"Travelers Life & Annuity," "The Travelers Insurance Company," "The
Travelers Life and Annuity Company" and related names in connection
with the Company's business.
The 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
2003 presentation.
ACCOUNTING CHANGES
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board (FASB)
released FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 changes the method of determining
whether certain entities, including securitization 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 Statement of Financial
Accounting Standards (SFAS) No. 94, "Consolidation of All
Majority-Owned Subsidiaries" (SFAS 94). A VIE is consolidated by its
primary beneficiary,
19
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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.
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
are 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. In October 2003, the FASB announced that the
effective date of FIN 46 was deferred from July 1, 2003 to periods ending after
December 15, 2003 for VIEs created prior to February 1, 2003. The Company
elected to implement the provisions of FIN 46 in the 2003 third quarter. Based
upon the implementation guidance, the Company is not considered a primary
beneficiary of any VIEs, thus no consolidations were required due to the
implementation of FIN 46 on July 1, 2003. The Company does, however, hold a
significant interest in other VIEs, none of which were material to the Company's
financial statements.
The implementation of FIN 46 encompassed a review of numerous entities to
determine the impact of adoption and considerable judgment was used in
evaluating whether or not a VIE should be consolidated. The FASB continues to
provide additional guidance on implementing FIN 46 through FASB Staff Positions.
In December 2003, the FASB released a revision of FIN 46 (FIN 46-R or the
interpretation), which includes substantial changes from the original. The
calculation of expected losses and expected residual returns have both been
altered to reduce the impact of decision maker and guarantor fees in the
calculation of expected residual returns and expected losses. In addition, FIN
46-R changes the definition of a variable interest. The interpretation permits
adoption of either the original or the revised versions of FIN 46 until the
first quarter of 2004, at which time FIN 46-R must be adopted. For 2003
year-end, the Company's financial statements are in accordance with the
original.
The Company is evaluating the impact of applying FIN 46-R to existing VIEs in
which it has variable interests and has not yet completed this analysis. At this
time, it is anticipated that the effect on the Company's balance sheet will be
immaterial. As the Company continues to evaluate the impact of applying FIN
46-R, entities may be identified that would need to be consolidated.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for 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 did not have an impact on the
Company's financial statements.
20
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 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, SFAS
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 SFAS 146 did not have an
impact on the Company's financial statements.
STOCK-BASED COMPENSATION
The Company and its employees participate in stock option plans of Citigroup. On
January 1, 2003, the Company adopted the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 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
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure", issued in December 2002.
SFAS 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 shareholder's equity
under SFAS 123 is recorded equal to the amount of compensation expense charged.
The adoption of SFAS 123 did not have a significant impact on the Company's
financial statements.
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations" (SFAS 141) and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 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.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other
21
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the consolidated balance sheet and measure those instruments at
fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a recognized asset or liability or of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation. The cumulative effect of adopting SFAS 133 was an
after-tax charge of $62 thousand included in net income and an after-tax benefit
of $62 thousand included in accumulated other changes in equity from nonowner
sources.
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND RETAINED
BENEFICIAL INTEREST IN SECURITIZED FINANCIAL ASSETS
In April 2001, the Company adopted the FASB Emerging Issues Task Force (EITF)
99-20, "Recognition of Interest Income and Impairment of Purchased and Retained
Beneficial Interests in Securitized Financial Assets" (EITF 99-20). EITF 99-20
establishes guidance on the recognition and measurement of interest income and
impairment on certain investments, e.g., certain asset-backed securities.
Interest income on a beneficial interest falling within the scope of EITF 99-20
is to be recognized prospectively. The adoption of EITF 99-20 had no effect on
the Company's financial statements.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
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 adoption of SOP 03-01
will not have a material impact on the Company's financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB released a revision of FIN 46 (FIN 46-R). See
"Consolidation of Variable Interest Entities" in the "Accounting Changes"
section of this Note for a discussion of FIN 46-R.
22
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 financial 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
determine 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 a rigorous review each quarter to
identify and evaluate investments that have possible indications of impairment.
An investment in a debt or equity security is impaired if its fair value falls
below its cost and the decline is considered other-than-temporary. Factors
considered in determining whether a loss is temporary include the length of time
and extent to which fair value has been below cost; the financial condition and
near-term prospects of the issuer; and the Company's ability and intent to hold
the investment for a period of time sufficient to allow for any anticipated
recovery. Changing economic conditions - global, regional, or related to
specific issuers or industries - could result in other-than-temporary losses.
Also included in fixed maturities are loan-backed and structured securities
(including beneficial interests in securitized financial assets). Beneficial
interests in securitized financial assets that are rated "A" and below are
accounted for under the prospective method in accordance with EITF 99-20. Under
the prospective method of accounting, the investment's effective yield and
impairment for other-than-temporary losses in value are based upon projected
future cash flows. All other loan-backed and structured securities are amortized
using the retrospective method. The effective yield used to determine
amortization is calculated based upon actual historical and projected future
cash flows.
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 trading securities, 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
23
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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.
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 are 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, the ineffective portion of the changes in fair value is 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.
The effectiveness of these hedging relationships is evaluated on a retrospective
and prospective basis using quantitative measures of correlation. If a hedge
relationship is found to be ineffective, it no longer qualifies as a hedge and
any gains or losses attributable to such ineffectiveness as well as subsequent
changes in fair value are recognized in realized investment gains and losses.
For those fair value and cash flow 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
24
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
remain in the accumulated other changes in equity from nonowner sources in
shareholder's equity 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, the accumulated changes in fair value of the end-user
derivative recorded in shareholder's equity are immediately reflected in
realized investment gains and losses.
The Company enters into derivative contracts that are economic hedges but do not
qualify or are not designated as hedges for accounting purposes. These
derivatives are carried at fair value, with changes in value reflected in
realized investment gains and losses.
Financial Instruments with embedded derivatives
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 risks of the host contract, the entire instrument
would not otherwise be remeasured at fair value and a separate instrument with
the same terms of the embedded instrument would meet the definition of a
derivative under SFAS 133.
The Company 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 investment gains and losses.
Derivatives embedded in convertible debt securities are classified in the
consolidated balance sheet as fixed maturity securities, consistent with the
host instruments.
The Company markets certain investment contracts that have embedded derivatives,
primarily variable annuity contracts with put options. These embedded
derivatives are carried at fair value with changes in value reflected in
realized investment gains and losses. Derivatives embedded in variable annuity
contracts are classified in the consolidated balance sheet as future policy
benefits and claims.
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 losses exist. Changing economic conditions - global,
regional, or related to specific issuers or industries - could result in
other-than-temporary losses. 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.
25
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 (UL) and deferred 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
type based upon three different accounting pronouncements: SFAS No. 60,
"Accounting and Reporting by Insurance Enterprises" (SFAS 60), SFAS No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long Duration
Contracts and for Realized Gains and Losses from the Sale of Investments" (SFAS
97).
DAC for deferred annuities, both fixed and variable, is amortized employing a
level effective yield methodology per SFAS 91 as indicated by AICPA Practice
Bulletin 8. An amortization rate is developed using the outstanding DAC balance
and projected account balances. This rate 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 at least annually, and changes in
underlying lapse and interest rate assumptions are to be treated
retrospectively. Variances in expected equity market returns versus actual
returns are treated prospectively and 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 UL is amortized in relation to estimated gross profits from surrender
charges, investment, mortality, and expense margins per SFAS 97. Actual profits
can vary from management's estimates resulting in increases or decreases in the
rate of amortization. Re-estimates of gross profits, performed at least
annually, 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 SFAS 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.
All DAC is reviewed, at least annually, 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
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
26
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 over 31 years. 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.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life products. 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 2.07% to 7.85%
for these annuity products with a weighted average interest rate of 6.6%,
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 and 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. Interest assumptions applicable to traditional life products range
from 3.0% to 7.0%, with a weighted average of 5.8%.
CONTRACTHOLDER FUNDS
Contractholder funds represent deposits from the issuance of UL pension
investment and certain deferred annuity and structured settlement contracts. For
UL 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 contractholders where these charges and expenses may not be fixed
or guaranteed. Interest rates credited to contractholder funds related to
universal life range from 4.0% to 5.95%, with a weighted average interest rate
of 5.01%.
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 1.0 % to 7.75% with
a weighted average interest rate of 5.35%.
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, 2003 and 2002, the
Company's liability for guaranty fund assessments was not significant.
27
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 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 revenue when due.
The portion of premium which is not required to provide for benefits and
expenses is deferred and recognized in revenues in a constant relationship to
insurance benefits in force.
FEE INCOME
Fee income is recognized on deferred annuity and UL 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.
CURRENT AND FUTURE INSURANCE BENEFITS
Current and future insurance benefits represent charges for mortality and
morbidity related to fixed annuities, universal life and term life insurance
benefits.
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.
28
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, 2003 AMORTIZED UNREALIZED UNREALIZED FAIR
($ in thousands) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 644,362 $ 18,352 $ 1,598 $ 661,116
U.S. Treasury securities and obligations
of U.S. Government and government agencies
and authorities 192,271 4,756 731 196,296
Obligations of states and political
subdivisions 52,867 6,151 - 59,018
Debt securities issued by foreign
governments 57,656 3,386 83 60,959
All other corporate bonds 3,179,328 240,472 5,329 3,414,471
All other debt securities 903,211 59,113 3,105 959,219
Redeemable preferred stock 4,083 2,155 92 6,146
-------------- ----------- ---------- ----------
Total Available For Sale $ 5,033,778 $ 334,385 $ 10,938 $5,357,225
-------------- ----------- ---------- ----------
GROSS GROSS
DECEMBER 31, 2002 AMORTIZED UNREALIZED UNREALIZED FAIR
($ 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 - 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
-------------- ----------- ---------- ----------
Proceeds from sales of fixed maturities classified as available for sale were
$1.7 billion, $1.7 billion and $939 million in 2003, 2002 and 2001,
respectively. Gross gains of $48.2 million, $85.6 million
29
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
and $67.0 million and gross losses of $52.4 million, $29.9 million and $22.4
million in 2003, 2002 and 2001, respectively, were realized on those sales.
Additional losses of $10.2 million, $66.9 million and $11.5 million were
realized due to other-than-temporary losses in value in 2003, 2002 and 2001,
respectively. Impairment activity increased significantly in 2002. These prior
year 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 $1.0 billion and $840.4 million at
December 31, 2003 and 2002, respectively.
The amortized cost and fair value of fixed maturities available for sale at
December 31, 2003, by contractual maturity, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
AMORTIZED FAIR
($ in thousands) COST VALUE
---------------- --------- ----------
MATURITY:
Due in one year or less $ 210,086 $ 214,645
Due after 1 year through 5 years 1,529,425 1,634,709
Due after 5 years through 10 years 1,821,121 1,963,235
Due after 10 years 828,784 883,520
---------- ----------
4,389,416 4,696,109
---------- ----------
Mortgage-backed securities 644,362 661,116
---------- ----------
Total Maturity $5,033,778 $5,357,225
---------- ----------
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, 2003 and 2002, the Company held CMOs classified as available for
sale with a fair value of $332.4 million and $265.5 million, respectively.
Approximately 34% and 33%, respectively, of the Company's CMO holdings are fully
collateralized by GNMA, FNMA or FHLMC securities at December 31, 2003 and 2002.
In addition, the Company held $327.7 million and $177.8 million of GNMA, FNMA or
FHLMC mortgage-backed pass-through securities at December 31, 2003 and 2002,
respectively. All of these securities are rated AAA.
30
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The Company engages in securities lending transactions 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
invests in a short-term investment pool. See Note 11. The loaned securities
remain a recorded asset of the Company. 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,
2003 and 2002, the Company held cash collateral of $154.0 million and $149.0
million, respectively.
The Company participates in dollar roll repurchase transactions as a way to
generate investment income. These transactions involve the sale of
mortgage-backed securities with the agreement to repurchase substantially the
same securities from the same counterparty. Cash is received from the sale,
which is invested in the Company's short-term money market pool. The cash is
returned at the end of the roll period when the mortgage-backed securities are
repurchased. The Company will generate additional investment income based upon
the difference between the sale and repurchase prices.
These transactions are recorded as secured borrowings. The mortgage-backed
securities remain recorded as assets. The cash proceeds are reflected in
short-term investments and a liability is established to reflect the Company's
obligation to repurchase the securities at the end of the roll period. This
liability is classified as other liabilities in the balance sheets and
fluctuates based upon the timing of the repayments. The balances were
insignificant at December 31, 2003 and 2002, respectively.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
($ in thousands) COST GAINS LOSSES VALUE
---------------- ------- ---------- ---------- ------
DECEMBER 31, 2003
Common stocks $ 1,645 $ 343 $ 249 $ 1,739
Non-redeemable preferred stocks 6,608 30 70 6,568
------- ---------- ---------- -------
Total Equity Securities $ 8,253 $ 373 $ 319 $ 8,307
------- ---------- ---------- -------
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
------- ---------- ---------- -------
Proceeds from sales of equity securities were $7.8 million, $35.6 million and
$6.4 million in 2003, 2002 and 2001, respectively. Gross gains and losses on
sales and impairments were insignificant.
OTHER-THAN-TEMPORARY LOSSES ON INVESTMENTS
At December 31, 2003, the cost of approximately 220 investments in fixed
maturity and equity securities exceeded their fair value by $11.3 million. Of
the $11.3 million, $9.2 million represents
31
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
fixed maturity investments that have been in a gross unrealized loss position
for less than a year and of these 87% are rated investment grade. Fixed maturity
investments that have been in a gross unrealized loss position for a year or
more total $1.8 million and 32% of these are rated investment grade. The gross
unrealized loss on equity securities was $.3 million at December 31, 2003.
Management has determined that the unrealized losses on the Company's
investments in fixed maturity and equity securities at December 31, 2003 are
temporary in nature. The Company conducts a rigorous review each quarter to
identify and evaluate investments that have possible indications of impairment.
An investment in a debt or equity security is impaired if its fair value falls
below its cost and the decline is considered other-than-temporary. Factors
considered in determining whether a loss is temporary include the length of time
and extent to which fair value has been below cost; the financial condition and
near-term prospects of the issuer; and the Company's ability and intent to hold
the investment for a period of time sufficient to allow for any anticipated
recovery. The Company's review for impairment generally entails:
- Identification and evaluation of investments that have
possible indications of impairment;
- Analysis of individual investments that have fair values less
than 80% of amortized cost, including consideration of length
of time the investment has been in an unrealized loss
position.
- Discussion of evidential matter, including an evaluation of
factors or triggers that would or could cause individual
investments to qualify as having other-than-temporary
impairments and those that would not support
other-than-temporary impairment;
- Documentation of the results of these analyses, as required
under business policies.
The table below shows the fair value of investments in fixed maturities and
equity securities in an unrealized loss position at December 31, 2003:
Gross Unrealized Losses
-----------------------
Less Than One Year One Year or Longer Total
--------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
($ in thousands) Value Losses Value Losses Value Losses
- --------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available-for-sale:
Mortgage-backed securities-CMO's and
pass-through securities $142,683 $ 1,598 $ - $ - $142,683 $ 1,598
U.S. Treasury securities and obligations of
U.S. Government and government agencies
and authorities 132,402 731 - - 132,402 731
Debt securities issued by foreign governments 2,183 83 - - 2,183 83
All other corporate bonds 237,621 4,266 19,461 1,063 257,082 5,329
All other debt securities 122,769 2,461 20,054 644 142,823 3,105
Redeemable preferred stock 650 41 659 51 1,309 92
-------- ---------- ------- ---------- -------- ----------
Total fixed maturities $638,308 $ 9,180 $40,174 $ 1,758 $678,482 $ 10,938
Equity securities $ 2,642 $ 56 $ 946 $ 263 $ 3,588 $ 319
-------- ---------- ------- ---------- -------- ----------
32
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
MORTGAGE LOANS
At December 31, 2003 and 2002, the Company's mortgage loan portfolios consisted
of the following:
($ in thousands) 2003 2002
- ----------------------------------------------------
Current Mortgage Loans $135,347 $130,303
Underperforming Mortgage Loans - 3,775
-------- --------
Total $135,347 $134,078
-------- --------
Underperforming assets include delinquent mortgage loans over 90 days past due,
loans in the process of foreclosure and loans modified at interest rates below
market.
Aggregate annual maturities on mortgage loans at December 31, 2003 are as shown
below. Actual maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations with or without prepayment
penalties.
YEAR ENDING DECEMBER 31,
($ in thousands)
2004 $ 11,301
2005 6,137
2006 27,827
2007 5,155
2008 5,804
Thereafter 79,123
--------
Total $135,347
========
OTHER INVESTED ASSETS
Other invested assets are composed of the following:
($ in millions) 2003 2002
- --------------------------------------------------------
Private equity and arbitrage investments $ 203 $ 142
Derivatives 115 162
Trading Securities 33 27
Policy Loans 27 28
Real estate investments 15 26
----- -----
Total $ 393 $ 385
----- -----
33
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
CONCENTRATIONS
The Company participates in a short-term investment pool maintained by TIC. See
Note 11.
The Company's industry concentrations of investments, excluding those in federal
and government agencies, primarily fixed maturities at fair value, were as
follows:
($ in thousands) 2003 2002
- ------------------------------------------
Finance $555,067 $562,179
Electric Utilities 454,960 512,950
Banking 364,094 265,442
Media 354,213 324,008
Telecommunications 287,955 304,171
Insurance 261,198 200,525
The Company held investments in foreign banks in the amount of $152 million and
$147 million at December 31, 2003 and 2002, 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 $157 million and $109 million in Electric Utilities, $31 million and $35
million in Media, and $34 million and $53 million in Telecommunications at
December 31, 2003 and 2002, respectively. Below investment grade assets in other
categories were insignificant. Total below investment grade assets were $506
million and $414 million at December 31, 2003 and 2002, respectively.
Included in mortgage loans were the following group concentrations:
($ in thousands)
- ---------------------------------------
At December 31, 2003 2002
- ---------------------------------------
STATE
California $34,304 $42,169
New York 30,766 22,636
- ---------------------------------------
PROPERTY TYPE
Agricultural $63,672 $79,075
Office 61,812 44,094
- ---------------------------------------
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, credit limits and
other monitoring procedures. Collateral for fixed maturities often includes
pledges of assets, including stock and other assets, guarantees and letters of
credit. The Company's underwriting standards with respect to new mortgage loans
generally require loan to value ratios of 75% or less at the time of mortgage
origination.
34
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
RESTRUCTURED INVESTMENTS
Mortgage loan and debt securities which were restructured at below market terms
at December 31, 2003 and 2002 were insignificant. The new terms of restructured
investments typically defer a portion of contract interest payments to varying
future periods. Gross interest income on restructured assets that would have
been recorded in accordance with the original terms of such assets was
insignificant. Interest on these assets, included in net investment income, was
insignificant.
NET INVESTMENT INCOME
FOR THE YEAR ENDED DECEMBER 31,
($ in thousands) 2003 2002 2001
- --------------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $316,790 $276,818 $217,813
Other invested assets 33,118 27,886 22,542
Mortgage loans 10,931 10,578 11,327
Other 935 1,402 2,227
-------- -------- --------
Total gross investment income 361,774 316,684 253,909
-------- -------- --------
Investment expenses 5,311 4,738 2,855
-------- -------- --------
Net investment income $356,463 $311,946 $251,054
-------- -------- --------
35
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the periods were as follows:
FOR THE YEAR ENDED DECEMBER 31,
($ in thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------
REALIZED
Fixed maturities $(14,361) $(11,185) $ 33,061
Other invested assets 8,152 (19,423) (4,980)
Mortgage loans (886) (61) (707)
Other (107) 85 (1,230)
-------- -------- --------
Total realized investment gains (losses) $ (7,202) $(30,584) $ 26,144
-------- -------- --------
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) 2003 2002 2001
- --------------------------------------------------------------------------------------
UNREALIZED
Fixed maturities $188,949 $ 91,013 $ 14,761
Other invested assets (2,805) 22,449 (16,182)
-------- -------- --------
Total unrealized investment gains (losses) 186,144 113,462 (1,421)
Related taxes 65,151 39,712 (497)
-------- -------- --------
Change in unrealized investment gains (losses) 120,993 73,750 (924)
Balance beginning of year 86,448 12,698 13,622
-------- -------- --------
Balance end of year $207,441 $ 86,448 $ 12,698
-------- -------- --------
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 (YRT) coinsurance and modified coinsurance. The Company
remains primarily liable as the direct insurer on all risks reinsured.
Since 1997 the majority of UL business has been reinsured under an
80%/20% YRT quota share reinsurance program and term life business has
been reinsured under a 90%/10% YRT quota share reinsurance program.
Beginning in September, 2002, newly issued term life business has been
reinsured under a 90%/10% coinsurance quota share reinsurance program.
Maximum retention of $2.5 million is generally reached on policies in
excess of $12.5 million for UL and $25.0 million for term insurance.
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.
Total life insurance in-force ceded under reinsurance contracts was
$35.0 billion and $29.3 billion at December 31, 2003 and 2002,
including $4.5 million and $6.0 million, respectively to TIC. Total
life
36
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
insurance premiums ceded were $24.9 million, $14.9 million and $11.9
million in 2003, 2002 and 2001, respectively. Ceded premiums paid to
TIC were insignificant for these same periods.
Prior to April 1, 2001, the Company also reinsured substantially all of
the guaranteed minimum death benefit (GMDB) on its variable annuity
product. Total variable annuity account balances with GMDB were $9.9
billion, including $5.4 billion or 55% which was reinsured, and $7.1
billion, of which $4.9 billion or 69% is reinsured at December 31, 2003
and 2002, respectively. 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 was $887 million and $2.2 billion at December 31,
2003 and 2002, respectively. NAR included $816 million, or 92%, and
$1.9 billion, or 86%, which was reinsured at December 31, 2003 and
2002, respectively.
4. INTANGIBLE ASSETS
The Company has two intangible, amortizable assets, DAC and the value
of insurance in force. The following is a summary of capitalized DAC by
product type:
Traditional Deferred
($ in millions) Life Annuity UL Total
- ---------------------------------------------------------------------------------
Beginning balance
January 1, 2002 $ 47.7 $ 511.5 $ 255.2 $ 814.4
Commissions and expenses deferred 16.5 169.4 130.8 316.7
Amortization expense (8.9) (72.6) (9.3) (90.8)
Underlying lapse and interest rate
assumptions - 29.8 - 29.8
Amortization related to FAS 91
reassessment - (6.0) - (6.0)
----------- -------- ------- --------
Balance December 31, 2002 55.3 632.1 376.7 1,064.1
Commissions and expenses deferred 14.3 172.1 164.9 351.3
Amortization expense (10.2) (107.6) (18.5) (136.3)
----------- -------- ------- --------
Balance December 31, 2003 $ 59.4 $ 696.6 $ 523.1 $1,279.1
----------- -------- ------- --------
The value of insurance in force totaled $11.7 million and $12.5 million
at December 31, 2003 and 2002, respectively, and was reported in other
assets. Amortization expense of value of insurance in force was
insignificant for 2003, 2002 and 2001.
5. DEPOSIT FUNDS AND RESERVES
At December 31, 2003 and 2002, the Company had $5.6 billion and $5.0
billion of life and annuity deposit funds and reserves, respectively.
Of those totals, $1.6 billion were not subject to discretionary
withdrawal based on contract terms for 2003 and 2002. The remaining
amounts were life and annuity products that were subject to
discretionary withdrawal by the contractholders.
37
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Included in the amounts that are subject to discretionary withdrawal
were $2.6 billion and $2.4 billion of liabilities that are
surrenderable with market value adjustments. Also included are an
additional $1.3 billion and $.9 billion of life insurance and
individual annuity liabilities which are subject to discretionary
withdrawals with an average surrender charge of 4.7% and 4.2%,
respectively. The remaining $.1 billion in 2003, and $.1 billion in
2002, is surrenderable without charge. The life insurance risks would
have to be underwritten again if transferred to another carrier, which
is considered a significant deterrent for long-term policyholders.
Insurance liabilities that are surrendered or withdrawn from the
Company are reduced by outstanding policy loans and related accrued
interest prior to payout.
6. FEDERAL INCOME TAXES
EFFECTIVE TAX RATE
($ in thousands)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
- --------------------------------------------------------------------------
Income before federal income taxes $ 154,048 $ 159,024 $ 176,249
Statutory tax rate 35% 35% 35%
--------- ---------- ---------
Expected federal income taxes 53,917 55,658 61,687
Tax effect of:
Non-taxable investment income (11,626) - (36)
Tax reserve release (7,852) - -
Other, net 149 4 (562)
--------- ---------- ---------
Federal income taxes $ 34,588 $ 55,654 $ 61,089
========= ========== =========
Effective tax rate 22% 35% 35%
--------- ---------- ---------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 72,983 $ (30,830) $ (19,007)
Foreign 440 (313) -
--------- ---------- ---------
Total 73,423 (31,143) (19,007)
--------- ---------- ---------
Deferred:
United States (38,835) 86,797 80,096
Foreign - - -
--------- ---------- ---------
Total (38,835) 86,797 80,096
--------- ---------- ---------
Federal income taxes $ 34,588 $ 55,654 $ 61,089
========= ========== =========
38
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 2003 and 2002 were
comprised of the tax effects of temporary differences related to the
following assets and liabilities:
($ in thousands) 2003 2002
- -----------------------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 251,017 $ 151,454
Other 6,496 2,286
--------- ---------
Total 257,513 153,740
--------- ---------
Deferred Tax Liabilities:
Investments, net (117,613) (48,363)
Deferred acquisition costs and value of insurance in force (363,670) (303,652)
Other (1,051) (1,075)
--------- ---------
Total (482,334) (353,090)
--------- ---------
Net Deferred Tax Liability $(224,821) $(199,350)
--------- ---------
TIC and its subsidiaries, including the Company, file a consolidated
federal income tax return with Citigroup. Federal income taxes are
allocated to each member of the consolidated group, according to a Tax
Sharing Agreement (the Agreement), on a separate return basis adjusted
for credits and other amounts required by the Agreement. TLAC had a
$9.1 million recoverable from TIC at December 31, 2003 and a $53.6
million payable to TIC at December 31, 2002 pursuant to the Agreement.
At December 31, 2003 and 2002, 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 income (loss) was $37.3 million, $(133.9)
million and $(73.4) million for the years ended December 31, 2003, 2002
and 2001, respectively. Statutory capital and surplus was $494 million
and $397 million at December 31, 2003 and 2002, respectively.
Effective January 1, 2001, the Company began preparing its statutory
basis financial statements in accordance with the National Association
of Insurance Commissioners' Accounting Practices and Procedures Manual
- version effective January 1, 2001, subject to any deviations
prescribed or
39
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
permitted by its domicilary insurance commissioner (see Permitted
Statutory Accounting Practices in Note 1). The impact of this change on
statutory capital and surplus was not significant.
The Company is currently subject to various regulatory restrictions
that limit the maximum amount of dividends available to be paid to its
parent without prior approval of insurance regulatory authorities. In
accordance with Connecticut statutes, after reducing the Company's
unassigned funds (surplus) by 25% of the change in net unrealized
capital gains, the Company may not pay dividends during 2004 without
prior approval of the State of Connecticut Insurance Department.
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX
Changes in each component of Accumulated Other Changes in Equity from Nonowner
Sources were as follows:
NET ACCUMULATED
UNREALIZED OTHER CHANGES
GAIN/LOSS ON DERIVATIVE IN EQUITY FROM
INVESTMENT INSTRUMENTS & NONOWNER
($ in thousands) SECURITIES HEDGING ACTIVITIES SOURCES
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 $ 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 $10,673 19,821 - 19,821
Less: Reclassification adjustment for gains
included in net income, net of tax of $(11,170) (20,745) - (20,745)
Add: 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 $35,352 65,653 - 65,653
Add: Reclassification adjustment for losses included in net
income, net of tax of $4,360 8,097 - 8,097
Add: 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
Unrealized gains on investment securities,
net of tax of $60,482 112,322 - 112,322
Add: Reclassification adjustment for losses included in net income,
net of tax of $4,669 8,671 - 8,671
Less: Derivative instrument hedging activity loss, net of tax benefits
of $(845) - (1,568) (1,568)
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 120,993 (1,568) 119,425
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 $ 207,441 $ 6,925 $ 214,366
- -----------------------------------------------------------------------------------------------------------------------------------
40
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 2003, 2002 and 2001.
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 2003, 2002 and 2001.
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.
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
into contracts to
41
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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.
Several of the Company's hedging strategies do not qualify or are not
designated as hedges for accounting purposes. This can occur when the
hedged item is carried at fair value with changes in fair value
recorded in earnings, the derivative contracts are used in a macro
hedging strategy, the hedge is not expected to be highly effective, or
structuring the hedge to qualify for hedge accounting is too costly or
time consuming.
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.
Additionally, the Company enters into collateral agreements with its
derivative counterparties. As of December 31, 2003 the Company held
collateral under these contracts amounting to approximately $69.7
million.
The following table summarizes certain information related to the
Company's hedging activities for the years ended December 31, 2003 and
2002:
Year Ended Year Ended
($ in thousands) December 31, 2003 December 31, 2002
-----------------------------------------------------------------------------------------
Hedge ineffectiveness recognized
related to fair value hedges $(3,309) $ (5,215)
Hedge ineffectiveness recognized
related to cash flow hedges (296) 1,141
Net gain or loss from economic
hedges in earnings 8,076 (13,597)
During the year ended December 31, 2002 the Company recorded a gain of
$.3 million from discontinued forecasted transactions. There was no
such gain in 2003.
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, 2003 is not
significant.
The Company had interest rate and equity options with fair values of
$115.1 million and $161.7 million, at December 31, 2003 and 2002,
respectively. Included in these amounts were $3.5 million and $4.8
million with affiliates, 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, 2003 and 2002
were $6.2 million and $23.9 million respectively. The notional values
of unfunded commitments were $31.0 million and $35.5 million at
December 31, 2003 and 2002, respectively.
42
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. Certain insurance contracts are excluded by SFAS No. 107,
"Disclosure about Fair Value of Financial Instruments," and therefore
are not included in the amounts discussed.
At December 31, 2003, investments in fixed maturities had a carrying
value and a fair value of $5.4 billion compared with a carrying value
and a fair value of $4.5 billion at December 31, 2002. See Notes 1 and
2.
At December 31, 2003, mortgage loans had a carrying value of $135.4
million and a fair value of $147.6 million and at December 31, 2002 had
a carrying value of $134.1 million and a fair value of $148.0 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 $195.3 million and
$475.4 million in 2003 and 2002, respectively, which approximated their
fair values. Policy loans which are included in other invested assets
had carrying values of $26.8 million and $27.4 million in 2003 and
2002, respectively, which also approximated their fair values.
The carrying values of $260.6 million and $151.5 million of financial
instruments classified as other assets approximated their fair values
at December 31, 2003 and 2002, respectively. The carrying values of
$439.2 million and $319.8 million of financial instruments classified
as other liabilities also approximated their fair values at December
31, 2003 and 2002, respectively. Fair value is determined using various
methods, including discounted cash flows, as appropriate for the
various financial instruments.
At December 31, 2003, contractholder funds with defined maturities had
a carrying value of $2.8 billion and a fair value of $3.0 billion,
compared with a carrying value of $2.7 billion and a fair value of $2.9
billion at December 31, 2002. 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 $677.7 million and a fair value of $527.3 million at
December 31, 2003, compared with a carrying value of $605.0 million and
a fair value of $416.2 million at December 31, 2002. These contracts
generally are valued at surrender value.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
In 2003, several issues in the mutual fund and variable insurance
product industries have come under the scrutiny of federal and state
regulators. Like many other companies in our industry, the Company has
received a request for information from the Securities and Exchange
Commission (SEC) and a subpoena from the New York Attorney General
regarding market timing and late trading. In March 2004 the SEC
requested additional information about the Company's variable product
operations on market timing, late trading and revenue sharing. The
Company is cooperating fully with all of these reviews and is not able
to predict their outcomes.
43
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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.
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, 2003 and 2002. At
December 31, 2001 the majority of these services were provided by
either Citigroup and its subsidiaries or TPC, a former affiliate.
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 for the Company in 2003, 2002 and 2001.
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, 2003 and 2002, the pool
totaled approximately $3.8 billion and $4.2 billion, respectively. The
Company's share of the pool amounted to $124.6 million and $356.0
million at December 31, 2003 and 2002, respectively, and is included in
short-term securities in the balance sheet.
At December 31, 2003 and 2002, the Company had investments in Tribeca
Citigroup Investments Ltd., an affiliate of the Company, in the amounts
of $25.5 million and $26.7 million, respectively. Income of $6.6
million, $1.9 million and $4.5 million was earned on these investments
in 2003, 2002 and 2001, respectively. The Company also had investments
in an affiliated joint venture, Tishman Speyer, in the amount of $11.8
million and $24.1 million at December 31, 2003 and 2002, respectively.
Income earned on these investments in 2003 was insignificant and was
$19.8 million and $8.5 million in 2002 and 2001, 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, 2003 and 2002 the Company had outstanding loaned
securities to its affiliate Smith Barney (SB), a division of Citigroup
Global Markets Inc., in the amount of $7.1 million and $10.2 million,
respectively.
The Company has other affiliated investments. The individual investment
with any one affiliate was insignificant at December 31, 2003 and 2002.
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.
44
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The Company distributes fixed and variable annuity products through SB.
Premiums and deposits related to these products were $.7 billion, $.8
billion and $1.2 billion in 2003, 2002 and 2001, respectively. The
Company also markets term and universal life products through SB.
Premiums related to such products were $87.5 million, $87.2 million and
$74.5 million in 2003, 2002 and 2001, respectively. Commissions and
fees paid to SB were $56.7 million, $57.5 million and $68.1 million in
2003, 2002 and 2001, respectively.
The Company also distributes deferred annuity products through its
affiliates Primerica Financial Services (PFS), CitiStreet Retirement
Services, a division of CitiStreet LLC, (CitiStreet) and Citibank, N.A.
(together with its subsidiaries, Citibank). Deposits received from PFS
were $628 million, $662 million and $738 million in 2003, 2002 and
2001, respectively. Commissions and fees paid to PFS were $52.4
million, $47.1 million and $51.6 million in 2003, 2002 and 2001,
respectively.
Deposits from Citibank and CitiStreet were $162 million and $82 million
respectively, for 2003, $117 million and $184 million, respectively,
for 2002, and $166 million and $136 million, respectively, for 2001.
Commissions and fees paid to Citibank and CitiStreet were $12.4 million
and $2.3 million, respectively, in 2003, $7.2 million and $2.6 million,
respectively, in 2002 and $9.8 million and $2.9 million, respectively,
in 2001 .
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 2001, Citigroup introduced
the 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. During 2003
Citigroup introduced the Citigroup 2003 Stock Purchase Program, which
allowed eligible employees of Citigroup, including the Company's
employees, to enter into fixed subscription agreements to purchase
shares at the lesser of the market value on the first date of the
offering period or the market value at the close of the offering
period. Enrolled employees are permitted to make one purchase prior to
the expiration date. The Company's charge to income for these plans was
insignificant in 2003, 2002 and 2001.
Prior to the IPO of TPC, most leasing functions for TIC and its
subsidiaries, including the Company, were handled by its
property-casualty insurance affiliates. 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 2003, 2002
and 2001.
45
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
Net Income $ 119,460 $ 103,370 $ 115,160
Adjustments to reconcile net income to cash used in
operating activities:
Realized (gains) losses 7,202 30,584 (26,144)
Deferred federal income taxes (38,835) 86,797 80,096
Amortization of deferred policy acquisition costs 136,310 66,972 89,475
Additions to deferred policy acquisition costs (351,310) (316,721) (324,277)
Investment income accrued (36,834) (35,133) (39,875)
Insurance reserves (16,138) (9,000) (14,382)
Other (44,755) 72,190 11,398
- ------------------------------------------------------------------------------------------------
Net cash used in operations $(224,900) $ (941) $(108,549)
- ------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 ended
December 31, 2003 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over
financial reporting.
46
THE TRAVELERS LIFE AND ANNUITY COMPANY
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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During 2003 the Securities and Exchange Commission (SEC) changed the
definitions of certain terms used by public companies to categorize and
disclose various types of services performed by independent auditors.
The following is a description of the fees earned by KPMG for services
rendered to the Company for the years ended December 31, 2003 and 2002:
AUDIT FEES: Audit fees include fees paid by the Company to KPMG in
connection with the annual audit of the Company's financial statements,
KPMG's audits of subsidiary financial statements and KPMG's review of
the Company's interim financial statements. Audit fees also include
fees for services performed by KPMG that are closely related to the
audit and in many cases could only be provided by our independent
auditors. Such services include comfort letters and consents related to
SEC registration statements and other capital raising activities and
certain reports relating to the Company's regulatory filings, reports
on internal control reviews required by regulators, due diligence on
completed acquisitions, accounting advice on completed transactions,
and certain forensic services in connection with audit services. The
aggregate fees earned by KPMG for audit services rendered to the
Company totaled $70 thousand and $60 thousand in each of the years
ended December 31, 2003 and December 31, 2002, respectively.
AUDIT RELATED FEES: Audit related services include due diligence
services related to contemplated mergers and acquisitions, accounting
consultations, internal control reviews not required by regulators,
securitization related services, employee benefit plan audits and
certain attest services as well as certain agreed upon procedures. The
aggregate fees earned by KPMG for audit related services rendered to
the Company were $3 thousand for each of the years ended December 31,
2003 and December 31, 2002.
TAX FEES: Tax fees include corporate tax compliance, counsel and
advisory services as well as expatriate tax services. The Company did
not incur any charges from KPMG for tax related services rendered to
the Company for the years ended December 31, 2003 and December 31,
2002.
47
THE TRAVELERS LIFE AND ANNUITY COMPANY
ALL OTHER FEES: The Company did not incur any charges from KPMG for
other services rendered to the Company for matters such as general
consulting for the years ended December 31, 2003 and December 31, 2002.
Financial Information Systems Design and Implementation Fees: The
Company did not engage KPMG to provide advice to the Company regarding
financial information systems design and implementation during the
years ended December 31, 2003 and December 31, 2002.
Approval of Independent Auditor Services and Fees:
Citigroup's audit and risk management committee has consistently
reviewed and approved all fees charged by Citigroup's independent
auditors, and actively monitored the relationship between audit and
non-audit services provided. The audit and risk management committee
has concluded that the provision of services by KPMG was consistent
with the maintenance of the external auditors' independence in the
conduct of its auditing functions. Effective January 1, 2003, Citigroup
adopted a policy that it and its subsidiaries would no longer engage
its primary independent auditors for non-audit services other than
"audit related services," as defined by the SEC, certain tax services,
and other permissible non-audit services as specifically approved by
the chair of the audit and risk management committee and presented to
the full committee at its next regular meeting.
Under the Citigroup policy approved by the audit and risk management
committee, the committee must pre-approve all services provided by
Citigroup's independent auditors and fees charged. The committee will
consider annually the provision of audit services and, if appropriate,
pre-approve certain defined audit fees, audit related fees, tax fees
and other fees with specific dollar value limits for each category of
service. The audit and risk management committee will also consider on
a case by case basis and, if appropriate, approve specific engagements
that are not otherwise pre-approved. Any proposed engagement that does
not fit within the definition of a pre-approved service may be
presented to the chair of the audit and risk management committee for
approval and to the full audit and risk management committee at its
next regular meeting. The policy includes limitations on hiring of
partners or other professional employees of KPMG that require
adjustments to KPMG 's audit approach if there is any apparent
conflict, and at all times we are mindful of the independence
requirements of the SEC in considering employment of these individuals.
Administration of the policy is centralized within, and monitored by,
Citigroup senior corporate financial management, which reports
throughout the year to the audit and risk management committee.
48
THE TRAVELERS LIFE AND ANNUITY COMPANY
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) Documents filed:
(1) Financial Statements. See index on page 13 of this report.
(2) Financial Statement Schedules. See index on page 52 of this
report.
(3) Exhibits. See Exhibit Index on the following page.
(b) Reports on Form 8-K:
None.
49
THE TRAVELERS LIFE AND ANNUITY COMPANY
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, incorporated
by reference to Exhibit 14.01 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002.
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.
+Filed herewith
50
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 22nd day of March,
2004.
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 22nd day of March, 2004.
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 L. Preston Director
- -------------------------------
(Kathleen L. 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.
51
THE TRAVELERS LIFE AND ANNUITY COMPANY
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 53
Schedule I - Summary of Investments - Other than Investments in Related Parties 2003 54
Schedule III - Supplementary Insurance Information 2001-2003 55
Schedule IV - Reinsurance 2001-2003 56
All other schedules are inapplicable for this filing.
* See index on page 13.
52
THE TRAVELERS LIFE AND ANNUITY COMPANY
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Life and Annuity Company:
Under date of February 26, 2004, we reported on the balance sheets of The
Travelers Life and Annuity Company as of December 31, 2003 and 2002, 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, 2003, which are
included in the 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
methods of accounting for goodwill and intangible assets in 2002 and for
derivative instruments and hedging activities and for securitized financial
assets in 2001.
/s/KPMG LLP
Hartford, Connecticut
February 26, 2004
53
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2003
($ in thousands)
AMOUNT SHOWN IN
TYPE OF INVESTMENT COST VALUE BALANCE SHEET (1)
- -----------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and authorities $ 624,596 $ 637,700 $ 637,700
States, municipalities and political subdivisions 52,867 59,018 59,018
Foreign governments 57,656 60,959 60,959
Public utilities 346,616 377,238 377,238
Convertible bonds and bonds with warrants attached 20,734 24,014 24,014
All other corporate bonds 3,927,226 4,192,150 4,192,150
- --------------------------------------------------------------------------------------------------------------
Total Bonds 5,029,695 5,351,079 5,351,079
Redeemable Preferred Stocks 4,083 6,146 6,146
- --------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 5,033,778 5,357,225 5,357,225
- --------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Industrial, miscellaneous and all other 1,645 1,739 1,739
- --------------------------------------------------------------------------------------------------------------
Total Common Stocks 1,645 1,739 1,739
Non-Redeemable Preferred Stocks 6,608 6,568 6,568
- --------------------------------------------------------------------------------------------------------------
Total Equity Securities 8,253 8,307 8,307
- --------------------------------------------------------------------------------------------------------------
Mortgage Loans 135,347 135,347
Policy Loans (4) 26,827 26,827
Short-Term Securities 195,279 195,279
Other Investments (2) (3) 289,599 287,168
- --------------------------------------------------------------------------------------------------------------
Total Investments $ 5,689,083 $6,010,153
==============================================================================================================
(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
$75,313 and $76,349, respectively.
(3) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
(4) Included in other invested assets on balance sheet.
54
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
2001-2003
($ in thousands)
FUTURE POLICY BENEFITS,
DEFERRED POLICY BENEFITS, LOSSES, NET CLAIMS, LOSSES OTHER
ACQUISITION CLAIMS AND LOSS PREMIUM INVESTMENT AND SETTLEMENT AMORTIZATION OF DEFERRED OPERATING PREMIUMS
COSTS EXPENSES (1) REVENUE INCOME EXPENSES (2) POLICY ACQUISITION COSTS EXPENSES WRITTEN
- ----------------------------------------------------------------------------------------------------------------------------
2003 $1,279,118 $5,609,517 $40,866 $ 356,463 $ 306,681 $136,310 $ 49,288 $ 40,866
2002 $1,064,118 $5,031,775 $42,893 $ 311,946 $ 275,123 $ 66,972 $ 32,352 $ 42,893
2001 $ 814,369 $3,665,426 $39,222 $ 251,054 $ 214,722 $ 89,475 $ 23,404 $ 39,222
(1) Includes contractholder funds.
(2) Includes interest credited on contractholder funds.
55
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE IV
REINSURANCE
($ in thousands)
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET
- --------------------------------------------------------------------------------------------
2003
Life Insurance In Force $43,671,192 $34,973,161 $ - $8,698,031 -%
Premiums:
Annuity $ 3,696 $ - $ - $ 3,696
Individual life 62,034 24,864 - 37,170
----------- ----------- ----- ----------
Total Premiums $ 65,730 $ 24,864 $ - $ 40,866 -%
=========== =========== ===== ==========
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 -%
=========== =========== ===== ==========
56