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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 MARCH 31, 2005
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 $100 per share, of the registrant, all of which were owned by The
Travelers Insurance Company, an indirect wholly owned subsidiary of Citigroup
Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
THE TRAVELERS LIFE AND ANNUITY COMPANY
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Statements of Income for the three
months ended March 31, 2005 and 2004 (unaudited)................. 3
Condensed Balance Sheets as of March 31, 2005 (unaudited) and
December 31, 2004................................................ 4
Condensed Statements of Changes in Shareholder's Equity
for the three months ended March 31, 2005 and 2004 (unaudited)... 5
Condensed Statements of Cash Flows for the
three months ended March 31, 2005 and 2004 (unaudited)........... 6
Notes to Condensed Financial Statements (unaudited).............. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 14
ITEM 4. CONTROLS AND PROCEDURES................................. 17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS................................................ 18
Signatures....................................................... 19
Exhibit 31.01.................................................... 20
Exhibit 31.02.................................................... 21
Exhibit 32.01.................................................... 22
2
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
($ in millions)
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
------- --------
REVENUES
Premiums $ 10 $ 10
Net investment income 105 88
Net realized investment gains (losses) 2 (11)
Fee income 107 75
Other revenues 4 6
----- -----
Total Revenues 228 168
----- -----
BENEFITS AND EXPENSES
Current and future insurance benefits 24 24
Interest credited to contractholders 62 57
Amortization of deferred acquisition costs 61 43
General and administrative expenses 17 15
----- -----
Total Benefits and Expenses 164 139
----- -----
Income before federal income taxes 64 29
Federal income taxes 20 1
----- -----
Net Income $ 44 $ 28
===== =====
See Notes to Condensed Financial Statements.
3
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED BALANCE SHEETS
($ in millions)
MARCH 31, 2005
(UNAUDITED) DECEMBER 31, 2004
-------------- -----------------
ASSETS
Investments (including $187 and $133 subject to
securities lending agreements) $ 7,326 $ 7,329
Separate and variable accounts 11,419 11,631
Deferred acquisition costs 1,574 1,522
Premiums and fees receivable 73 75
Other assets 218 268
------- -------
Total Assets $20,611 $20,825
------- -------
LIABILITIES
Future policy benefits and claims $ 1,075 $ 1,079
Contractholder funds 5,332 5,227
Separate and variable accounts 11,419 11,631
Deferred federal income taxes 146 180
Other liabilities 727 747
------- -------
Total Liabilities 18,699 18,864
------- -------
SHAREHOLDER'S EQUITY
Common stock, par value $100; 100,000 shares authorized,
30,000 issued and outstanding 3 3
Additional paid-in capital 817 817
Retained earnings 966 922
Accumulated other changes in equity from nonowner sources 126 219
------- -------
Total Shareholder's Equity 1,912 1,961
------- -------
Total Liabilities and Shareholder's Equity $20,611 $20,825
======= =======
See Notes to Condensed Financial Statements.
4
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
($ in millions)
THREE MONTHS ENDED
MARCH 31,
-------------------
2005 2004
-------- -------
COMMON STOCK
Balance, beginning of period $ 3 $ 3
Changes in common stock - -
------- -------
Balance, end of period $ 3 $ 3
======= =======
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period $ 817 $ 417
Changes in additional paid-in capital - -
------- -------
Balance, end of period $ 817 $ 417
======= =======
RETAINED EARNINGS
Balance, beginning of period $ 922 $ 764
Net income 44 28
------- -------
Balance, end of period $ 966 $ 792
======= =======
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
Balance, beginning of period $ 219 $ 215
Unrealized gains (losses), net of tax (92) 71
Derivative instrument hedging activity losses, net of tax (1) -
------- -------
Balance, end of period $ 126 $ 286
======= =======
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
Net income $ 44 $ 28
Other changes in equity from nonowner sources (93) 71
------- -------
Total changes in equity from nonowner sources $ (49) $ 99
======= =======
TOTAL SHAREHOLDER'S EQUITY
Balance, beginning of period $ 1,961 $ 1,399
Changes in nonowner sources (49) 99
------- -------
Balance, end of period $ 1,912 $ 1,498
======= =======
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)
THREE MONTHS ENDED
MARCH 31,
2005 2004
-------- --------
NET CASH USED IN OPERATING ACTIVITIES $ (13) $ (61)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 138 119
Equity Securities - 3
Mortgage loans 5 3
Proceeds from sales of investments
Fixed maturities 109 107
Equity securities 2 3
Real Estate - 2
Purchases of investments
Fixed maturities (309) (364)
Equity securities (1) (3)
Mortgage loans (22) (15)
Policy loans, net (1) (1)
Short-term securities purchases, net (43) (136)
Other investment (purchases) sales, net (18) 12
Securities transactions in course of settlement, net 48 137
----- -----
Net cash used in investing activities (91) (133)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 269 253
Contractholder fund withdrawals and maturities (164) (52)
----- -----
Net cash provided by financing activities 105 201
----- -----
Net increase in cash 1 7
Cash at beginning of period 1 1
----- -----
Cash at end of period $ 2 $ 8
----- -----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $(268) $ (13)
===== =====
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 (CIHC), 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 U.S. generally accepted accounting principles (GAAP) and are
unaudited.
On January 31, 2005, Citigroup announced its intention to sell its Life
Insurance and Annuities business, which includes TIC, the Company and
certain other businesses, to MetLife, Inc. (MetLife).
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,
2004. The condensed balance sheet as of December 31, 2004 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 2005 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
7
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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.
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. The Company
evaluates new issues of variable products to determine that mortality risk
on GMDB features is insignificant.
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. The Company capitalized
sales inducements of $6 million and $5 million in the first quarter of
2005 and 2004, respectively, in accordance with SOP 03-1. These
inducements relate to bonuses on certain products offered by the Company.
For the three months ended March 31, 2005 and 2004, amortization of these
capitalized amounts was insignificant.
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. FIN 46 and FIN 46-R change the method of determining whether
certain entities should be included in the Company's financial statements.
The effect of adopting FIN 46-R on the Company's balance sheet was
immaterial.
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
8
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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, 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. 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. 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.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
OTHER-THAN-TEMPORARY IMPAIRMENTS OF CERTAIN INVESTMENTS
On September 30, 2004, the FASB voted unanimously to delay the effective
date of Emerging Issues Task Force (EITF) No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
Investments" (EITF 03-1). The delay applies to both debt and equity
securities and specifically applies to impairments caused by interest rate
and sector spreads. In addition, the provisions of EITF 03-1 that have
been delayed relate to the requirements that a company declare its intent
to hold the security to recovery and designate a recovery period in order
to avoid recognizing an other-than-temporary impairment charge through
earnings.
The FASB will be issuing proposed implementation guidance related to this
topic. Once issued, the Company will evaluate the impact of adopting EITF
03-1. The disclosures required by EITF 03-1 are included in Note 3.
STOCK-BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123 (Revised 2004),
"Share-Based Payment" (SFAS 123-R), which replaces the existing SFAS 123
and supersedes APB 25. SFAS 123-R requires companies to measure and record
compensation expense for stock options and other share-based payment based
on the instruments' fair value. SFAS 123-R is effective for interim and
annual reporting periods beginning after June 15, 2005. The Company will
adopt SFAS 123-R on January 1, 2006 by using a modified prospective
approach. For unvested stock-based awards granted before January 1, 2003
(APB 25 awards), the Company will expense the fair value of the awards as
at the grant date over the remaining vesting period. The impact of
recognizing compensation expense for the unvested APB 25 awards is
expected to be immaterial. The Company continues to evaluate other
aspects of adotping SFAS 123-R.
9
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities were
as follows:
GROSS GROSS
MARCH 31, 2005 UNREALIZED UNREALIZED
($ in millions) AMORTIZED COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------------------------- -------------- ---------- ---------- ----------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and pass-through securities $ 965 $ 14 $ 6 $ 973
U.S. Treasury securities and obligations of U.S. Government
and government agencies and authorities 122 8 - 130
Obligations of states, municipalities and political subdivisions 58 9 - 67
Debt securities issued by foreign governments 59 4 - 63
All other corporate bonds 3,682 152 25 3,809
Other debt securities 1,103 48 7 1,144
Redeemable preferred stock 3 2 - 5
------ ------ ------ ------
Total Available For Sale $5,992 $ 237 $ 38 $6,191
------ ------ ------ ------
GROSS GROSS
DECEMBER 31, 2004 UNREALIZED UNREALIZED
($ in millions) AMORTIZED COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------------------------- -------------- ---------- ---------- ----------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and pass-through securities $ 906 $ 24 $ 1 $ 929
U.S. Treasury securities and obligations of U.S. Government
and government agencies and authorities 154 9 - 163
Obligations of states, municipalities and political subdivisions 57 8 - 65
Debt securities issued by foreign governments 63 6 - 69
All other corporate bonds 3,565 219 4 3,780
Other debt securities 1,180 71 2 1,249
Redeemable preferred stock 4 2 - 6
------ ------ ------ ------
Total Available For Sale $5,929 $ 339 $ 7 $6,261
------ ------ ------ ------
10
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
AGING OF GROSS UNREALIZED LOSSES ON AVAILABLE FOR SALE
The aging of gross unrealized losses on fixed maturity investments is as
follows:
TOTAL FIXED MATURITIES
WITH UNREALIZED LOSS
TOTAL FIXED MATURITIES TOTALING 20% OR MORE
---------------------- ----------------------
MARCH 31, 2005 AMORTIZED UNREALIZED AMORTIZED UNREALIZED
($ in millions) COST LOSS COST LOSS
- ---------------------------------------------- --------- ---------- --------- -----------
Six months or less $1,756 $ 30 $ 2 $ 1
Greater than six months to nine months 52 2 - -
Greater than nine months to twelve months 111 3 - -
Greater than twelve months 60 3 - -
------ ------ ------ ------
Total $1,979 $ 38 $ 2 $ 1
====== ====== ====== ======
TOTAL FIXED MATURITIES
WITH UNREALIZED LOSS
TOTAL FIXED MATURITIES TOTALING 20% OR MORE
---------------------- ----------------------
DECEMBER 31, 2004 AMORTIZED UNREALIZED AMORTIZED UNREALIZED
($ in millions) COST LOSS COST LOSS
- ---------------------------------------------- --------- ---------- --------- -----------
Six months or less $ 505 $ 3 $ - $ -
Greater than six months to nine months 134 2 - -
Greater than nine months to twelve months 26 1 - -
Greater than twelve months 40 1 - -
------- ------- ------- -------
Total $ 705 $ 7 $ - $ -
======= ======= ======= =======
NET REALIZED CAPITAL GAINS (LOSSES)
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
($ in millions) 2005 2004
- ------------------------------------- -------- ---------
NET REALIZED CAPITAL GAINS (LOSSES)
BY ASSET CLASS:
Fixed maturities $ (2) $ -
Equities 1 -
Derivatives:
Guaranteed minimum withdrawal
benefit derivatives, net 3 (5)
Other derivatives - (10)
Other - 4
---- ----
Total $ 2 $(11)
==== ====
11
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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 condensed
balance sheets and fluctuates based upon the timing of the repayments. The
liability balances were $24 million and $0 at March 31, 2005 and December
31, 2004, respectively.
4. DEPOSIT FUNDS AND RESERVES
At March 31, 2005 and December 31, 2004, the Company had $6.4 billion and
$6.3 billion of life and annuity deposit funds and reserves respectively,
as follows:
($ in millions) March 31, 2005 December 31, 2004
-------------- -----------------
Subject to discretionary withdrawal:
With fair value adjustments $ 2,552 $ 2,594
Subject to surrender charges 1,773 1,672
Surrenderable without charge 311 289
-------- --------
Total $ 4,636 $ 4,555
Not subject to discretionary withdrawal: $ 1,761 $ 1,744
-------- --------
Total $ 6,397 $ 6,299
======== ========
5. SHAREHOLDER'S EQUITY
Statutory capital and surplus of the Company was $942 million at December
31, 2004. The Company is subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to its parent
without prior approval of insurance regulatory authorities. In accordance
with Connecticut statutes, the Company may not pay dividends during 2005
without prior approval of the State of Connecticut Insurance Department.
As noted in Note 1, Citigroup has agreed to sell the Company to MetLife.
The State of Connecticut Insurance Department requires prior approval for
any dividends for a period of two years following a change in control.
Accordingly, any dividends from the Company during that period would
require prior approval from the State of Connecticut Insurance Department.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
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
12
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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 the
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. The class
action claims against TLA are 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.
In 2003 and 2004, 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. During 2004 the SEC requested
additional information about the Company's variable product operations on
market timing, late trading and revenue sharing, and the SEC, the National
Association of Securities Dealers and the New York Insurance Department
have made inquiries into these issues and other matters associated with
the sale and distribution of insurance products. In addition, like many
insurance companies and agencies, in 2004 and 2005 the Company received
inquiries from certain state Departments of Insurance regarding producer
compensation and bidding practices. The Company is cooperating fully with
all of these requests and is not able to predict their outcomes.
In addition, the Company is a defendant or co-defendant in various other
litigation matters in the normal course of business. These include civil
actions, arbitration proceedings and other matters arising in the normal
course of business out of activities as an insurance company, a broker and
dealer in securities or otherwise.
In the opinion of the Company's management, the ultimate resolution of
these legal and regulatory proceedings would not be likely to have a
material adverse effect on the Company's financial condition or liquidity,
but, if involving monetary liability, may be material to the Company's
operating results for any particular period.
13
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, 2004.
The Company's Annual Report on Form 10-K, its quarterly reports on Form 10-Q,
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
MARCH 31,
2005 2004
------ ------
Revenues $ 228 $ 168
Benefits and interest credited 86 81
Operating expenses 78 58
------ -----
Income before taxes 64 29
Income taxes 20 1
------ -----
Net income $ 44 $ 28
====== =====
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.
On January 31, 2005, Citigroup announced its intention to sell its Life
Insurance and Annuities business, which includes TIC, the Company and certain
other businesses, to MetLife, Inc. (MetLife).
Net income was $44 million for the three months ended March 31, 2005 up 57% from
$28 million for the prior year quarter. The increase in net income was related
to higher fee income, net investment income (NII), based on a higher asset base
and increased business volumes, and net realized capital gains on investments.
Partially offsetting the increased revenues were higher business-volume related
operating expenses and an increase in federal income taxes related to the
absence of an $8 million tax benefit related to an adjustment to the Dividends
Received Deduction (DRD) in the first quarter of 2004.
The revenue increase for the first quarter 2005 over the prior year period was
primarily driven by increases in fee income and NII. Fee income increased 43% to
$107 million in the first quarter of 2005, primarily in the individual life
product line, which increased $25 million due to higher business volumes. NII
increased $17 million or 19% in the first quarter of 2005 versus the same period
in 2004, related to increased business volumes and a higher capital base.
14
THE TRAVELERS LIFE AND ANNUITY COMPANY
Operating expenses increased $20 million from $58 million for the three months
ended March 31, 2004 to $78 million for the three-month period ended March 31,
2005. This increase is related to the amortization of deferred acquisition costs
(DAC), which was $61 million in 2005 versus $43 million in 2004. The majority of
this increase also related to volume growth in the UL business.
The majority of the annuity business and a substantial portion of the life
business written by the Company are accounted for as investment contracts, with
the result that deposits collected are reported as liabilities and are not
included in revenues. Deposits represent an operating statistic used for
measuring business volumes, which management of the Company uses to manage the
life insurance and annuities operations, and may not be comparable to similarly
captioned measurements used by other life insurance companies. The following
table shows net written premiums and deposits by product line for the quarterly
periods ended March 31, 2005 and 2004.
PREMIUMS AND DEPOSITS ($ in millions)
THREE MONTHS ENDED
MARCH 31,
2005 2004
------ ------
Premiums
Individual Life $ 8 $ 9
Retail Annuity 2 -
Other Annuity - 1
------ ------
Total Premiums $ 10 $ 10
------ ------
Deposits
Retail Annuity - Fixed $ 14 $ 125
Retail Annuity - Variable 338 547
------ ------
Total Retail Annuity 352 672
Individual Life 264 232
Other Annuity - 2
------ ------
Total Deposits $ 616 $ 906
------ ------
Retail annuity deposits collected for the quarter ended March 31, 2005 decreased
$320 million, or 48%. This decrease was driven by lower fixed annuity sales and
a third quarter 2004 shift in offering certain variable annuity products by TIC,
which were previously offered by the Company. Retail annuity account balances
and benefit reserves were $14.7 billion and $14.9 billion at March 31, 2005 and
December 31, 2004, respectively. This slight decrease is reflective of a $236
million decrease in market appreciation and partially offset by $105 million of
net sales of variable annuity investments.
Deposits for the life insurance business increased $32 million, or 14% for the
three months ended March 31, 2005 versus 2004. This increase was the result of
the continued momentum of universal life production. Life insurance in force was
$57 billion at March 31, 2005, up from $55 billion at December 31, 2004.
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 page 17.
The Company is included in the TLA segment of TIC and its outlook should be
considered within that context. The Company 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. The Company 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.
15
THE TRAVELERS LIFE AND ANNUITY COMPANY
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. The retail annuities
business is interest rate and equity market sensitive. TLA's variable annuities
offer products with guaranteed features that are equity market sensitive. The
guaranteed minimum death benefit feature pays benefits when at the time of death
of a contractholder the account value is below the guaranteed amount. Another
guaranteed feature offered is a guaranteed minimum withdrawal benefit, which is
considered an embedded derivative. Exposure increases with the decline in equity
markets and exposure decreases with equity market growth. This creates earnings
volatility because the embedded derivative is marked to market through income.
TLA has entered into an alternative hedging strategy to reduce the earnings
volatility.
Citigroup, the Company's ultimate parent has agreed to sell its Life Insurance
and Annuities business to MetLife. The Company is included in Citigroup's Life
Insurance and Annuities business. The transaction is expected to close this
summer. At that time, the Company will become part of MetLife, Inc. MetLife has
filed with the Insurance Department of the State of Connecticut (the
"Department") a Form A Statement Regarding the Acquisition of Control of or
Merger with a Domestic Insurer, dated March 7, 2005 (the "Form A"), seeking
the approval of the Department to acquire control of the Company and TIC. The
Form A includes MetLife's post-acquisition business plan and financial
projections for the Company and TIC after the Closing Date (the "Business
Plan"). Pursuant to the Business Plan, the Company would generally cease
issuing certain institutional annuity and other products immediately following
the Closing Date, including funding agreements and guaranteed investment
contracts. Both the Company and TIC will generally phase out the remaining
products that they currently issue by the end of 2006.
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, producer
compensation 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.
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, 2004,
the Company had total adjusted capital in excess of amounts requiring any
regulatory action as defined by the NAIC.
In accordance with Connecticut statutes, the Company may not pay dividends
during 2005 without prior approval of the State of Connecticut Insurance
Department. As noted in Note 1 of Notes to Condensed Financial Statements,
Citigroup has agreed to sell the Company to MetLife. The State of Connecticut
Insurance Department requires prior approval for any dividends for a period of
two years following a change in control. Accordingly, any dividends from the
Company during that period would require prior approval from the State of
Connecticut Insurance Department.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 2 of Notes to Condensed Financial Statements for a discussion of
recently issued accounting pronouncements.
16
THE TRAVELERS LIFE AND ANNUITY COMPANY
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.
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.
17
THE TRAVELERS LIFE AND ANNUITY COMPANY
PART II - OTHER INFORMATION
ITEM 6. 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.
- -----------------------------------
+Filed herewith
18
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 May 13, 2005 /s/ Glenn D. Lammey
--------------------------------------
Glenn D. Lammey
Senior Executive Vice President,
Chief Financial Officer and Chief
Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
19