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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM______________ TO _____________
_______________________________
COMMISSION FILE NUMBER 33-58677
_______________________________
THE TRAVELERS LIFE AND ANNUITY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-0904249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE CITYPLACE, HARTFORD, CONNECTICUT 06103-3415
(Address of principal executive offices) (Zip Code)
(860) 308-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of the date hereof, there were outstanding 30,000 shares of common stock, par
value $100 per share, of the registrant, all of which were owned by The
Travelers Insurance Company, an indirect wholly owned subsidiary of Citigroup
Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
THE TRAVELERS LIFE AND ANNUITY COMPANY
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Statements of Income for the six
months ended June 30, 2004 and 2003 (unaudited)......................... 3
Condensed Balance Sheets as of June 30, 2004 (unaudited) and
December 31, 2003 ...................................................... 4
Condensed Statements of Changes in Shareholder's Equity
for the six months ended June 30, 2004 and 2003 (unaudited)............. 5
Condensed Statements of Cash Flows for the
six months ended June 30, 2004 and 2003 (unaudited)..................... 6
Notes to Condensed Financial Statements (unaudited)..................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 11
ITEM 4. CONTROLS AND PROCEDURES........................................ 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 15
Signatures.............................................................. 16
Exhibit 31.01........................................................... 17
Exhibit 31.02........................................................... 18
Exhibit 32.01........................................................... 19
2
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
($ in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------------
2004 2003 2004 2003
-------- -------- -------- --------
REVENUES
Premiums $ 10 $ 10 $ 20 $ 21
Net investment income 102 83 190 167
Realized investment gains (losses) 7 (4) (4) (7)
Fee income 78 57 153 108
Other revenues 3 5 9 10
- --------------------------------------------------------------------------------------
Total Revenues 200 151 368 299
- --------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 14 21 38 44
Interest credited to contractholders 57 54 114 105
Amortization of deferred acquisition costs 44 33 87 65
General and administrative expenses 10 8 25 15
- --------------------------------------------------------------------------------------
Total Benefits and Expenses 125 116 264 229
- --------------------------------------------------------------------------------------
Income before federal income taxes 75 35 104 70
Federal income taxes 26 10 27 16
- --------------------------------------------------------------------------------------
Net Income $ 49 $ 25 $ 77 $ 54
======================================================================================
See Notes to Condensed Financial Statements.
3
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED BALANCE SHEETS
($ in millions)
JUNE 30, 2004
(UNAUDITED) DECEMBER 31, 2003
- ---------------------------------------------------------------------------------------------
ASSETS
Investments (including $127 and $131 subject to
securities lending agreements) $ 6,639 $ 6,089
Separate and variable accounts 10,639 9,690
Deferred acquisition costs 1,426 1,279
Premiums and fees receivable 72 67
Other assets 436 313
- ---------------------------------------------------------------------------------------------
Total Assets $ 19,212 $ 17,438
- ---------------------------------------------------------------------------------------------
LIABILITIES
Future policy benefits and claims $ 1,072 $ 1,098
Contractholder funds 4,890 4,512
Separate and variable accounts 10,639 9,690
Deferred federal income taxes 328 225
Other liabilities 503 515
- ---------------------------------------------------------------------------------------------
Total Liabilities 17,432 16,040
- ---------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $100; 100,000 shares authorized,
30,000 issued and outstanding 3 3
Additional paid-in capital 817 417
Retained earnings 841 764
Accumulated other changes in equity from nonowner sources 119 215
- ---------------------------------------------------------------------------------------------
Total Shareholder's Equity 1,780 1,399
- ---------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $ 19,212 $ 17,438
=============================================================================================
See Notes to Condensed Financial Statements.
4
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
($ in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, beginning of period $ 3 $ 3 $ 3 $ 3
Changes in common stock - - - -
- --------------------------------------------------------------------------------------------------
Balance, end of period $ 3 $ 3 $ 3 $ 3
==================================================================================================
ADDITIONAL PAID-IN CAPITAL
- --------------------------------------------------------------------------------------------------
Balance, beginning of period $ 417 $ 417 $ 417 $ 417
Contribution from parent 400 - 400 -
- --------------------------------------------------------------------------------------------------
Balance, end of period $ 817 $ 417 $ 817 $ 417
==================================================================================================
RETAINED EARNINGS
- --------------------------------------------------------------------------------------------------
Balance, beginning of period $ 792 $ 674 $ 764 $ 645
Net income 49 25 77 54
- --------------------------------------------------------------------------------------------------
Balance, end of period $ 841 $ 699 $ 841 $ 699
==================================================================================================
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- --------------------------------------------------------------------------------------------------
Balance, beginning of period $ 286 $ 147 $ 215 $ 95
Unrealized gains (losses), net of tax (165) 126 (94) 177
Derivative instrument hedging activity gains (losses),
net of tax (2) 2 (2) 3
- --------------------------------------------------------------------------------------------------
Balance, end of period $ 119 $ 275 $ 119 $ 275
==================================================================================================
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- --------------------------------------------------------------------------------------------------
Net income $ 49 $ 25 $ 77 $ 54
Other changes in equity from nonowner sources (167) 128 (96) 180
- --------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ (118) $ 153 $ (19) $ 234
==================================================================================================
TOTAL SHAREHOLDER'S EQUITY
Balance, beginning of period $ 1,498 $ 1,241 $ 1,399 $ 1,160
Changes in nonowner sources (118) 153 (19) 234
Changes in additional paid-in capital 400 - 400 -
- --------------------------------------------------------------------------------------------------
Balance, end of period $ 1,780 $ 1,394 $ 1,780 $ 1,394
==================================================================================================
See Notes to Condensed Financial Statements.
5
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
($ in millions)
SIX MONTHS ENDED
JUNE 30,
2004 2003
- -------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES $ (71) $ (60)
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 281 237
Equity Securities 3 -
Mortgage loans 42 4
Proceeds from sales of investments
Fixed maturities 476 566
Equity securities 3 6
Mortgage loans 6 -
Real Estate 2 1
Purchases of investments
Fixed maturities (1,039) (1,185)
Equity securities (4) (3)
Mortgage loans (59) (24)
Policy loans, net (3) (2)
Short-term securities sales (purchases), net (391) 14
Other investment purchases, net (15) (34)
Securities transactions in course of settlement, net (8) 147
- -------------------------------------------------------------------------------
Net cash used in investing activities (706) (273)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 493 447
Contractholder fund withdrawals (115) (128)
Contribution from parent company 400 -
- -------------------------------------------------------------------------------
Net cash provided by financing activities 778 319
- -------------------------------------------------------------------------------
Net increase (decrease) in cash 1 (14)
Cash at beginning of period 1 15
- -------------------------------------------------------------------------------
Cash at end of period $ 2 $ 1
- -------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes (paid) received $ 168 $ (92)
===============================================================================
See Notes to Condensed Financial Statements.
6
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The Travelers Life and Annuity Company (the Company) is a wholly owned
subsidiary of The Travelers Insurance Company (TIC), a wholly owned
subsidiary of Citigroup Insurance Holding Corporation, an indirect wholly
owned subsidiary of Citigroup Inc. (Citigroup). Citigroup is a diversified
global financial services holding company whose businesses provide a broad
range of financial services to consumer and corporate customers around the
world. The condensed financial statements and accompanying condensed
footnotes of the Company are prepared in conformity with accounting
principles generally accepted in the United States of America (GAAP) and
are unaudited. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and benefits and expenses during the
reporting period. Actual results could differ from those estimates.
In the opinion of management, the interim financial statements reflect all
adjustments necessary for a fair presentation of results for the periods
reported. The accompanying condensed financial statements should be read
in conjunction with the financial statements and related notes included in
the Company's Annual Report on Form 10-K for the year ended December 31,
2003. The condensed balance sheet as of December 31, 2003 was derived from
the audited balance sheet included in the Form 10-K. Certain financial
information that is normally included in annual financial statements
prepared in accordance with GAAP, but is not required for interim
reporting purposes, has been condensed or omitted. Certain prior year
amounts have been reclassified to conform to the 2004 presentation.
2. ACCOUNTING STANDARDS
ACCOUNTING CHANGES
ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS
On January 1, 2004, the Company adopted the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants
Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1). The main components of SOP 03-1 provide
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.
The following summarizes the more significant aspects of the Company's
adoption of SOP 03-1:
Variable Annuity Contracts with Guaranteed Minimum Death Benefit Features.
For variable annuity contracts with guaranteed minimum death benefit
features (GMDB), SOP 03-1 requires the reporting entity to categorize the
contract as either an insurance or investment contract based upon the
significance of mortality or morbidity risk. SOP 03-1 provides explicit
guidance for calculating a reserve for insurance contracts, and provides
that the reporting entity does not hold reserves for investment contracts
(i.e. there is no significant mortality risk).
The Company determined that the mortality risk on its GMDB features was
not a significant component of the total variable annuity product, and
accordingly continued to classify these products as investment contracts.
7
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Reserving for Universal Life and Variable Universal Life Contracts. SOP
03-1 requires that a reserve, in addition to the account balance, be
established for certain insurance benefit features provided under
universal life (UL) and variable universal life (VUL) products if the
amounts assessed against the contract holder each period for the insurance
benefit feature are assessed in a manner that is expected to result in
profits in earlier years and losses in subsequent years from the insurance
benefit function.
The Company's UL and VUL products were reviewed to determine if an
additional reserve is required under SOP 03-1. The Company determined that
SOP 03-1 applied to some of its UL and VUL contracts with these features
and established an additional reserve of less than $1 million.
Sales Inducements to Contract Holders. SOP 03-1 provides that,
prospectively, sales inducements provided to contract holders meeting
certain criteria are capitalized and amortized over the expected life of
the contract as a component of benefit expense. During the first six
months of 2004, the Company capitalized sales inducements of approximately
$13.1 million in accordance with SOP 03-1. These inducements relate to
bonuses on certain products offered by the Company. For the three and six
months ended June 30, 2004, amortization of these capitalized amounts was
immaterial.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
On January 1, 2004, the Company adopted the Financial Accounting Standards
Board (FASB) Interpretation No. 46, "Consolidation of Variable Interest
Entities (revised December 2003)" (FIN 46-R), which includes substantial
changes from the original FIN 46. Included in these changes, the
calculation of expected losses and expected residual returns has been
altered to reduce the impact of decision maker and guarantor fees in the
calculation of expected residual returns and expected losses. In addition,
the definition of a variable interest has been changed in the revised
guidance. The Company has evaluated the impact of applying FIN 46-R to
existing variable interest entities in which it has variable interests.
The effect of adopting FIN 46-R on the Company's balance sheet is
immaterial.
FIN 46 and FIN 46-R change the method of determining whether certain
entities, including securitization entities, should be included in the
Company's condensed financial statements. An entity is subject to FIN 46
and FIN 46-R and is called a 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, 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
interests 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 interests of the VIE.
In October 2003, 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. The implementation of
FIN 46 encompassed a review of numerous entities to determine the impact
of adoption
8
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
and considerable judgment was used in evaluating whether or not a VIE
should be consolidated. 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.
STOCK-BASED COMPENSATION
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 December 31, 2002. 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. During the 2004 first
quarter, the Company changed its valuation from the Black-Scholes model to
the Binomial Method. The impact of this change was insignificant.
Compensation expense and proforma compensation expense had the Company
applied SFAS 123 prior to 2003 was insignificant for the quarter and six
months ended June 30, 2004 and 2003.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
OTHER-THAN-TEMPORARY IMPAIRMENTS OF CERTAIN INVESTMENTS
On March 31, 2004, the FASB ratified EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments, "(EITF 03-1), which provides guidance on recognizing
other-than temporary impairments on certain investments. The Issue is
effective for other-than-temporary impairment evaluations for investments
accounted for under SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as well as non-marketable equity securities
accounted for under the cost method for reporting periods beginning after
June 15, 2004. The Company is evaluating the impact of adopting EITF 03-1
and has not yet completed this analysis.
3. SHAREHOLDER'S EQUITY
Statutory capital and surplus of the Company was $494 million at December
31, 2003. The Company is currently subject to various regulatory
restrictions that limit the maximum amount of dividends available to be
paid to its parent without prior approval of insurance regulatory
authorities. The Company may not pay dividends during 2004 without prior
approval of the State of Connecticut Insurance Department.
In June 2004, TIC contributed $400 million as additional paid-in capital
to the Company.
9
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
4. COMMITMENTS AND CONTINGENCIES
In August 1999, an amended putative class action complaint captioned Lisa
Macomber, et al. vs. Travelers Property Casualty Corporation, et al. was
filed in New Britain, Connecticut Superior Court against the Company, its
parent corporation, certain of the Company's affiliates (collectively
TLA), and the Company's former affiliate, Travelers Property Casualty
Corporation. The amended complaint alleges Travelers Property Casualty
Corporation purchased structured settlement annuities from the Company and
spent less on the purchase of those structured settlement annuities than
agreed with claimants; and that commissions paid to brokers of structured
settlement annuities, including an affiliate of the Company, were paid, in
part, to Travelers Property Casualty Corporation. The amended complaint
was dismissed and following an appeal by plaintiff in September 2002 the
Connecticut Supreme Court reversed the dismissal of several of the
plaintiff's claims. On May 26, 2004, the Connecticut Superior Court
certified a nation wide class action involving the following claims
against TLA: violation of the Connecticut Unfair Trade Practice Statute,
unjust enrichment and civil conspiracy. On June 15, 2004, the Defendants,
including TLA, appealed the Connecticut Superior Court's May 26, 2004
class certification order.
The Company is continuing to assess its potential exposure in connection
with this matter, but does not currently believe that its ultimate
resolution is likely to have a material adverse effect on the Company's
financial condition.
In the ordinary course of business, the Company is a defendant or
co-defendant in various other 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.
10
THE TRAVELERS LIFE AND ANNUITY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis (MDA) of Financial Condition and
Results of Operations, pursuant to General Instruction H(2)(a) of Form 10-Q.
This MDA should be read in conjunction with the MDA included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003.
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 Travelers Life & Annuity website at
http://www.travelerslife.com by selecting the "Financial Information" page and
selecting "SEC Filings".
RESULTS OF OPERATIONS ($ in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------- -------- -------- --------
Revenues $ 200 $ 151 $ 368 $ 299
Benefits and interest credited 71 75 152 149
Operating expenses 54 41 112 80
-------- -------- -------- --------
Income before taxes 75 35 104 70
Income taxes 26 10 27 16
-------- -------- -------- --------
Net income $ 49 $ 25 $ 77 $ 54
======== ======== ======== ========
The Travelers Life and Annuity Company (the Company) is a wholly owned
subsidiary of The Travelers Insurance Company (TIC), a wholly owned subsidiary
of Citigroup Insurance Holdings Corporation, an indirect wholly owned subsidiary
of Citigroup Inc. (Citigroup). TIC has a license from The St. Paul Travelers
Companies, Inc. to permit it and the Company to use the names "Travelers Life &
Annuity," "The Travelers Insurance Company," "The Travelers Life and Annuity
Company" and related names in connection with their businesses. The Company
offers fixed and variable retail annuities and individual life insurance to
individuals and small businesses.
Net income for the second quarter of 2004 was $49 million, versus $25 million in
the prior year second quarter. The increase in net income was driven by higher
business volumes, higher retained investment margins, a one time investment
transaction resulting in additional mortgage loan interest income of $3 million
after-tax, a one time structured settlement benefit reserve release of $6
million after-tax and increased after-tax realized investment portfolio gains.
Partially offsetting these increases were increased operating expenses related
to $7 million of after-tax amortization of deferred acquisition costs (DAC)
resulting from business volume growth.
Net income was $77 million and $54 million for the six months ended June 30,
2004 and 2003, respectively. This 43% increase resulted from higher fee and net
investment income (NII) from continued growth in business volumes as well as the
one time structured settlement benefit reserve release. Offsetting increased
revenues was a $14 million after-tax increase in DAC amortization and an
increase in other operating expenses resulting from business volume growth.
The revenue increase for the second quarter 2004 over the prior year period was
primarily driven by a 42% increase in fee income. Fee income in the retail
annuity and individual life product lines together increased $21 million due to
higher business volumes, particularly in the individual life line. NII increased
23% in the second quarter of 2004 versus the same period in 2003, primarily as
the result of a larger invested asset base
11
THE TRAVELERS LIFE AND ANNUITY COMPANY
created through continued growth in business volumes, a one time investment
transaction which resulted in $5 million of additional mortgage loan interest
and growth in the income of private equity investments. Net realized investment
gains on derivatives related to the Company's guaranteed minimum withdrawal
benefit feature increased, also contributing to the quarterly increase in
revenues.
Revenues for the six months ended June 30, 2004 and June 30, 2003 were $368
million and $299 million, respectively. Fee income increased $45 million, or
42%, due to continued business volume growth in both the retail annuity and
individual life product lines. NII increased $23 million, or 14%, primarily
related to a larger invested asset base also created through the continued
growth in business volumes, the one time investment transaction in the second
quarter of 2004 discussed above and increases in income from private equities.
Interest credited increased slightly for both the quarter and six-month periods
over prior year, mainly due to increased universal life (UL) production, offset
by decreases in structured settlements, which are no longer written by the
Company. Insurance benefits decreased on both a quarterly and six-month basis as
the second quarter of 2004 had a one time pre-tax benefit reserve release of $9
million in structured settlement annuities.
Operating expenses increased from $41 million to $54 million for the three-month
period ended June 30, 2004 over June 30, 2003. This increase was primarily
related to the amortization of DAC which was $44 million in 2004 versus $33
million in 2003. Operating expenses were up 40% to $112 million for the
six-month period of 2004 from $80 million for the same period of 2003, primarily
as DAC amortization related to business volume growth increased $22 million, or
34%.
The majority of the annuity business and a substantial portion of the life
business written by the Company are accounted for as investment contracts, with
the result that deposits collected are reported as liabilities and are not
included in revenues. Deposits represent an operating statistic used for
measuring business volumes, which management of the Company uses to manage the
life insurance and annuities operations, and may not be comparable to similarly
captioned measurements used by other life insurance companies. The following
table shows net written premiums and deposits by product line for the quarterly
and six-month periods ended June 30, 2004 and 2003.
PREMIUMS AND DEPOSITS ($ in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------- -------- -------- --------
Premiums
Individual Life $ 8 $ 9 $ 17 $ 19
Other Annuity 2 1 3 2
-------- -------- -------- --------
Total Premiums $ 10 $ 10 $ 20 $ 21
-------- -------- -------- --------
Deposits
Retail Annuity - Fixed $ 105 $ 179 $ 231 $ 318
Retail Annuity - Variable 433 340 979 584
-------- -------- -------- --------
Total Retail Annuity 538 519 1,210 902
Individual Life 215 124 447 211
Other Annuity 1 1 3 2
-------- -------- -------- --------
Total Deposits $ 754 $ 644 $ 1,660 $ 1,115
-------- -------- -------- --------
Retail annuity deposits collected for the quarter and six months ended June 30,
2004 were up from the comparable prior year periods primarily as a result of a
27% and 68% increase in variable annuity sales, respectively. This annuity sales
increase was due mainly to improved equity market conditions in 2004 and
increased sales of annuities with a guaranteed minimum withdrawal benefit
feature. These increases were partially offset by decreased fixed annuity sales
in the modified guaranteed annuity product. Retail annuity
12
THE TRAVELERS LIFE AND ANNUITY COMPANY
account balances and benefit reserves were $14 billion and $11 billion at June
30, 2004 and 2003, respectively. This increase is reflective of $1.3 billion
market appreciation and $1.7 billion of net sales of variable annuity
investments subsequent to June 30, 2003.
Deposits for the life insurance business increased 73% and 112% for the three
and six months ended June 30, 2004 versus 2003, respectively. This increase was
the result of the continued momentum of universal life production, including
significant single premium sales in the second quarter of 2004. Life insurance
in force was $49 billion at June 30, 2004, up from $39 billion at June 30, 2003.
OUTLOOK
The Company's business is significantly affected by movements in the U.S. equity
and fixed income credit markets. U.S. equity and credit market events can have
both positive and negative effects on the deposit, revenue and policy retention
performance of the business. A sustained weakness in the equity markets will
decrease revenues and earnings in variable products. Declines in credit quality
of issuers will have a negative effect on earnings. This statement is a
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on this page.
INSURANCE REGULATIONS
Risk-based capital requirements are used as minimum capital requirements by the
National Association of Insurance Commissioners (NAIC) and the states to
identify companies that merit further regulatory action. At December 31, 2003,
the Company had total adjusted capital in excess of amounts requiring any
regulatory action as defined by the NAIC.
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 the state of domicile. The
Company may not pay dividends during 2004 without prior approval of the State of
Connecticut Insurance Department. The Company did not pay any dividends to its
parent during the six months ended June 30, 2004.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 2 of Notes to Condensed Financial Statements for a discussion of
recently issued accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "may increase," "predict," 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 and the
potential impact of a decline in credit quality of investments on earnings.
13
THE TRAVELERS LIFE AND ANNUITY COMPANY
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended ("Exchange Act")) as of the end of the period covered by this report.
Based on such evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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THE TRAVELERS LIFE AND ANNUITY COMPANY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1999, an amended putative class action complaint captioned Lisa
Macomber, et al. vs. Travelers Property Casualty Corporation, et al. was
filed in New Britain, Connecticut Superior Court against the Company, its
parent corporation, certain of the Company's affiliates (collectively
TLA), and the Company's former affiliate, Travelers Property Casualty
Corporation. The amended complaint alleges Travelers Property Casualty
Corporation purchased structured settlement annuities from the Company and
spent less on the purchase of those structured settlement annuities than
agreed with claimants; and that commissions paid to brokers of structured
settlement annuities, including an affiliate of the Company, were paid, in
part, to Travelers Property Casualty Corporation. The amended complaint
was dismissed and following an appeal by plaintiff in September 2002 the
Connecticut Supreme Court reversed the dismissal of several of the
plaintiff's claims. On May 26, 2004, the Connecticut Superior Court
certified a nation wide class action involving the following claims
against TLA: violation of the Connecticut Unfair Trade Practice Statute,
unjust enrichment and civil conspiracy. On June 15, 2004, the Defendants,
including TLA, appealed the Connecticut Superior Court's May 26, 2004
class certification order.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.01 Charter of The Travelers Life and Annuity Company (the
"Company"), as amended on April 10, 1990, incorporated
herein by reference to Exhibit 6(a) to the Registration
Statement on Form N-4, File No. 33-58131, filed on March
17, 1995.
3.02 By-laws of the Company, as amended on October 20, 1994,
incorporated herein by reference to Exhibit 6(b) to the
Registration Statement on Form N-4, File No. 33-58131,
filed on March 17, 1995.
31.01+ Certification of chief financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.02+ Certification of chief executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.01+ Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K.
None.
- --------------------
+Filed herewith
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THE TRAVELERS LIFE AND ANNUITY COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TRAVELERS LIFE AND ANNUITY COMPANY
(Registrant)
Date August 13, 2004 /s/ Glenn D. Lammey
---------------------------------------------------
Glenn D. Lammey
Senior Executive Vice President,
Chief Financial Officer & Chief Accounting Officer
(Principal Financial Officer & Principal Accounting
Officer)
16