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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
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Commission file number 33-33691
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The Travelers Insurance Company
(exact name of registrant as specified in its charter)
Connecticut 06-0566090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Tower Square, Hartford, Connecticut 06183
(Address of principal executive offices) (Zip Code)
(860) 277-0111
(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 |_|
At February 28, 2002 there were outstanding 40,000,000 shares of common stock,
par value $2.50 per share, of the registrant, all of which were owned by
Travelers Property Casualty Corp. (formerly known as Travelers Insurance Group
Inc.), 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 INSURANCE COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
Form 10-K
Item Number PART I Page
- ----------- ----
1. Business.................................................................................2
A. General.............................................................................2
B. Business by Segment
Travelers Life & Annuity.......................................................2
Primerica Life Insurance.......................................................3
C. Insurance Regulations...............................................................4
2. Properties...............................................................................5
3. Legal Proceedings........................................................................6
4. Submission of Matters to a Vote of Security Holders......................................6
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters....................6
6. Selected Financial Data..................................................................7
7. Management's Discussion and Analysis of Financial Condition and Results of Operations....7
7A. Quantitative and Qualitative Disclosures About Market Risk..............................12
8. Financial Statements and Supplementary Data.............................................15
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....54
PART III
10. Directors and Executive Officers of the Registrant......................................54
11. Executive Compensation..................................................................54
12. Security Ownership of Certain Beneficial Owners and Management..........................54
13. Certain Relationships and Related Transactions..........................................54
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................55
Exhibit Index...........................................................................56
Signatures..............................................................................57
Index to Financial Statements and Financial Statement Schedules.........................58
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PART I
Item 1. Business.
GENERAL
At December 31, 2001 and 2000 The Travelers Insurance Company (TIC, together
with its subsidiaries, the Company), was a wholly owned subsidiary of The
Travelers Insurance Group Inc. (TIGI), an indirect wholly owned subsidiary of
Citigroup Inc. (Citigroup). On February 4, 2002, TIGI changed its name to
Travelers Property Casualty Corp. (TPC). Citigroup is a diversified holding
company whose businesses provide a broad range of financial services to consumer
and corporate customers around the world. The periodic reports of Citigroup
provide additional business and financial information concerning that company
and its consolidated subsidiaries. TIC was incorporated in 1863. With $77.9
billion of assets and $510.5 billion of life insurance in force at December 31,
2001, the Company believes that it is one of the largest stock life insurance
groups in the United States as measured by these criteria.
TIGI has filed a registration statement on Form S-1, relating to an offering of
common stock and other securities with the Securities and Exchange Commission on
February 8, 2002. At the time of such offering, it is expected that TIC will no
longer be a subsidiary of TPC, but will remain an indirect wholly owned
subsidiary of Citigroup. See Note 16 of Notes to Consolidated Financial
Statements.
The Company's two reportable business segments are Travelers Life & Annuity and
Primerica Life Insurance. The primary insurance entities of the Company are TIC
and its subsidiary The Travelers Life and Annuity Company (TLAC), included in
the Travelers Life & Annuity segment, and Primerica Life Insurance Company
(Primerica Life) and its subsidiaries, Primerica Life Insurance Company of
Canada, CitiLife Financial Limited (CitiLife) and National Benefit Life
Insurance Company (NBL), included in the Primerica Life Insurance segment. The
consolidated financial statements include the accounts of the Company on a fully
consolidated basis.
BUSINESS BY SEGMENT
Travelers Life & Annuity
Travelers Life & Annuity (TLA) core offerings include individual annuity,
individual life, corporate owned life insurance (COLI) and group annuity
insurance products distributed by TIC and The Travelers Life and Annuity Company
(TLAC). Among the range of individual products offered are fixed and variable
deferred annuities, payout annuities and term, universal and variable life
insurance. The COLI product is a variable universal life product distributed
through independent specialty brokers. The group products include institutional
pensions, including guaranteed investment contracts, payout annuities, group
annuities sold to employer-sponsored retirement and savings plans and structured
finance transactions. The majority of the annuity business and a substantial
portion of the life business written by TLA are accounted for as investment
contracts, with the result that the deposits collected are reported as
liabilities and are not included in revenues.
Individual fixed and variable annuities are primarily used for retirement
funding purposes. Variable annuities permit policyholders to direct retirement
funds into a number of separate accounts, which offer differing investment
options. Individual payout annuities offer a guaranteed payment stream over a
specified period.
Individual life insurance is used to meet estate, business planning and
retirement needs and also to provide protection against financial loss due to
death.
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THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Group annuity products, including fixed and variable rate guaranteed investment
contracts, which provide a guaranteed return on investment, continue to be a
popular investment choice for employer-sponsored retirement and savings plans.
Annuities purchased by employer-sponsored plans fulfill retirement obligations
to individual employees. Payout annuities are used for providing structured
settlements of certain indemnity claims and making other payments to
policyholders over a period of time. Structured finance transactions offer fixed
term and rate investment options with policyholder status to domestic and
foreign institutional investors. These group annuity products are sold through
direct sales and various intermediaries.
TIC is licensed to sell and market its individual products in all 50 states, the
District of Columbia, Puerto Rico, Guam, the Bahamas and the U.S. and British
Virgin Islands.
Individual annuity products are distributed through affiliated channels and
non-affiliated channels. The affiliated channels include CitiStreet Retirement
Services LLC (CitiStreet), a joint venture between Citigroup and State Street
Bank; Salomon Smith Barney (SSB); Primerica Financial Services (Primerica); and
Citibank, N.A. (Citibank). The non-affiliated channels primarily include a
nationwide network of independent financial professionals and independent wire
houses and broker-dealers. CitiStreet is a captive sales organization of
personal retirement planning specialists focused primarily on the qualified
periodic deferred annuity marketplace. CitiStreet's share of total individual
annuity production was 26% in 2001. SSB distributes Travelers Life & Annuity's
individual annuities and individual life products, and accounted for 24% of
total individual annuity production in 2001. Sales by Primerica and Citibank
accounted for 15% and 9% respectively, of total individual annuity premiums and
deposits in 2001. The non-affiliated channels accounted for 26% of individual
annuity premiums and deposits.
Individual life products are primarily marketed by the independent financial
professionals and by SSB, who accounted for 74% and 20%, respectively, of total
individual life sales for 2001.
Effective July 1, 2000, the Company sold 90% of its individual long-term care
insurance business to General Electric Capital Assurance Company in the form of
an indemnity reinsurance arrangement. See Note 2 of Notes to Consolidated
Financial Statements.
The Company operates Tower Square Securities, Inc. (Tower Square Securities),
which is an introducing broker-dealer offering a full line of brokerage
services. Tower Square Securities facilitates the sale of individual variable
life and annuity insurance products by the independent financial professionals
of the Company.
Primerica Life Insurance
Primerica Life and its subsidiaries, Primerica Life Insurance Company of Canada,
CitiLife and NBL, are the insurance operations of Primerica. Their primary
product is individual term life insurance marketed through a sales force
composed of approximately 96,000 Personal Financial Analysts. A great majority
of the domestic licensed sales force works on a part-time basis. NBL also
provides statutory disability benefits and insurance, primarily in New York, as
well as direct response student term life insurance nationwide. CitiLife was
established in September 2000 to underwrite insurance in Europe. Primerica Life
and its subsidiaries together are licensed to sell and market term life
insurance in all 50 states, the District of Columbia, Canada, Puerto Rico, Guam,
the U.S. Virgin Islands, Northern Mariana Islands and Spain.
3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
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. Prior to
codification of statutory accounting principles effective in 2001, 15% of the
companies included in the IRIS system were expected by the NAIC, in normal
years, to be outside the usual range on four or more ratios.
In 2000, four IRIS ratios for TLAC had fallen outside of the usual range due to
growth in business volume. For 2000, the regulators have been satisfied upon
follow-up that there was no solvency problem. In 2001, the same four ratios have
fallen outside of the usual range and management believes that the resolution in
the current year would be the same, however no assurances at this time can be
given that such resolution will be the same as in prior years. This statement is
a forward-looking statement within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 12. No
regulatory action has been taken by any state insurance department or the NAIC
with respect to IRIS ratios of the primary insurance entities of the Company or
any of its insurance subsidiaries during the two years ended December 31, 2001.
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:
o asset risk (i.e., the risk of asset default),
o insurance risk (i.e., the risk of adverse mortality and morbidity
experience),
o interest rate risk (i.e., the risk of loss due to changes in
interest rates) and
o business risk (i.e., normal business and management risk).
4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Under laws adopted by the states, insurers having less total adjusted capital
than that required by the RBC calculation will be subject to varying degrees of
regulatory action, depending upon the level of capital inadequacy.
The RBC law provides for four levels of regulatory action as defined by the
NAIC. The extent of regulatory intervention and action increases as the level of
total adjusted capital to RBC falls. The first level, the company action level,
requires an insurer to submit a plan of corrective actions to the regulator if
total adjusted capital falls below 200% of the RBC amount. The second level, the
regulatory action level, requires an insurer to submit a plan containing
corrective actions and requires the relevant insurance commissioner to perform
an examination or other analysis and issue a corrective order if total adjusted
capital falls below 150% of the RBC amount. The third level, the authorized
control level, authorizes the relevant commissioner to take whatever regulatory
actions are considered necessary to protect the best interest of the
policyholders and creditors of the insurer which may include the actions
necessary to cause the insurer to be placed under regulatory control, i.e.,
rehabilitation or liquidation, if total adjusted capital falls below 100% of the
RBC amount. The fourth level, the mandatory control level, requires the relevant
insurance commissioner to place the insurer under regulatory control if total
adjusted capital falls below 70% of 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, 2001, the Company's principal insurance entities all
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
TIC is domiciled in the State of Connecticut. The insurance holding company law
of Connecticut requires notice to, and approval by, the State of Connecticut
Insurance Department for the declaration or payment of any dividend which,
together with other distributions made within the preceding twelve months,
exceeds the greater of (i) 10% of the insurer's surplus or (ii) the insurer's
net gain from operations for the twelve-month period ending on the preceding
December 31st, in each case determined in accordance with statutory accounting
practices. Such declaration or payment is further limited by adjusted unassigned
funds (surplus), as determined in accordance with statutory accounting
practices. The insurance holding company laws of other states in which the
Company's insurance subsidiaries are domiciled generally contain similar
(although in certain instances somewhat more restrictive) limitations on the
payment of dividends. A maximum of $586 million is available by the end of the
year 2002 for such dividends without prior approval of the State of Connecticut
Insurance Department, depending upon the amount and timing of the payments.
Item 2. Properties.
The Company's executive offices are located in Hartford, Connecticut. At
December 31, 2001 the Company owned buildings containing approximately 1.38
million square feet of office space located in Hartford serving as the home
office for the Company and Travelers Insurance Group Holdings Inc. (TIGHI), an
affiliate. TIGHI leases approximately 1.03 million square feet of such office
space at One Tower Square, Hartford under a ten-year lease that expires on April
1, 2006. Leasehold interests of the Company included approximately 585,000
square feet of office space in 20 field offices throughout the United States.
The Company also leases approximately 575,000 square feet of office space in
Hartford, Connecticut, under a 25-year lease that expires in 2010. The Company
currently subleases approximately 426,000 square feet to third party tenants.
As of December 31, 2001 the Company also owned a building in Norcross, Georgia.
An affiliate's information systems department occupies the entire building,
which has approximately 147,000 square feet of space. The
5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Company is reimbursed by affiliates for their use of this space on a cost
allocation method based generally on estimated usage by department.
Management believes that these facilities are suitable and adequate for the
Company's current needs. See Note 16 of Notes to Consolidated Financial
Statements for additional information regarding these facilities.
The foregoing discussion does not include information on investment properties.
Item 3. Legal Proceedings.
This section describes the major pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company or its
subsidiaries is a party or to which any of their property is subject.
In March 1997, a purported class action entitled Patterman v. The Travelers,
Inc., et al. was commenced in the Superior Court of Richmond County, Georgia,
alleging, among other things, violations of the Georgia RICO statute and other
state laws by an affiliate of the Company, Primerica Financial Services, Inc.
and certain of its affiliates. Plaintiffs seek unspecified compensatory and
punitive damages and other relief. From February 1998 through April 2000,
various motions for transfer of the lawsuit were heard and appealed. In April
2000, the matter was remanded to the Superior Court of Richmond County by the
Georgia Supreme Court. Also, in April 2000 defendants moved for summary
judgement on all counts of the complaint. Discovery commenced in May 2000.
Defendants intend to vigorously contest the litigation.
In the ordinary course of business, TIC and its subsidiaries are defendants or
co-defendants in various other litigation matters incidental to and typical of
the businesses in which they are engaged. 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 proceedings would not be likely to have a
material adverse effect on its 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 12.
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 Shareholder Matters.
The Company has 40,000,000 authorized shares of common stock, all of which are
issued and outstanding as of December 31, 2001. All shares are held by an
indirect subsidiary of Citigroup, and there exists no established public trading
market for the common equity of the Company. The Company paid dividends to its
parent of $472 million in 2001. See Note 8 of Notes to Consolidated Financial
Statements for certain information regarding dividend restrictions.
6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
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.
At December 31, 2001 and 2000, The Travelers Insurance Company (TIC, together
with its subsidiaries, the Company) was a direct subsidiary of The Travelers
Insurance Group Inc. (TIGI), an indirect wholly owned subsidiary of Citigroup
Inc. (Citigroup). On February 4, 2002, TIGI changed its name to Travelers
Property Casualty Corp. (TPC). The Company is composed of two business segments,
Travelers Life & Annuity and Primerica Life Insurance.
TPC has filed a registration statement on Form S-1, relating to an offering of
common stock and other securities, with the Securities and Exchange Commission
on February 8, 2002. At the time of such offering, it is expected that TIC will
no longer be a subsidiary of TPC, but will remain an indirect wholly owned
subsidiary of Citigroup. See Note 16 of Notes to Consolidated Financial
Statements.
Significant Accounting Policies
The financial statements contain a summary of the Company's significant
accounting policies, including a discussion of recently-issued accounting
pronouncements. Certain of these policies are considered to be important 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. These policies include valuation of
financial instruments where no ready market exists and insurance policy and
claims reserves. Additional information about these policies can be found in
Note 1 of Notes to Consolidated Financial Statements.
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks. 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. Fixed maturities, including instruments subject to securities
lending agreements (see Note 4 of Notes to Consolidated 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.
7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Deferred Acquisition Costs
Costs of acquiring individual life insurance and annuities, 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, are deferred. Acquisition costs relating to traditional life
insurance, including term insurance, are amortized in relation to anticipated
premiums. Universal life costs are amortized in relation to estimated gross
profits, and annuity contracts employ a level yield method. For life insurance,
a 15 to 20-year amortization period is used, and a 7 to 20-year period is
employed for annuities. Deferred acquisition costs are reviewed periodically for
recoverability to determine if any adjustment is required. Adjustments, if any,
are charged to income.
Future Policy Benefits
Future policy benefits represent liabilities for future insurance policy
benefits. Benefit reserves for life insurance and annuities have been computed
based upon mortality, morbidity, persistency and interest assumptions applicable
to these coverages, which range from 2.5% to 8.1%, including adverse deviation.
These assumptions consider Company experience and industry standards. The
assumptions vary by plan, age at issue, year of issue and duration. Appropriate
recognition has been given to experience rating and reinsurance.
Premiums
Premiums are recognized as revenues when due. Reserves are established for the
portion of premiums that will be earned in future periods and for deferred
profits on limited-payment policies that are being recognized in income over the
policy term.
CONSOLIDATED OVERVIEW
For the years ended December 31, 2001 2000
($ in millions) ---- ----
Revenues $5,702 $5,254
====== ======
Net income (1) $1,272 $1,103
====== ======
(1) Net income includes net realized investment gains of $81 million and a $9
million charge from the cumulative effects of changes in accounting
principles in 2001, and net realized investment losses of $50 million in
2000.
Operating income, defined as income before net realized gains or losses and
cumulative effect of changes in accounting principles, increased 4% to $1.20
billion in 2001 from $1.15 billion in 2000. The operating earnings increase was
driven by increased revenues from business volume growth, mitigated by the loss
of revenues related to the long-term care insurance business sold in 2000, and a
reduction in general and administrative expenses due to continued expense
management and the absence of expenses related to the long-term care insurance
business.
8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Travelers Life & Annuity
For the years ended December 31, 2001 2000
($ in millions) ---- ----
Revenues $4,089 $3,822
====== ======
Net income (1) $ 826 $ 758
====== ======
(1) Net income includes net realized investment gains of $33 million and an $8
million charge from the cumulative effects of changes in accounting
principles in 2001, and net realized investment losses of $19 million in
2000.
Travelers Life & Annuity (TLA) core offerings include individual annuity,
individual life, corporate owned life insurance (COLI) and group annuity
insurance products distributed by TIC and The Travelers Life and Annuity Company
(TLAC). Among the range of individual products offered are fixed and variable
deferred annuities, payout annuities and term, universal and variable life
insurance. The COLI product is a variable universal life product distributed
through independent specialty brokers. The group products include institutional
pensions, including guaranteed investment contracts, payout annuities, group
annuities sold to employer-sponsored retirement and savings plans and structured
finance transactions. The majority of the annuity business and a substantial
portion of the life business written by TLA are accounted for as investment
contracts, with the result that the deposits collected are reported as
liabilities and are not included in revenues.
The cross-selling of TLA products through CitiStreet Retirement Services
LLC (CitiStreet), Primerica Financial Services, Inc. (Primerica), Citibank and
Salomon Smith Barney (SSB) distribution channels, along with improved sales
through a nationwide network of independent financial professionals and outside
wire houses and broker-dealers, and strong group sales through various
intermediaries, reflect ongoing efforts to build market share by strengthening
relationships in key distribution channels.
Operating income increased 3% to $801 million in 2001, compared to $777
million in 2000. The improvement in earnings during 2001 was largely driven by
increases in investment income from business volume, particularly Group Annuity,
expense management and the absence of expenses due to the sale of the long-term
care insurance business in 2000.
Business Volume ($ in millions)
2001 2000 % change
---- ---- --------
Individual Annuity Account Balances $28,873 $27,981 3.2
Group Annuity Account Balances $20,992 $17,460 20.2
Direct Periodic Premiums and Deposits $ 652 $ 511 27.6
Individual annuity account balances were $28.9 billion at year-end 2001, up 3%
from $28.0 billion at year-end 2000, reflecting good in-force policy retention,
offset by declines in market values of investments. Net premiums and deposits
decreased 2% in 2001 to $6.1 billion, from $6.2 billion in 2000. This decrease
in individual annuity net written premiums and deposits was driven by a decline
in variable annuity sales due to market conditions, but was partially offset by
significant fixed annuity sales increases over the prior year. Non-affiliated
sales channels increased 34%, allowing the individual annuity line to increase
market share despite lower sales.
9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Group annuity account balances and benefits reserves reached $21.0 billion at
year-end 2001, up 20% from $17.5 billion at year-end 2000. This volume growth
reflects strong sales momentum in all products, particularly guaranteed
investment contracts (GIC) and long-term liability contracts. Net premiums and
deposits (excluding Citigroup's employee pension plan deposits) were $7.1
billion in 2001 compared to $5.5 billion in 2000, which reflected particularly
strong fixed GIC growth through structured finance transactions and long term
liability growth through the extension of structured settlement broker
relationships and large case employer pension sales.
Direct periodic premiums for individual life insurance of $651.6 million were up
28% from $510.6 million in 2000, driven by independent financial professionals,
particularly in the high end estate planning markets, and COLI sales. Life
insurance in force was $75.7 billion at December 31, 2001, up from $68.3 billion
at year-end 2000. This reflects strong agency results and increased
corporate-owned life insurance sales.
TLA general and administrative expenses decreased 34% to $154 million in 2001
from $234 million in 2000, resulting from decreases in renewal commissions,
premium taxes, licenses and fees related to the long-term care insurance
business sold in 2000, reduced goodwill amortization and strict expense
management.
Effective July 1, 2000, the Company sold 90% of its individual long-term care
insurance business to General Electric Capital Assurance Company and its
subsidiary in the form of an indemnity reinsurance arrangements. See Note 2 of
Notes to Consolidated Financial Statements.
OUTLOOK
TLA should benefit from growth in the aging population which is becoming more
focused on the need to accumulate adequate savings for retirement, to protect
these savings and to plan for the transfer of wealth to the next generation. TLA
is well positioned to take advantage of the favorable long-term demographic
trends through its strong financial position, widespread brand name recognition
and broad array of competitive life, annuity and retirement and estate planning
products sold through established distribution channels.
However, competition in both product pricing and customer service is
intensifying. While there has been some consolidation within the industry, other
financial services organizations are increasingly involved in the sale and/or
distribution of insurance products. Financial services reform is likely to have
many effects on the life insurance industry and the results will take time to
assess; however, heightened competition is expected. Also, the annuities
business is interest rate and market sensitive, and swings in interest rates and
equity markets could influence sales and retention of in-force policies. In
order to strengthen its competitive position, TLA expects to maintain a
competitive product portfolio, further diversify its distribution channels, and
retain its financial position through increased sales growth and maintenance of
an efficient cost structure.
The statements above are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 12.
10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Primerica Life Insurance
For the years ended December 31, 2001 2000
($ in millions) ---- ----
Revenues $1,613 $1,432
====== ======
Net income (1) $ 446 $ 345
====== ======
(1) Net income includes net realized investment gains of $48 million and a $1
million charge from the cumulative effect of change in accounting
principle in 2001, and net realized investment losses of $31 million in
2000.
Operating income was $399 million in 2001 compared to $376 million in 2000. The
6% improvement in 2001 reflects growth in life insurance in force, increased
investment earnings and disciplined expense management.
Earned Premiums, Net of Reinsurance
For the years ended December 31, 2001 2000
($ in millions) ---- ----
Individual term life $1,078 $1,038
Other 67 68
------ ------
$1,145 $1,106
====== ======
The average face value per policy issued was $250,000 in 2001 compared to
$245,000 in 2000. Total face amount of term life insurance issued was $71.5
billion in 2001 compared to $67.4 billion in 2000. The number of policies issued
was 244,700 in 2001 compared to 234,700 in 2000. These increases in term life
production resulted from the increase in licensed life agents and reflects the
use of the Financial Needs Analysis, the diagnostic tool that enhances the
ability of the Personal Financial Analysts to address client needs. Life
insurance in force at year-end 2001 reached $434.8 billion, up from $412.7
billion at year-end 2000, continuing to reflect strong policy persistency.
OUTLOOK
Over the last few years, programs including sales and product training were
begun that are designed to maintain high compliance standards, increase the
number of producing agents and customer contacts and, ultimately, increase
production levels. Insurance in-force has grown and the number of producing
agents has also grown. A continuation of these trends could positively influence
future operations. This statement is a forward-looking statement within the
meaning of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on page 12.
11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Consolidated Financial Statements for Future Applications
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," "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 and the
Company's market risk, as well as the discussions of the Company's prospects
under "Outlook" for each of the businesses.
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, 2001.
Market risk sensitive instruments entered into for purposes other than trading
The primary market risk to the Company's investment portfolio is interest rate
risk associated with investments. 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 product
line, with each product line'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 4
of Notes to Consolidated 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,
2000. 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 this page.
12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
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, interest-bearing non-redeemable preferred stock,
mortgage loans, short-term securities, cash, investment income accrued, policy
loans, contractholder funds, guaranteed separate account assets and liabilities
and derivative financial instruments. In addition, certain non-financial
instrument liabilities have been included in the sensitivity analysis model.
These non-financial instruments include future policy benefits and policy and
contract claims. The primary market risk to the Company's market sensitive
instruments is interest rate risk. The sensitivity analysis model uses a 100
basis point change in interest rates to measure the hypothetical change in fair
value of financial instruments and the non-financial instruments included in the
model.
For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and reset
features. Portfolio durations are calculated on a market value weighted basis,
including accrued investment income, using trade date holdings as of December
31, 2001 and 2000. The sensitivity analysis model used by the Company produces a
loss in fair value of interest rate sensitive invested assets of approximately
$1.7 billion and $1.3 billion based on a 100 basis point increase in interest
rates as of December 31, 2001 and 2000, 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 $1.3 billion and $.9 billion based
on a 100 basis point increase in interest rates as of December 31, 2001 and
2000, respectively. Based on the sensitivity analysis model used by the Company,
the net loss in fair value of market sensitive instruments, including
non-financial instrument liabilities, as a result of a 100 basis point increase
in interest rates as of December 31, 2001 and 2000 is not material.
Market risk sensitive instruments entered into for trading purposes
The Company maintains a trading portfolio consisting of carrying values of
$1,880 million and $1,870 million of convertible bonds and common stocks as of
December 31, 2001 and 2000, respectively, and $891 million and $1,109 million of
liabilities resulting from common stocks sold not yet purchased (referred to as
short sales) as of December 31, 2001 and 2000, respectively. The primary market
risk to the trading portfolio is equity risk. Assets are reported as trading
securities and liabilities are reported as trading securities sold not yet
purchased.
13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The common stocks are paired with short sales, reflecting the Company's
arbitrage strategy where both positions are invested in each of the companies
involved in a merger. The convertible bonds are also paired with short sales of
the common stocks of companies issuing the convertible bonds. These positions
are established and maintained so that general changes in equity markets and
interest rates should not materially impact the value of the portfolio.
Tabular presentation
The table below provides information about the trading portfolio's financial
instruments that are primarily exposed to equity price risk. This table presents
the fair values of these instruments by trading portfolio type, as designated
internally by the Company, as of December 31, 2001 and 2000. Fair values are
based upon quoted market prices.
($ in millions) Fair value as of Fair value as of
December 31, 2001 December 31, 2000
----------------- -----------------
Assets
Trading securities
Convertible bond arbitrage $1,798 $1,474
Merger arbitrage 80 309
Other 2 87
------ ------
$1,880 $1,870
====== ======
Liabilities
Trading securities sold not yet purchased
Convertible bond arbitrage $ 836 $ 845
Merger arbitrage 51 205
Other 4 59
------ ------
$ 891 $1,109
====== ======
The Company's trading portfolio investments and related liabilities are normally
held for periods less than six months. Therefore, expected future cash flows for
these assets and liabilities are expected to be realized in less than one year.
14
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
----
Independent Auditors' Report..................................................16
Consolidated Financial Statements:
Consolidated Statements of Income for
the years ended December 31, 2001, 2000 and 1999.........................17
Consolidated Balance Sheets - December 31, 2001 and 2000.................18
Consolidated Statements of Changes in Retained Earnings
and Accumulated Other Changes in Equity from Nonowner
Sources for the years ended December 31, 2001, 2000 and 1999.............19
Consolidated Statements of Cash Flows for
the years ended December 31, 2001, 2000 and 1999.........................20
Notes to Consolidated Financial Statements............................21-53
15
Independent Auditors' Report
The Board of Directors and Shareholder
The Travelers Insurance Company:
We have audited the accompanying consolidated balance sheets of The Travelers
Insurance Company and subsidiaries as of December 31, 2001 and 2000, and the
related statements of income, changes in retained earnings and accumulated other
changes in equity from nonowner sources, and cash flows for each of the years
in the three-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Travelers
Insurance Company and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities and for securitized financial assets in 2001.
/s/ KPMG LLP
Hartford, Connecticut
January 17, 2002, except as to
Note 16, which is as of February 27, 2002
16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in millions)
For the Year Ended December 31, 2001 2000 1999
---- ---- ----
REVENUES
Premiums $ 2,102 $ 1,966 $1,728
Net investment income 2,831 2,730 2,506
Realized investment gains (losses) 125 (77) 113
Fee income 537 505 432
Other revenues 107 130 89
- ----------------------------------------------------------------------------------------------------------------
Total Revenues 5,702 5,254 4,868
- ----------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,862 1,752 1,505
Interest credited to contractholders 1,179 1,038 937
Amortization of deferred acquisition costs 379 347 315
General and administrative expenses 371 463 519
- ----------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 3,791 3,600 3,276
- ----------------------------------------------------------------------------------------------------------------
Income from operations before federal income taxes and cumulative
effects of changes in accounting principles 1,911 1,654 1,592
- ----------------------------------------------------------------------------------------------------------------
Federal income taxes
Current 471 462 409
Deferred 159 89 136
- ----------------------------------------------------------------------------------------------------------------
Total Federal Income Taxes 630 551 545
- ----------------------------------------------------------------------------------------------------------------
Income before cumulative effects of changes in accounting principles 1,281 1,103 1,047
Cumulative effect of change in accounting for derivative instruments and
hedging activities, net of tax (6) -- --
Cumulative effect of change in accounting for securitized financial assets,
net of tax (3) -- --
- ----------------------------------------------------------------------------------------------------------------
Net income $ 1,272 $ 1,103 $1,047
================================================================================================================
See Notes to Consolidated Financial Statements.
17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions)
At December 31, 2001 2000
- -----------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value (including $2,309 and $1,494
subject to securities lending agreements) $32,072 $26,812
Equity securities, at fair value 472 592
Mortgage loans 1,995 2,187
Real estate held for sale 55 31
Policy loans 1,208 1,249
Short-term securities 3,053 2,136
Trading securities, at fair value 1,880 1,870
Other invested assets 2,485 2,356
- -----------------------------------------------------------------------------------------------------------
Total Investments 43,220 37,233
- -----------------------------------------------------------------------------------------------------------
Cash 146 150
Investment income accrued 487 442
Premium balances receivable 137 97
Reinsurance recoverables 4,163 3,977
Deferred acquisition costs 3,461 2,989
Separate and variable accounts 24,837 24,006
Other assets 1,415 1,399
- -----------------------------------------------------------------------------------------------------------
Total Assets $77,866 $70,293
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $22,810 $19,394
Future policy benefits and claims 14,221 13,300
Separate and variable accounts 24,837 23,994
Deferred federal income taxes 409 284
Trading securities sold not yet purchased, at fair value 891 1,109
Other liabilities 5,513 3,818
- -----------------------------------------------------------------------------------------------------------
Total Liabilities $68,681 $61,899
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized, issued and outstanding 100 100
Additional paid-in capital 3,869 3,848
Retained earnings 5,142 4,342
Accumulated other changes in equity from nonowner sources 74 104
- -----------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 9,185 8,394
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $77,866 $70,293
===========================================================================================================
See Notes to Consolidated Financial Statements.
18
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS AND
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES
($ in millions)
For the Year Ended December 31,
- -------------------------------------------------------------------------------------------
Statements of Changes in Retained Earnings 2001 2000 1999
- -------------------------------------------------------------------------------------------
Balance, beginning of year $ 4,342 $ 4,099 $ 3,602
Net income 1,272 1,103 1,047
Dividends to parent 472 860 550
- -------------------------------------------------------------------------------------------
Balance, end of year $ 5,142 $ 4,342 $ 4,099
===========================================================================================
- -------------------------------------------------------------------------------------------
Statements of Accumulated Other Changes
In Equity From Nonowner Sources
- -------------------------------------------------------------------------------------------
Balance, beginning of year $ 104 $ (398) $ 598
Cumulative effect of accounting for
derivative instruments and hedging activities, net
of tax (29) 0 0
Unrealized gains (losses), net of tax 68 501 (996)
Foreign currency translation, net of tax (5) 1 0
Derivative instrument hedging activity losses, net
of tax (64) 0 0
- -------------------------------------------------------------------------------------------
Balance, end of year $ 74 $ 104 $ (398)
===========================================================================================
- -------------------------------------------------------------------------------------------
Summary of Changes in Equity
From Nonowner Sources
- -------------------------------------------------------------------------------------------
Net Income $ 1,272 $ 1,103 $ 1,047
Other changes in equity from nonowner sources (30) 502 (996)
- -------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 1,242 $ 1,605 $ 51
===========================================================================================
See Notes to Consolidated Financial Statements.
19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
($ in millions)
For the Year Ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Premiums collected $ 2,109 $ 1,986 $ 1,715
Net investment income received 2,430 2,489 2,365
Other revenues received 867 865 537
Benefits and claims paid (1,176) (1,193) (1,094)
Interest credited to contractholders (1,159) (1,046) (958)
Operating expenses paid (1,000) (970) (1,013)
Income taxes paid (472) (490) (393)
Trading account investments purchases, net (92) (143) (80)
Other (227) (258) (104)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,280 1,240 975
- ----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from maturities of investments
Fixed maturities 3,706 4,257 4,103
Mortgage loans 455 380 662
Proceeds from sales of investments
Fixed maturities 14,110 10,840 12,562
Equity securities 112 397 100
Real estate held for sale 6 244 219
Purchases of investments
Fixed maturities (22,556) (17,836) (18,129)
Equity securities (50) (7) (309)
Mortgage loans (287) (264) (470)
Policy loans, net 41 9 599
Short-term securities (purchases) sales, net (914) (810) 316
Other investments (purchases), sales, net 103 (461) (413)
Securities transactions in course of settlement, net 1,086 944 (463)
- ----------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (4,188) (2,307) (1,223)
- ----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Contractholder fund deposits 8,308 6,022 5,764
Contractholder fund withdrawals (4,932) (4,030) (4,946)
Dividends to parent company (472) (860) (550)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 2,904 1,132 268
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (4) 65 20
Cash at December 31, previous year 150 85 65
- ----------------------------------------------------------------------------------------------------
Cash at December 31, current year $ 146 $ 150 $ 85
====================================================================================================
See Notes to Consolidated Financial Statements.
20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the
accompanying financial statements follow.
Basis of Presentation
At December 31, 2001 and 2000, The Travelers Insurance Company (TIC,
together with its subsidiaries, the Company), was a wholly owned
subsidiary of The Travelers Insurance Group Inc. (TIGI), an indirect
wholly owned subsidiary of Citigroup Inc. (Citigroup), a diversified
holding company whose businesses provide a broad range of financial
services to consumer and corporate customers around the world. On February
4, 2002, TIGI changed its name to Travelers Property Casualty Corp. (TPC).
The consolidated financial statements include the accounts of the Company
and its insurance and non-insurance subsidiaries on a fully consolidated
basis. The primary insurance entities of the Company are TIC and its
subsidiaries, The Travelers Life and Annuity Company (TLAC), Primerica
Life Insurance Company (Primerica Life), and its subsidiaries, Primerica
Life Insurance Company of Canada, CitiLife Financial Limited (CitiLife)
and National Benefit Life Insurance Company (NBL). Significant
intercompany transactions and balances have been eliminated. See Note 16.
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
and 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.
Certain prior year amounts have been reclassified to conform to the 2001
presentation.
Accounting Changes
Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). FAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other 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.
As a result of adopting FAS 133, the Company recorded a charge of $6
million after tax, reflected as a cumulative catch-up adjustment in the
consolidated statement of income and a charge of $29 million after tax,
reflected as a cumulative catch-up adjustment in the accumulated other
changes in equity from nonowner
21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
sources section of shareholder's equity. During the twelve months ending
December 31, 2001, the Company reclassified from accumulated other changes
in equity from nonowner sources into net investment income $35 million of
losses related to derivatives that were designated as cash flow hedges at
transition.
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests 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 on 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. The recognition of impairment resulting from the
adoption of EITF 99-20 was recorded as a cumulative catch-up adjustment.
Interest income on beneficial interest falling within the scope of EITF
99-20 is to be recognized prospectively. As a result of adopting EITF
99-20, the Company recorded a charge of $3 million after tax, reflected as
a cumulative catch-up adjustment in the consolidated statement of income.
The implementation of this EITF did not have a significant impact on
results of operations, financial condition or liquidity.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, a replacement of FASB Statement
No. 125" (FAS 140). Provisions of FAS 140 primarily relating to transfers
of financial assets and securitizations that differ from provisions of
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (FAS 125) are effective for transfers
taking place after March 31, 2001. Special purpose entities (SPEs) used in
securitizations that are currently qualifying SPEs under FAS 125 will
continue to be treated as qualifying SPEs so long as they issue no new
beneficial interests and accept no new asset transfers after March 31,
2001, other than transfers committed to prior to that date. Under FAS 140
qualifying SPEs are not consolidated by the transferor. FAS 140 also
amends the accounting for collateral and requires new disclosures for
collateral, securitizations, and retained interests in securitizations.
These provisions are effective for financial statements for fiscal years
ending after December 15, 2000. The accounting for collateral, as amended,
requires (a) certain assets pledged as collateral to be separately
reported in the consolidated balance sheet from assets not so encumbered
and (b) disclosure of assets pledged as collateral that have not been
reclassified and separately reported. The adoption of FAS 140 did not have
a significant effect on the Company's results of operations, financial
condition or liquidity. See Note 4.
Accounting Standards Not Yet Adopted
Business Combinations, Goodwill and Other Intangible Assets
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and
Other Intangible Assets" (FAS 142). These standards change the accounting
for business combinations by, among other things, prohibiting the
prospective use of pooling-of-interests accounting and requiring companies
to stop amortizing goodwill and certain intangible assets with an
indefinite useful life created by business combinations accounted for
using the purchase method of accounting. Instead, goodwill and intangible
assets deemed to have an indefinite useful life will be subject to an
annual review for impairment. Other intangible assets that are not deemed
to have an indefinite
22
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
useful life will continue to be amortized over their useful lives. The
Company will apply the new rules on accounting for goodwill and other
intangible assets in the first quarter of 2002 and for purchase business
combinations consummated after June 30, 2001.
Upon adoption, the Company will stop amortizing goodwill and
indefinite-lived intangible assets. Based on the current levels of these
assets, this would reduce general and administrative expenses and increase
net income by approximately $11 million in 2002. In addition, the Company
has performed the transitional impairment tests using the fair value
approach required by the new standard. Based upon these tests, the Company
does not anticipate impairing goodwill or other intangible assets as of
January 1, 2002.
Asset Retirement Obligations
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). FAS 143
changes the measurement of an asset retirement obligation from a
cost-accumulation approach to a fair value approach, where the fair value
(discounted value) of an asset retirement obligation is recognized as a
liability in the period in which it is incurred and accretion expense is
recognized using the credit-adjusted risk-free interest rate in effect
when the liability was initially recognized. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset and subsequently amortized into expense. The pre-FAS 143
prescribed practice of reporting a retirement obligation as a contra-asset
will no longer be allowed. The Company is in the process of assessing the
impact of the new standard that will take effect on January 1, 2003.
Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (FAS 144). FAS 144 establishes a single accounting
model for long-lived assets to be disposed of by sale. A long-lived asset
classified as held for sale is to be measured at the lower of its carrying
amount or fair value less cost to sell. Depreciation (amortization) is to
cease. Impairment is recognized only if the carrying amount of a
long-lived asset is not recoverable from its undiscounted cash flows and
is measured as the difference between the carrying amount and fair value
of the asset. Long-lived assets to be abandoned, exchanged for a similar
productive asset, or distributed to owners in a spin-off are considered
held and used until disposed of. Accordingly, discontinued operations are
no longer to be measured on a net realizable value basis, and future
operating losses are no longer recognized before they occur.
The Company will adopt FAS 144 effective January 1, 2002. The provisions
of the new standard are generally to be applied prospectively and are not
expected to significantly affect the Company's results of operations,
financial condition or liquidity.
23
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Accounting Policies
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks.
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. Also included in fixed maturities
are loan-backed and structured securities, which are amortized using the
retrospective method. The effective yield used to determine amortization
is calculated based upon actual historical and projected future cash
flows, which are obtained from a widely accepted securities data provider.
Fixed maturities, including instruments subject to securities lending
agreements (see Note 4), 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.
Equity securities, which include common and non-redeemable preferred
stocks, are classified as "available for sale" and 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 higher returns required in the current real estate
financing market. Impaired loans were insignificant at December 31, 2001
and 2000.
Real estate held for sale is carried at the lower of cost or fair value
less estimated cost to sell. Fair value of foreclosed properties is
established at the time of foreclosure by internal analysis or external
appraisers, using discounted cash flow analyses and other accepted
techniques. Thereafter, an allowance for losses on real estate held for
sale is established if the carrying value of the property exceeds its
current fair value less estimated costs to sell. There was no such
allowance at December 31, 2001 and 2000.
Policy loans are carried at the amount of the unpaid balances that are not
in excess of the net cash surrender values of the related insurance
policies. The carrying value of policy loans, which have no defined
maturities, is considered to be fair value.
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.
Trading securities and related liabilities are normally held for periods
less than six months. These investments are marked to market with the
change recognized in net investment income during the current period.
Other invested assets include partnership investments and real estate
joint ventures accounted for on the equity method of accounting.
Undistributed income is reported in net investment income. Also included
in other invested assets is an investment in Citigroup Preferred Stock.
See Note 13.
24
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Accrual of income 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. Investments in default at December 31, 2001
and 2000 were insignificant.
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures contracts, interest rate swaps, currency swaps, equity swaps,
options and forward contracts, as a means of hedging exposure to interest
rate changes, equity price change and foreign currency risk. The Company,
through Tribeca Investments LLC, a subsidiary that is a broker-dealer,
holds and issues derivative instruments for trading purposes. (See Note 11
for a more detailed description of the Company's derivative use.)
Derivative financial instruments in a gain position are reported in the
consolidated balance sheet in other invested assets while derivative
financial instruments in a loss position are reported in the consolidated
balance sheet in other liabilities.
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 (losses), together with changes in the fair
value of the related hedged item. 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
in shareholder's equity. These changes in fair value will be included in
earnings of future periods when earnings are also affected by the
variability of the hedged cash flows. To the extent these derivatives are
not effective, changes in their fair values are immediately included in
realized investment gains (losses). The Company's cash flow hedges
primarily include hedges of foreign denominated funding agreements and
floating rate available-for-sale securities.
For net investment hedges, in which derivatives hedge the foreign currency
exposure of a net investment in a foreign operation, the accounting
treatment will similarly depend on the effectiveness of the hedge. The
effective portion of the change in fair value of the derivative, including
any forward premium or discount, is reflected in the accumulated other
changes in equity from nonowner sources as part of the foreign currency
translation adjustment in shareholder's equity. The ineffective portion is
reflected in realized investment gains (losses).
Derivatives that are used to hedge instruments that are carried at fair
value, or do not qualify as hedges under the new rules, are also carried
at fair value with changes in value reflected in realized investment gains
(losses).
25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 excess gains or losses attributable to
such ineffectiveness as well as subsequent changes in fair value are
recognized in realized investment gains (losses).
For those hedge relationships that are terminated, hedge designations
removed, or forecasted transactions that are no longer expected to occur,
the hedge accounting treatment described in the paragraphs above will no
longer apply. For fair value hedges, any changes to the hedged item remain
as part of the basis of the asset or liability and are ultimately
reflected as an element of the yield. For cash flow hedges, any changes in
fair value of the end-user derivative remain in the accumulated other
changes in equity from nonowner sources 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, any changes in fair value of the end-user derivative are
immediately reflected in realized investment gains (losses).
Financial instruments with embedded derivatives:
The Company bifurcates an embedded derivative where a.) 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, b.) the entire instrument would not otherwise be remeasured at
fair value and c.) a separate instrument with the same terms of the
embedded instrument would meet the definition of a derivative under FAS
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 (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 insurance 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 (losses) consistent with the hedge
instrument. Derivatives embedded in variable annuity contracts are
classified in the consolidated balance sheet as future policyholder
benefits and claims.
Prior to the adoption of FAS 133 on January 1, 2001, end-user derivatives
designated as qualifying hedges were accounted for consistent with the
risk management strategy as follows. Derivatives used for hedging purposes
were generally accounted for using hedge accounting. Changes in value of
the derivatives which were expected to substantially offset the changes in
value of the hedged items qualified for hedge accounting. Hedges were
monitored to ensure that there was a high correlation between the
derivative instrument and the hedged investment. Derivatives that did not
qualify for hedge accounting were marked to market with changes in market
value reflected in the consolidated statement of income as realized gains
(losses).
Payments to be received or made under interest rate swaps were accrued and
recognized in net investment income. Swaps hedging investments were
carried at fair value with unrealized gains (losses), net of taxes,
charged directly to shareholder's equity. Interest rate and currency swaps
hedging liabilities were treated as off-balance sheet instruments. Gains
and losses arising from financial future contracts were used to adjust the
basis of hedged investments and were recognized in net investment income
over the life of the investment. Gains and losses arising from equity
index options were marked to market with changes in market value
26
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
reflected in realized investment gains (losses). Forward contracts hedging
investments were marked to market based on changes in the spot rate with
changes in market value reflected in realized investment gains (losses)
and any forward premium or discount was recognized in net investment
income over the life of the contract. Gains and losses from forward
contracts hedging foreign operations were carried at fair value with
unrealized gains (losses), net of taxes, charged directly to shareholder's
equity.
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. Other-than-temporary declines in fair value of
investments are included in realized investment gains and 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. The foreign exchange effects of Canadian
operations are included in unrealized gains and losses.
Deferred Acquisition Costs
Costs of acquiring individual life insurance and annuities, 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, are deferred. Acquisition costs relating to
traditional life insurance, including term insurance, are amortized in
relation to anticipated premiums. Universal life costs are amortized in
relation to estimated gross profits, and annuity contracts employ a level
yield method. For life insurance, a 15 to 20-year amortization period is
used, and a 7 to 20-year period is employed for annuities. Deferred
acquisition costs are reviewed periodically for recoverability to
determine if any adjustment is required. Adjustments, if any, are charged
to income.
Value of Insurance in Force
The value of insurance in force is an asset that was recorded at the time
of acquisition of the Company by Citigroup's predecessor. It represents
the actuarially determined present value of anticipated profits to be
realized from life insurance, annuities and health contracts at the date
of acquisition using the same assumptions that were used for computing
related liabilities where appropriate. The value of insurance in force was
the actuarially determined present value of the projected future profits
discounted at interest rates ranging from 14% to 18%. Traditional life
insurance and guaranteed renewable health policies are amortized in
relation to anticipated premiums; universal life is amortized in relation
to estimated gross profits; and annuity contracts are amortized employing
a level yield method. The value of insurance in force, which is included
in other assets, is reviewed periodically for recoverability to determine
if any adjustment is required. Adjustments, if any, are charged to income.
The carrying value at December 31, 2001 and 2000 was $144 million and $170
million, respectively.
Separate and Variable Accounts
Separate and variable accounts primarily represent funds for which
investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contractholders. Each account 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
market value.
27
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Certain other separate accounts provide guaranteed levels of return or
benefits and the assets of these accounts are primarily carried at market
value. Amounts assessed to the 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.
Goodwill and Intangible Assets
Goodwill and intangible assets are included in other assets. Prior to the
adoption of FASB Statements of Financial Accounting Standards No. 141
"Business Combinations" (FAS 141) and No. 142 "Goodwill and Other
intangible Assets" (FAS 142), which will be applied to goodwill and
intangible assets in the first quarter of 2002, goodwill is being
amortized on a straight-line basis principally over a 40-year period. The
carrying amount of $336 million and $334 million of goodwill and other
intangible assets at December 31, 2001 and 2000, respectively, is
regularly reviewed for indication of impairment in value that in the view
of management would be other than temporary. If it is determined that
goodwill and other intangible assets are unlikely to be recovered,
impairment is recognized on a discounted cash flow basis.
Upon adoption of FAS 141 and FAS 142, the Company will stop amortizing
goodwill and intangible assets deemed to have an infinite useful life.
Instead, these assets will be subject to an annual review for impairment.
Other intangible assets that are not deemed to have an indefinite useful
life will continue to be amortized over their useful lives. See Note 1,
Summary of Significant Accounting Policies, Accounting Standards Not Yet
Adopted.
Contractholder Funds
Contractholder funds represent receipts from the issuance of universal
life, corporate owned life insurance, pension investment and certain
deferred annuity contracts. Contractholder fund balances are increased by
such receipts and credited interest and reduced by withdrawals, mortality
charges and administrative expenses charged to the contractholders.
Interest rates credited to contractholder funds range from 1.9% to 14.0%.
Future Policy Benefits
Future policy benefits represent liabilities for future insurance policy
benefits. Benefit reserves for life insurance and annuities have been
computed based upon mortality, morbidity, persistency and interest
assumptions applicable to these coverages, which range from 2.5% to 8.1%,
including adverse deviation. These assumptions consider Company experience
and industry standards. The assumptions vary by plan, age at issue, year
of issue and duration. Appropriate recognition has been given to
experience rating and reinsurance.
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 premium 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, 2001 and 2000,
28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
the Company had a liability of $22.3 million and $22.5 million,
respectively, for guaranty fund assessments and a related premium tax
offset recoverable of $4.3 million and $3.4 million, respectively. The
assessments are expected to be paid over a period of 3 to 5 years and the
premium tax offsets are expected to be realized over a period of 10 to 15
years.
Permitted Statutory Accounting Practices
The Company's insurance subsidiaries, domiciled principally in Connecticut
and Massachusetts, prepare statutory financial statements in accordance
with the accounting practices prescribed or permitted by the insurance
departments of the states of domicile. 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 impact of any permitted accounting practices on statutory
surplus of the Company is not material.
Premiums
Premiums are recognized as revenues when due. Reserves are established for
the portion of premiums that will be earned in future periods and for
deferred profits on limited-payment policies that are being recognized in
income over the policy term.
Fee Income
Fee income includes mortality, administrative and equity protection
charges, as well as universal life and variable annuity separate account
management fees.
Other Revenues
Other revenues include surrender, penalties and other charges related to
annuity and universal life contracts. Also included are revenues of
non-insurance subsidiaries and amortization of deferred income.
Current and Future Insurance Benefits
Current and future insurance benefits represent charges for mortality and
morbidity related to fixed annuities, universal life, term life and health
insurance benefits.
Interest Credited to Contractholders
Interest credited to contractholders represents amounts earned by
universal life, corporate owned life insurance, 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.
29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Stock-Based Compensation
The Company accounts for the stock-based compensation plans using the
accounting method prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and has included
in the Notes to Consolidated Financial Statements the pro forma
disclosures required by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (FAS 123). See Note 13. The
Company accounts for its stock-based non-employee compensation plans at
fair value.
2. BUSINESS DISPOSITION
Effective July 1, 2000, the Company sold 90% of its individual long-term
care insurance business to General Electric Capital Assurance Company and
its subsidiary in the form of indemnity reinsurance arrangements. The
proceeds were $410 million, resulting in a deferred gain of approximately
$150 million after-tax. The deferred gain will be amortized in relation to
anticipated premiums. After-tax amortization amounted to $21 million and
$5 million in 2001 and 2000, respectively. Earned premiums were $25
million, $138 million and $230 million in 2001, 2000 and 1999,
respectively.
3. OPERATING SEGMENTS
The Company has two reportable business segments that are separately
managed due to differences in products, services, marketing strategy and
resource management. The business of each segment is maintained and
reported through separate legal entities within the Company. The
management groups of each segment report separately to the common ultimate
parent, Citigroup Inc.
Travelers Life & Annuity (TLA) core offerings include individual annuity,
individual life, corporate owned life insurance (COLI) and group annuity
insurance products distributed by TIC and TLAC principally under the
Travelers name. Among the range of individual products offered are fixed
and variable deferred annuities, payout annuities and term, universal and
variable life insurance. The COLI product is a variable universal life
product distributed through independent specialty brokers. The group
products include institutional pensions, including guaranteed investment
contracts (GICs), payout annuities, group annuities sold to
employer-sponsored retirement and savings plans and structured finance
transactions. The majority of the annuity business and a substantial
portion of the life business written by TLA are accounted for as
investment contracts, with the result that the deposits collected are
reported as liabilities and are not included in revenues.
The Primerica Life Insurance business segment consolidates primarily the
business of Primerica Life, Primerica Life Insurance Company of Canada,
CitiLife and NBL. The Primerica Life Insurance business segment offers
individual life products, primarily term insurance, to customers through a
nationwide sales force of approximately 96,000 full and part-time licensed
Personal Financial Analysts.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1), except that
management also includes receipts on long-duration contracts (universal
life-type and investment contracts) as deposits along with premiums in
measuring business volume. The amount of investments in equity method
investees and total expenditures for additions to long-
30
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
lived assets other than financial instruments, long-term customer
relationships of a financial institution, mortgage and other servicing
rights, and deferred tax assets, were not material.
Business Segment Information:
- ------------------------------------------------------------------------------------------------
At and for the year
Ended December 31, 2001 Travelers Life Primerica Life
($ in millions) & Annuity Insurance Total
- ------------------------------------------------------------------------------------------------
Business Volume:
Premiums $ 957 $1,145 $ 2,102
Deposits 13,067 -- 13,067
------- ------ -------
Total business volume $14,024 $1,145 $15,169
Net investment income 2,530 301 2,831
Interest credited to contractholders 1,179 -- 1,179
Amortization of deferred acquisition costs 171 208 379
Total expenditures for deferred acquisition costs 553 298 851
Federal income taxes (FIT) on Operating Income 377 209 586
Operating Income (excludes realized gains or
losses and the related FIT) $ 801 $ 399 $ 1,200
Segment Assets $69,836 $8,030 $77,866
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
At and for the year
Ended December 31, 2000 Travelers Life Primerica Life
($ in millions) & Annuity Insurance Total
- ------------------------------------------------------------------------------------------------
Business Volume:
Premiums $ 860 $1,106 $ 1,966
Deposits 11,536 -- 11,536
------- ------ -------
Total business volume $12,396 $1,106 $13,502
Net investment income 2,450 280 2,730
Interest credited to contractholders 1,038 -- 1,038
Amortization of deferred acquisition costs 166 181 347
Total expenditures for deferred acquisition costs 520 272 792
Federal income taxes (FIT) on Operating Income 381 197 578
Operating Income (excludes realized gains or
losses and the related FIT) $ 777 $ 376 $ 1,153
Segment Assets $62,771 $7,522 $70,293
- ------------------------------------------------------------------------------------------------
31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
- ---------------------------------------------------------------------------------------------------
At and for the year
Ended December 31, 1999 Travelers Life Primerica Life
($ in millions) & Annuity Insurance Total
- ---------------------------------------------------------------------------------------------------
Business Volume:
Premiums $ 656 $1,072 $ 1,728
Deposits 10,639 -- 10,639
------- ------ -------
Total business volume $11,295 $1,072 $12,367
Net investment income 2,249 257 2,506
Interest credited to contractholders 937 -- 937
Amortization of deferred acquisition costs 127 188 315
Total expenditures for deferred acquisition costs 430 256 686
Federal income taxes (FIT) on Operating Income 319 186 505
Operating Income (excludes realized gains or
losses and the related FIT) $ 619 $ 355 $ 974
Segment Assets $56,615 $6,916 $63,531
- ---------------------------------------------------------------------------------------------------
32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
- -----------------------------------------------------------------------------------------------
Business Segment Reconciliation:
($ in millions) At and for the years ended December 31,
- -----------------------------------------------------------------------------------------------
Business Volume and Revenues 2001 2000 1999
- -----------------------------------------------------------------------------------------------
Total business volume $ 15,169 $ 13,502 $ 12,367
Other revenues, including fee income 644 635 521
Elimination of deposits (13,067) (11,536) (10,639)
--------------------------------------
Revenue from external sources 2,746 2,601 2,249
Net investment income 2,831 2,730 2,506
Realized investment gains (losses) 125 (77) 113
===============================================================================================
Total revenues $ 5,702 $ 5,254 $ 4,868
===============================================================================================
Operating Income
- -----------------------------------------------------------------------------------------------
Total operating income of business segments $ 1,200 $ 1,153 $ 974
Realized investment gains (losses), net of tax 81 (50) 73
Cumulative effect of change in accounting for
derivative instruments and hedging activities, net
of tax (6) -- --
Cumulative effect of change in accounting for
securitized financial assets, net of tax (3) -- --
- -----------------------------------------------------------------------------------------------
Income from continuing operations $ 1,272 $ 1,103 $ 1,047
===============================================================================================
Assets
- -----------------------------------------------------------------------------------------------
Total assets of business segments $ 77,866 $ 70,293 $ 63,531
===============================================================================================
Business Volume and Revenues
- -----------------------------------------------------------------------------------------------
Individual Annuities $ 7,166 $ 7,101 $ 5,816
Group Annuities 8,383 6,563 6,572
Individual Life and Health Insurance 2,854 2,445 2,424
Other (a) 366 681 695
Elimination of deposits (13,067) (11,536) (10,639)
- -----------------------------------------------------------------------------------------------
Total revenue $ 5,702 $ 5,254 $ 4,868
===============================================================================================
(a) Other represents revenue attributable to unallocated capital and run-off
businesses.
The Company's revenue was derived almost entirely from U.S. domestic business.
Revenue attributable to foreign countries was insignificant.
The Company had no transactions with a single customer representing 10% or more
of its revenue.
33
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. INVESTMENTS
Fixed Maturities
The amortized cost and fair value of investments in fixed maturities were
as follows:
- -------------------------------------------------------------------------------------------------------------
Gross Gross
December 31, 2001 Amortized Unrealized Unrealized Fair
($ in millions) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
Available For Sale:
Mortgage-backed securities - CMOs and
pass-through securities $ 6,654 $116 $ 57 $ 6,713
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,677 8 63 1,622
Obligations of states, municipalities and
political subdivisions 108 4 1 111
Debt securities issued by foreign
governments 810 46 5 851
All other corporate bonds 17,904 482 260 18,126
Other debt securities 4,406 154 86 4,474
Redeemable preferred stock 171 12 8 175
- -------------------------------------------------------------------------------------------------------------
Total Available For Sale $31,730 $822 $480 $32,072
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Gross Gross
December 31, 2000 Amortized Unrealized Unrealized Fair
($ in millions) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
Available For Sale:
Mortgage-backed securities - CMOs and
pass-through securities $ 5,492 $169 $ 34 $ 5,627
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,141 71 5 1,207
Obligations of states, municipalities and
political subdivisions 168 14 1 181
Debt securities issued by foreign
governments 761 18 14 765
All other corporate bonds 14,575 269 253 14,591
Other debt securities 4,217 87 59 4,245
Redeemable preferred stock 201 14 19 196
- -------------------------------------------------------------------------------------------------------------
Total Available For Sale $26,555 $642 $385 $26,812
- -------------------------------------------------------------------------------------------------------------
34
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Proceeds from sales of fixed maturities classified as available for sale
were $14.1 billion, $10.8 billion and $12.6 billion in 2001, 2000 and
1999, respectively. Gross gains of $633 million, $213 million and $200
million and gross losses of $426 million, $432 million and $223 million in
2001, 2000 and 1999, respectively, were realized on those sales.
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 are not available amounted to
$4.6 billion and $4.8 billion at December 31, 2001 and 2000, respectively.
The amortized cost and fair value of fixed maturities at December 31,
2001, by contractual maturity, are shown below. Actual maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------------------
Amortized
($ in millions) Cost Fair Value
- --------------------------------------------------------------------------------
Maturity:
Due in one year or less $ 1,843 $ 1,868
Due after 1 year through 5 years 9,206 9,401
Due after 5 years through 10 years 7,578 7,649
Due after 10 years 6,449 6,441
- --------------------------------------------------------------------------------
25,076 25,359
- --------------------------------------------------------------------------------
Mortgage-backed securities 6,654 6,713
- --------------------------------------------------------------------------------
Total Maturity $31,730 $32,072
- --------------------------------------------------------------------------------
The Company makes 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 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 a careful assessment indicates a favorable risk/return
tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 2001 and 2000, the Company held CMOs classified as
available for sale with a fair value of $4.5 billion and $4.4 billion,
respectively. Approximately 38% and 49%, respectively, of the Company's
CMO holdings are fully collateralized by GNMA, FNMA or FHLMC securities at
December 31, 2001 and 2000. In addition, the Company held $2.1 billion and
$1.1 billion of GNMA, FNMA or FHLMC mortgage-backed pass-through
securities at December 31, 2001 and 2000, respectively. All of these
securities are rated AAA.
35
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
The Company generally receives cash collateral from the borrower, equal to
at least the market value of the loaned securities plus accrued interest,
and reinvests it in short-term securities. The loaned securities remain a
recorded asset of the Company, however, the Company records a liability
for the amount of the collateral held, representing its obligation to
return the collateral related to these loaned securities, and reports that
liability as part of other liabilities in the consolidated balance sheet.
At December 31, 2001 and 2000, the Company held collateral of $2.4 billion
and $1.5 billion, respectively.
Equity Securities
The cost and fair values of investments in equity securities were as
follows:
- ---------------------------------------------------------------------------------------------------
Equity Securities: Gross Unrealized Gross Unrealized Fair
($ in millions) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
December 31, 2001
Common stocks $ 96 $11 $ 6 $101
Non-redeemable preferred stocks 375 8 12 371
- ---------------------------------------------------------------------------------------------------
Total Equity Securities $471 $19 $18 $472
- ---------------------------------------------------------------------------------------------------
December 31, 2000
Common stocks $139 $11 $25 $125
Non-redeemable preferred stocks 492 7 32 467
- ---------------------------------------------------------------------------------------------------
Total Equity Securities $631 $18 $57 $592
- ---------------------------------------------------------------------------------------------------
Proceeds from sales of equity securities were $112 million, $397 million
and $100 million in 2001, 2000 and 1999, respectively. Gross gains of $10
million, $107 million and $15 million and gross losses of $109 million,
$16 million and $8 million in 2001, 2000 and 1999, respectively, were
realized on those sales.
Mortgage Loans and Real Estate
At December 31, 2001 and 2000, the Company's mortgage loan and real estate
portfolios consisted of the following:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000
- --------------------------------------------------------------------------------
Current Mortgage Loans $1,976 $2,144
Underperforming Mortgage Loans 19 43
- --------------------------------------------------------------------------------
Total Mortgage Loans 1,995 2,187
- --------------------------------------------------------------------------------
Real Estate - Foreclosed 42 18
Real Estate - Investment 13 13
- --------------------------------------------------------------------------------
Total Real Estate 55 31
- --------------------------------------------------------------------------------
Total Mortgage Loans and Real Estate $2,050 $2,218
================================================================================
Underperforming mortgage loans include delinquent mortgage loans over 90 days
past due, loans in the process of foreclosure and loans modified at interest
rates below market.
36
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Aggregate annual maturities on mortgage loans at December 31, 2001 are as
follows:
- --------------------------------------------------------------------------------
Year Ending December 31,
($ in millions)
- --------------------------------------------------------------------------------
2002 $ 139
2003 174
2004 133
2005 132
2006 206
Thereafter 1,211
- --------------------------------------------------------------------------------
Total $1,995
================================================================================
Trading Securities
Trading securities of the Company are held in Tribeca Investments LLC. See
Note 11.
The Company's trading portfolio investments and related liabilities are
normally held for periods less than six months. Therefore, expected future
cash flows for these assets and liabilities are expected to be realized in
less than one year.
Other invested assets
Other invested assets are composed of the following:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000
- --------------------------------------------------------------------------------
Investment in Citigroup preferred stock $ 987 $ 987
Partnership investments 949 807
Real estate joint ventures 520 535
Other 29 27
- --------------------------------------------------------------------------------
Total $2,485 $2,356
- --------------------------------------------------------------------------------
Concentrations
At December 31, 2001 and 2000, the Company had an investment in Citigroup
Preferred Stock of $987 million. See Note 13.
The Company maintains a short-term investment pool for its insurance
affiliates in which the Company also participates. See Note 13.
37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company had concentrations of investments, primarily fixed maturities
at fair value, in the following industries:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000
- --------------------------------------------------------------------------------
Electric Utilities $3,883 $2,244
Banking 1,944 2,078
Finance 1,633 1,836
- --------------------------------------------------------------------------------
The Company held investments in foreign banks in the amount of $954
million and $1,082 million at December 31, 2001 and 2000, respectively,
which are included in the table above. Below investment grade assets
included in the categories of the preceding table totaled $401 million in
2001 and $214 million in 2000.
Included in fixed maturities are below investment grade assets totaling
$2.3 billion and $2.0 billion at December 31, 2001 and 2000, respectively.
The Company defines its below investment grade assets as those securities
rated Ba1 (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.
Included in mortgage loans were the following group concentrations:
-------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------
STATE
-----
California $788 $734
New York 203 208
PROPERTY TYPE
------------
Agricultural $1,131 $1,006
Office 471 661
-------------------------------------------------------------------
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, credit limits
and other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit. The Company's underwriting standards with respect
to new mortgage loans generally require loan to value ratios of 75% or
less at the time of mortgage origination.
Non-Income Producing Investments
Investments included in the consolidated balance sheets that were
non-income producing for the preceding 12 months were insignificant.
Restructured Investments
The Company had mortgage loans and debt securities that were restructured
at below market terms at December 31, 2001 and 2000. The balances of the
restructured investments were insignificant. The new terms typically defer
a portion of contract interest payments to varying future periods. The
accrual of interest is suspended on all restructured assets, and interest
income is reported only as payment is received. Gross interest income on
restructured assets that would have been recorded in accordance with the
original terms of such loans was insignificant in 2001 and 2000. Interest
on these assets, included in net investment income, was also insignificant
in 2001 and 2000.
38
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Net Investment Income
- --------------------------------------------------------------------------------
For The Year Ended December 31, 2001 2000 1999
($ in millions)
- --------------------------------------------------------------------------------
Gross Investment Income
Fixed maturities $2,328 $2,061 $1,806
Mortgage loans 210 223 235
Trading 131 208 141
Joint ventures and partnerships 71 150 141
Other, including policy loans 218 237 287
- --------------------------------------------------------------------------------
Total gross investment income 2,958 2,879 2,610
- --------------------------------------------------------------------------------
Investment expenses 127 149 104
- --------------------------------------------------------------------------------
Net investment income $2,831 $2,730 $2,506
- --------------------------------------------------------------------------------
Realized and Unrealized Investment Gains (Losses)
Net realized investment gains (losses) for the periods were as follows:
- --------------------------------------------------------------------------------
For The Year Ended December 31, 2001 2000 1999
($ in millions)
- --------------------------------------------------------------------------------
Realized Investment Gains (Losses)
Fixed maturities $ 207 $(219) $ (23)
Equity securities (99) 91 7
Mortgage loans 5 27 29
Real estate held for sale 3 25 108
Other 9 (1) (8)
- --------------------------------------------------------------------------------
Total realized investment gains (losses) $ 125 $ (77) $ 113
- --------------------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are reported in
accumulated other changes in equity from nonowner sources were as follows:
- -------------------------------------------------------------------------------------
For The Year Ended December 31, 2001 2000 1999
($ in millions)
- -------------------------------------------------------------------------------------
Unrealized Investment Gains (Losses)
Fixed maturities $ 85 $ 891 $(1,554)
Equity securities 40 (132) 49
Other (20) 13 (30)
- -------------------------------------------------------------------------------------
Total unrealized investment gains (losses) 105 772 (1,535)
- -------------------------------------------------------------------------------------
Related taxes 37 271 (539)
- -------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) 68 501 (996)
Balance beginning of year 103 (398) 598
- -------------------------------------------------------------------------------------
Balance end of year $ 171 $ 103 $ (398)
- -------------------------------------------------------------------------------------
39
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. REINSURANCE
The Company uses reinsurance in order to limit losses, minimize exposure
to large risks, provide additional capacity for future growth and to
effect business-sharing arrangements. Reinsurance is accomplished through
various plans of reinsurance, primarily yearly renewable term coinsurance
and modified coinsurance. The Company remains primarily liable as the
direct insurer on all risks reinsured.
Since 1997 universal life business has been reinsured under an 80%/20%
quota share reinsurance program and term life business has been reinsured
under a 90%/10% quota share reinsurance program. Maximum retention of $2.5
million is generally reached on policies in excess of $12.5 million. For
other plans of insurance, it is the policy of the Company to obtain
reinsurance for amounts above certain retention limits on individual life
policies, which limits vary with age and underwriting classification.
Generally, the maximum retention on an ordinary life risk is $2.5 million.
Total in-force business ceded under reinsurance contracts is $285.7
billion and $252.5 billion at December 31, 2001 and 2000.
Effective July 1, 2000 the Company sold 90% of its individual long-term
care insurance business to General Electric Capital Assurance Company and
its subsidiary in the form of indemnity reinsurance arrangements. Written
premiums ceded per these arrangements were $233.3 million and $123.4
million in 2001 and 2000, respectively and earned premiums ceded were
$240.1 million and $117.3 million in 2001 and 2000, respectively.
The Company writes workers' compensation business through its Accident
Department. This business is ceded 100% to an affiliate, The Travelers
Indemnity Company.
A summary of reinsurance financial data reflected within the consolidated
statements of income and balance sheets is presented below ($ in
millions):
For the years ending December 31,
Written Premiums 2001 2000 1999
- --------------------------------------------------------------------------------
Direct $ 2,848 $ 2,634 $ 2,274
Assumed from:
Non-affiliated companies 1 -- --
Ceded to:
Affiliated companies (146) (195) (206)
Non-affiliated companies (591) (465) (322)
- --------------------------------------------------------------------------------
Total Net Written Premiums $ 2,112 $ 1,974 $ 1,746
================================================================================
Earned Premiums 2001 2000 1999
- --------------------------------------------------------------------------------
Direct $ 2,879 $ 2,644 $ 2,248
Assumed from:
Non-affiliated companies 1 -- --
Ceded to:
Affiliated companies (180) (216) (193)
Non-affiliated companies (598) (462) (327)
================================================================================
Total Net Earned Premiums $ 2,102 $ 1,966 $ 1,728
================================================================================
40
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Reinsurance recoverables at December 31, 2001 and 2000 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
Reinsurance Recoverables 2001 2000
- --------------------------------------------------------------------------------
Life and Accident and Health Business:
Non-affiliated companies $2,282 $2,024
Property-Casualty Business:
Affiliated companies 1,881 1,953
- --------------------------------------------------------------------------------
Total Reinsurance Recoverables $4,163 $3,977
================================================================================
Reinsurance recoverables include $1,060 million and $820 million from
General Electric Capital Assurance Company, and also include $500 million
and $539 million, from The Metropolitan Life Insurance Company at December
31, 2001 and 2000, respectively.
6. DEPOSIT FUNDS AND RESERVES
At December 31, 2001 and 2000, the Company had $34.1 billion and $29.7
billion of life and annuity deposit funds and reserves, respectively. Of
that total, $19.1 billion and $16.4 billion is not subject to
discretionary withdrawal based on contract terms. The remaining $15.0
billion and $13.3 billion is for life and annuity products that are
subject to discretionary withdrawal by the contractholder. Included in the
amounts that are subject to discretionary withdrawal is $4.2 billion and
$2.9 billion of liabilities that are surrenderable with market value
adjustments. Also included are an additional $5.0 billion and $4.9 billion
of life insurance and individual annuity liabilities which are subject to
discretionary withdrawals, and have an average surrender charge of 4.7%
and 4.5%, respectively. In the payout phase, these funds are credited at
significantly reduced interest rates. The remaining $5.8 billion and $5.5
billion of liabilities are surrenderable without charge. More than 10.2%
and 10.5% of these relate to individual life products for 2001 and 2000,
respectively. These risks would have to be underwritten again if
transferred to another carrier, which is considered a significant
deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding
policy loans and related accrued interest prior to payout.
41
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. FEDERAL INCOME TAXES
Effective Tax Rate
($ in millions)
- --------------------------------------------------------------------------------
For the year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
Income Before Federal Income Taxes $ 1,911 $ 1,654 $ 1,592
Statutory Tax Rate 35% 35% 35%
- --------------------------------------------------------------------------------
Expected Federal Income Taxes 669 579 557
Tax Effect of:
Non-taxable investment income (20) (19) (19)
Other, net (19) (9) 7
- --------------------------------------------------------------------------------
Federal Income Taxes $ 630 $ 551 $ 545
================================================================================
Effective Tax Rate 33% 33% 34%
- --------------------------------------------------------------------------------
Composition of Federal Income Taxes
Current:
United States $ 424 $ 429 $ 377
Foreign 47 33 32
- --------------------------------------------------------------------------------
Total 471 462 409
- --------------------------------------------------------------------------------
Deferred:
United States 166 96 143
Foreign (7) (7) (7)
- --------------------------------------------------------------------------------
Total 159 89 136
- --------------------------------------------------------------------------------
Federal Income Taxes $ 630 $ 551 $ 545
================================================================================
Additional tax benefits attributable to employee stock plans allocated
directly to shareholder's equity for the years ended December 31, 2001,
2000 and 1999 were $21 million, $24 million and $17 million, respectively.
42
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The net deferred tax liabilities at December 31, 2001 and 2000 were
comprised of the tax effects of temporary differences related to the
following assets and liabilities:
- ---------------------------------------------------------------------------------------
($ in millions) 2001 2000
- ---------------------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 539 $ 667
Operating lease reserves 62 66
Employee benefits 104 102
Other 158 139
- ---------------------------------------------------------------------------------------
Total 863 974
- ---------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of insurance in force (968) (843)
Investments, net (215) (308)
Other (89) (107)
- ---------------------------------------------------------------------------------------
Total (1,272) (1,258)
- ---------------------------------------------------------------------------------------
Net Deferred Tax Liability $ (409) $ (284)
- ---------------------------------------------------------------------------------------
The Company and its life insurance subsidiaries file a consolidated
federal income tax return. Federal income taxes are allocated to each
member of the consolidated group on a separate return basis adjusted for
credits and other amounts required by the consolidation process. Any
resulting liability will be paid currently to the Company. Any credits for
losses will be paid by the Company to the extent that such credits are for
tax benefits that have been utilized in the consolidated federal income
tax return.
At December 31, 2001, the Company had no ordinary or capital loss
carryforwards.
The policyholders' surplus account, which arose under prior tax law, is
generally that portion of the gain from operations that has not been
subjected to tax, plus certain deductions. The balance of this account is
approximately $932 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 currently
contemplated from this account. At current rates the maximum amount of
such tax would be approximately $326 million.
43
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. SHAREHOLDER'S EQUITY
Shareholder's Equity and Dividend Availability
The Company's statutory net income, which includes the statutory net
income of all insurance subsidiaries, was $330 million, $981 million and
$890 million for the years ended December 31, 2001, 2000 and 1999,
respectively. The Company's statutory capital and surplus was $5.09
billion and $5.16 billion at December 31, 2001 and 2000, 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
permitted by its domicilary insurance commissioners (see Note 1, Summary
of Significant Accounting Policies, Permitted Statutory Accounting
Practices). The impact of this change on statutory capital and surplus was
not significant. The impact of this change on statutory net income was
$119 million, related to recording equity method investment earnings as
unrealized gains versus net investment income.
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. A maximum of
$586 million is available by the end of the year 2002 for such dividends
without prior approval of the State of Connecticut Insurance Department,
depending upon the amount and timing of the payments. The Company paid
dividends of $472 million, $860 million and $550 million in 2001, 2000 and
1999, respectively.
44
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. SHAREHOLDER'S EQUITY (continued)
Accumulated Other Changes in Equity from Nonowner Sources, Net of Tax
Changes in each component of Accumulated Other Changes in Equity from Nonowner
Sources were as follows:
Net Unrealized Accumulated
Gain (Loss) On Foreign Currency Derivative Other Changes in
Investment Translation Instruments And Equity from
($ in millions) Securities Adjustments Hedging Activities Nonowner Sources
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1999 $ 607 $ (9) $ -- $ 598
Unrealized losses on investment securities,
net of tax of $(576) (923) -- -- (923)
Less: reclassification adjustment for gains
included in net income, net of tax of $40 (73) -- -- (73)
- ------------------------------------------------------------------------------------------------------------------------------------
Period change (996) -- -- (996)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 (389) (9) -- (398)
Unrealized gains on investment securities,
net of tax of $297 451 -- -- 451
Less: reclassification adjustment for losses
included in net income, net of tax of $(27) 50 -- -- 50
Foreign currency translation adjustment, net
of tax of $1 -- 1 -- 1
- ------------------------------------------------------------------------------------------------------------------------------------
Period change 501 1 -- 502
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 112 (8) -- 104
Cumulative effect of change in accounting
for derivative instruments and hedging
activities, net of tax of $(16) -- -- (29) (29)
Unrealized gain on investment securities,
net of tax of $80 149 -- -- 149
Less: reclassification adjustment for gains
included in net income, net of tax of $44 (81) -- -- (81)
Foreign currency translation adjustment, net
of tax of $(3) -- (5) -- (5)
Derivative instrument hedging activity
losses, net of tax of $(35) -- -- (64) (64)
- ------------------------------------------------------------------------------------------------------------------------------------
Period change 68 (5) (93) (30)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 180 $ (13) $(93) $ 74
- ------------------------------------------------------------------------------------------------------------------------------------
45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9. BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by Citigroup. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by TPC. (See Note 16). The Company's share of net expense for
the qualified pension and other postretirement benefit plans was not
significant for 2001, 2000 and 1999.
401(k) Savings Plan
Substantially all of the Company's employees are eligible to participate
in a 401(k) savings plan sponsored by Citigroup. The Company's expenses in
connection with the 401(k) savings plan were not significant in 2001, 2000
and 1999. See Note 13.
10. LEASES
Most leasing functions for TPC and its subsidiaries are administered by
the property casualty affiliates of the Company. Rent expense related to
all leases is shared by the companies on a cost allocation method based
generally on estimated usage by department. Net rent expense was $26
million, $26 million, and $30 million in 2001, 2000 and 1999,
respectively.
- --------------------------------------------------------------------------------
Year Ending December 31, Minimum Operating
($ in millions) Rental Payments
- --------------------------------------------------------------------------------
2002 $ 46
2003 47
2004 44
2005 41
2006 43
Thereafter 220
- --------------------------------------------------------------------------------
Total Rental Payments $441
================================================================================
Future sublease rental income of approximately $91 million will partially
offset these commitments. Also, the Company will be reimbursed for 50% of
the rental expense for a particular lease totaling $167 million, by an
affiliate. Minimum future capital lease payments are not significant.
The Company is reimbursed for use of furniture and equipment through cost
sharing agreements by its affiliates.
See Note 16 for additional information about lease arrangements.
46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures contracts, interest rate swaps, currency swaps, equity swaps,
options and forward contracts, as a means of hedging exposure to interest
rate changes, equity price changes and foreign currency risk. The Company,
through Tribeca Investments LLC, a subsidiary that is a broker-dealer,
holds and issues 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, commodity, or currency 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.
Currency option contracts are used on an ongoing basis to hedge the
Company's exposure to foreign currency exchange rates that result from
the Company's direct foreign currency investments. To hedge against
adverse changes in exchange rates, the Company enters contracts that give
it the right, but not the obligation, to sell the foreign currency within
a limited time at a contracted price that may also be settled in cash,
based on differentials in the foreign exchange rate. These contracts
cannot be settled prior to maturity.
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 upon notional principal amount. The
Company also enters into basis swaps in which both legs of the swap are
floating with each other based on a different index. 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.
The Company enters into currency swaps in connection with other financial
instruments to provide greater risk diversification and better match
assets purchased in U.S. Dollars with a corresponding liability originated
in a foreign currency. Under currency swaps, the Company agrees with other
parties to exchange, at specified intervals, foreign currency for U.S.
Dollars based upon interest amounts calculated by reference to an agreed
upon notional principal amount. Generally, there is an exchange of foreign
currency for U.S. Dollars at the outset of the contract based upon
prevailing foreign exchange rates. Swap agreements are not exchange traded
so they are subject to the risk of default by the counterparty.
47
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Forward contracts are used on an ongoing basis to hedge the Company's
exposure to foreign currency exchange rates that result from the net
investment in the Company's Canadian Operations as well as direct foreign
currency investments. To hedge against adverse changes in exchange rates,
the Company enters into contracts to exchange foreign currency for U.S.
Dollars with major financial institutions. These contracts cannot be
settled prior to maturity. At the maturity date the Company must purchase
the foreign currency necessary to settle the contracts.
The Company monitors the 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, credit limits and other monitoring procedures.
The following table summarizes certain information related to the
Company's hedging activities for the year ended December 31, 2001:
Year Ended
(in millions) December 31,
2001
- --------------------------------------------------------------------------------
Hedge ineffectiveness recognized
related to fair value hedges $ (4.1)
Hedge ineffectiveness recognized
related to cash flow hedges (6.2)
Cash flow transaction amount
expected to be reclassified from
accumulated other changes in
equity from nonowner sources into
pretax earnings within twelve
months from 12/31/01 (110.0)
Net gain recorded in accumulated
other changes in equity from
nonowner sources related to net 0.8
investment hedges
- --------------------------------------------------------------------------------
During the year ended December 31, 2001 there were no discontinued
forecasted transactions.
In 2000, these derivative financial instruments were treated as
off-balance sheet instruments. Financial instruments with
off-balance sheet risk involve, to varying degrees, elements of credit and
market risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of these instruments reflect the extent of
involvement the Company has in a particular class of financial instrument.
However, the maximum loss of cash flow associated with these instruments
can be less than these amounts. For interest rate swaps, currency swaps,
equity swaps, options and forward contracts, credit risk is limited to the
amount that it would cost the Company to replace the contracts. Financial
futures contracts and purchased listed option contracts have very little
credit risk since organized exchanges are the counterparties.
48
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 non-affiliated
partnerships. The off-balance sheet risk of fixed and variable rate loan
commitments was not significant at December 31, 2001 and 2000. The Company
had unfunded commitments of $525.1 million and $491.2 million to these
partnerships at December 31, 2001 and 2000, respectively.
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 Statement of
Financial Accounting Standards No. 107, "Disclosure about Fair Value of
Financial Instruments," and therefore are not included in the amounts
discussed.
At December 31, 2001 and 2000, investments in fixed maturities had a
carrying value and a fair value of $32.1 billion and $26.8 billion,
respectively. See Notes 1 and 4.
At December 31, 2001, mortgage loans had a carrying value of $2.0 billion
and a fair value of $2.1 billion and at year-end 2000 had a carrying value
of $2.2 billion and a fair value of $2.2 billion. In estimating fair
value, the Company used interest rates reflecting the current real estate
financing market.
Included in other invested assets are 987 shares of Citigroup Cumulative
Preferred Stock Series YY carried at cost of $987 million at December 31,
2001 and 2000. This series YY preferred stock pays cumulative dividends at
5.321%, has a liquidation value of $1 million per share, and has perpetual
duration, is not subject to a sinking fund or mandatory redemption but may
be optionally redeemed by Citigroup at any time on or after December 22,
2018. Dividends totaling $52.5 million were received during 2001, 2000 and
1999, respectively. There is no established market for this investment and
it is not practicable to estimate the fair value of the preferred stock.
At December 31, 2001, contractholder funds with defined maturities had a
carrying value of $9.5 billion and a fair value of $10.0 billion, compared
with a carrying value and a fair value of $6.8 billion and $6.7 billion at
December 31, 2000. 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
$10.6 billion and a fair value of $10.3 billion at December 31, 2001,
compared with a carrying value of $10.1 billion and a fair value of $9.9
billion at December 31, 2000. These contracts generally are valued at
surrender value.
The carrying values of $495 million and $588 million of financial
instruments classified as other assets approximated their fair values at
December 31, 2001 and 2000, respectively. The carrying values of $1.5
billion and $2.4 billion of financial instruments classified as other
liabilities also approximated their fair values at December 31, 2001 and
2000, respectively. Fair value is determined using various methods,
including discounted cash flows, as appropriate for the various financial
instruments.
The assets of separate accounts providing a guaranteed return had a
carrying value and a fair value of $507 million at December 31, 2001,
compared with a carrying value and a fair value of $376 million at
December 31, 2000. The liabilities of separate accounts providing a
guaranteed return had a carrying value and a fair value of $507 million at
December 31, 2001, compared with a carrying value and a fair value of $376
million at December 31, 2000.
49
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The carrying values of cash, trading securities and trading securities
sold not yet purchased are carried at fair value. The carrying values of
short-term securities and investment income accrued approximated their
fair values.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
12. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
See Note 11 for a discussion of financial instruments with off-balance
sheet risk.
Litigation
In March 1997, a purported class action entitled Patterman v. The
Travelers, Inc., et al. was commenced in the Superior Court of Richmond
County, Georgia, alleging, among other things, violations of the Georgia
RICO statute and other state laws by an affiliate of the Company,
Primerica Financial Services, Inc. and certain of its affiliates.
Plaintiffs seek unspecified compensatory and punitive damages and other
relief. From February 1998 through April 2000, various motions for
transfer of the lawsuit were heard and appealed. In April 2000, the matter
was remanded to the Superior Court of Richmond County by the Georgia
Supreme Court. Also, in April 2000 defendants moved for summary judgement
on all counts of the complaint. Discovery commenced in May 2000.
Defendants intend to vigorously contest the litigation.
TIC and its subsidiaries are defendants or co-defendants 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 proceedings would not
be likely to have a material adverse effect on its results of operations,
financial condition or liquidity.
13. RELATED PARTY TRANSACTIONS
Certain administrative and data processing services are provided to the
Company by its property casualty affiliates. Investment advisory and
management services are provided to the Company by other affiliates. The
Company provides various employee benefits coverages to employees of
certain subsidiaries of TPC. The premiums for these coverages were charged
in accordance with cost allocation procedures based upon salaries or
census. Charges for these services are shared by the companies on cost
allocation methods based generally on estimated usage by department. The
amounts due from affiliates included in other assets in 2001 and 2000 were
$88.2 million and $50.0 million, respectively. See Note 16.
The Company maintains a short-term investment pool in which its insurance
affiliates participate. The position of each company participating in the
pool is calculated and adjusted daily. At December 31, 2001 and 2000, the
pool totaled approximately $5.6 billion and $4.4 billion, respectively.
The Company's share of the pool amounted to $2.6 billion and $1.8 billion
at December 31, 2001 and 2000, respectively, and is included in short-term
securities in the consolidated balance sheets.
50
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company markets deferred annuity products and life insurance through
its affiliate, Salomon Smith Barney (SSB). Annuity deposits related to
these products were $1.5 billion, $1.8 billion, and $1.3 billion in 2001,
2000 and 1999, respectively. Life premiums were $96.5 million, $77.0
million and $60.9 million in 2001, 2000 and 1999, respectively.
The Company also markets individual annuity and life insurance through
CitiStreet Retirement Services LLC, a division of CitiStreet, a joint
venture between Citigroup and State Street Bank. Deposits received from
CitiStreet Retirement Services, LLC were $1.6 billion, $1.8 billion and
$1.6 billion in 2001, 2000 and 1999, respectively.
Primerica Financial Services, Inc. (Primerica), an affiliate, is a
distributor of products for TLA. Primerica sold $901 million, $1.03
billion and $903 million of individual annuities in 2001, 2000 and 1999,
respectively.
The Company markets individual annuity products through an affiliate
Citibank, N.A. (Citibank). Deposits received from Citibank were $564
million and $392 million in 2001 and 2000, respectively, and were
insignificant in 1999.
The Company sells structured settlement annuities to its property casualty
affiliates in connection with the settlement of certain policyholder
obligations. Such premiums and deposits were $194 million, $191 million,
and $156 million for 2001, 2000 and 1999, respectively. Reserves and
contractholder funds related to these annuities amounted to $825 million
and $811 million in 2001 and 2000, respectively.
At December 31, 2001 and 2000 the Company had outstanding loaned
securities to SSB for $413.5 million and $234.1 million, respectively.
Included in other invested assets is a $987 million investment in
Citigroup preferred stock at December 31, 2001 and 2000, carried at cost.
Dividends received on this investment were $52.5 million in 2001, 2000 and
1999.
The Company had investments in an affiliated joint venture, Tishman
Speyer, in the amount of $310.9 million and $355.5 million at December 31,
2001 and 2000, respectively. Income of $65.5 million, $67.0 million and
$109.5 million was earned on these investments in 2001, 2000 and 1999,
respectively.
The Company also had an investment in Greenwich Street Capital Partners I,
an affiliated private equity investment, in the amount of $21.6 million
and $74.2 million at December 31, 2001 and 2000, respectively. Income
(loss) of $(41.6) million, $8.1 million and $9.9 million were earned on
this investment in 2001, 2000 and 1999, 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.
Primerica Life has entered into a General Agency Agreement with Primerica,
that provides that Primerica will be Primerica Life's general agent for
marketing all insurance of Primerica Life. In consideration of such
services, Primerica Life agreed to pay Primerica marketing fees of no less
than $10 million based upon U.S. gross direct premiums received by
Primerica Life. In each of 2001, 2000, and 1999 the fees paid by Primerica
Life were $12.5 million.
51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 this
program, all employees meeting established requirements have been granted
Citigroup stock options. During 2000 and 2001, Citigroup introduced the
Citigroup 2000 Stock Purchase Plan and Citigroup 2001 Stock Purchase
Program for new employees, which allowed eligible employees of Citigroup,
including the Company's employees, to enter into fixed subscription
agreements to purchase shares at the market value on the date of the
agreements. Enrolled employees are permitted to make one purchase prior to
the expiration date. The Company's charge to income was insignificant in
2001, 2000 and 1999.
The Company also participates in the Citigroup Capital Accumulation
Program. Participating officers and other employees receive a restricted
stock award in the form of Citigroup common stock. These restricted stock
awards generally vest after a three-year period and, except under limited
circumstances, the stock can not be sold or transferred during the
restricted period by the participant, who is required to render service to
the Company during the restricted period. The Company's charge to income
was insignificant in 2001, 2000 and 1999.
Unearned compensation expense associated with the Citigroup restricted
common stock grants, which represents the market value of Citigroup's
common stock at the date of grant, is included with other assets in the
Consolidated Balance Sheet and is recognized as a charge to income ratably
over the vesting period. The Company's charge to income was insignificant
during 2001, 2000 and 1999.
The Company applies Accounting Principles Board Opinion No. 25 (APB 25)
and related interpretations in accounting for stock options. Since stock
options under the Citigroup plans are issued at fair market value on the
date of award, no compensation cost has been recognized for these awards.
FAS 123 provides an alternative to APB 25 whereby fair values may be
ascribed to options using a valuation model and amortized to compensation
cost over the vesting period of the options.
Had the Company applied FAS 123 in accounting for Citigroup stock options,
net income would have been the pro forma amounts indicated below:
- --------------------------------------------------------------------------------
Year Ended December 31, 2001 2000 1999
($ in millions)
- --------------------------------------------------------------------------------
Net income, as reported $ 1,272 $ 1,103 $ 1,047
FAS 123 pro forma adjustments, after tax (15) (19) (16)
- --------------------------------------------------------------------------------
Net income, pro forma $ 1,257 $ 1,084 $ 1,031
- --------------------------------------------------------------------------------
The assumptions used in applying FAS 123 to account for Citigroup stock
options were as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
Expected volatility of Citigroup Stock 38.31% 41.5% 44.1%
Risk-free interest rate 4.42% 6.23% 5.29%
- --------------------------------------------------------------------------------
Expected annual dividend per Citigroup share $ 0.92 $0.78 $0.47
- --------------------------------------------------------------------------------
Expected annual forfeiture rate 5% 5% 5%
- --------------------------------------------------------------------------------
52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
14. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by
operating activities:
- ---------------------------------------------------------------------------------------------------
For The Year Ended December 31, 2001 2000 1999
($ in millions)
- ---------------------------------------------------------------------------------------------------
Net Income from Continuing Operations $ 1,281 $ 1,103 $ 1,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized (gains) losses (125) 77 (113)
Deferred federal income taxes 159 89 136
Amortization of deferred policy acquisition costs 379 347 315
Additions to deferred policy acquisition costs (851) (792) (686)
Investment income (493) (384) (221)
Premium balances 7 20 (13)
Insurance reserves and accrued expenses 686 559 411
Other 237 221 99
- ---------------------------------------------------------------------------------------------------
Net cash provided by operations $ 1,280 $ 1,240 $ 975
- ---------------------------------------------------------------------------------------------------
15. NON-CASH INVESTING AND FINANCING ACTIVITIES
Significant non-cash investing and financing activities include the
acquisition of real estate through foreclosures of mortgage loans
amounting to $205 million in 1999. Foreclosures in 2001 and 2000
were insignificant.
16. SUBSEQUENT EVENTS
On February 8, 2002, TPC filed a registration statement with the
Securities and Exchange Commission in connection with the proposed
offering of a minority interest in TPC. Citigroup has announced its plan
to make a tax-free distribution of a portion of its remaining interest in
TPC by year-end 2002. Prior to the proposed offering, the Company will be
distributed to by TPC to TPC's immediate parent company, so that the
Company will remain an indirect wholly owned subsidiary of Citigroup after
the offering. Therefore, all retirement and post retirement plans
previously provided to Company employees by TPC will be administered by
Citigroup. Prior to the offering, TIC intends to sell its home office
buildings in Hartford, Connecticut and a building in Norcross, Georgia
housing TPC's information systems department to TPC for $68 million. The
company will have the right to continue to use the names "Travelers Life &
Annuity," "The Travelers Insurance Company," "The Travelers Life and
Annuity Company," and the related names in connection with the Company's
business. Currently, TIC and TLAC share services with the property
casualty subsidiaries of TPC. These services, which include leasing
arrangements, facilities management, banking and financial functions,
benefit coverages, data processing services, a short-term investment pool
and others, will be phased out over a brief period of time if the
transaction is completed. If the distribution does not occur, these
services will likely continue for the foreseeable future.
In connection with the proposed distribution described above, on February
27, 2002, TPC exchanged the 50,793,450 shares of Citigroup common stock
owned by it for 2,225 shares of Citigroup's 6.767% Cumulative Preferred
Stock, Series YYY, par value $1.00 per share and liquidation value $1
million per share. The exchange ratio was based on the closing price of
Citigroup's common stock on the New York Stock Exchange on February 25,
2002. Prior to the proposed TPC offering, TPC will contribute the Series
YYY Preferred Stock to the Company.
53
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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.
54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed:
(1) Financial Statements. See index on page 15 of this report.
(2) Financial Statement Schedules. See index on page 58 of this report.
(3) Exhibits. See Exhibit Index on page 56.
(b) Reports on Form 8-K:
None
55
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3. Articles of Incorporation and By-Laws
a.) Charter of The Travelers Insurance Company (the
"Company"), as effective October 19, 1994, incorporated
by reference to Exhibit 3.01 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
September 30, 1994 (File No. 33-33691) (the "Company's
September 30, 1994 10-Q").
b.) By-laws of the Company, as effective October 20, 1994,
incorporated by reference to Exhibit 3.02 to the
Company's September 30, 1994 10-Q.
10. Lease for office space in Hartford, Connecticut dated as of
April 2, 1996, by and between the Company and The Travelers
Indemnity Company, incorporated by reference to Exhibit 10.14
to the Annual Report on Form 10-K of Travelers Property
Casualty Corp. for the fiscal year ended December 31, 1996
(File No. 1-14328).
21. Subsidiaries of the Registrant:
Omitted pursuant to General Instruction I(2)(b) of Form
10-K.
56
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 15th day of March,
2002.
THE TRAVELERS INSURANCE 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 15th day of March, 2002.
Signature Capacity
/s/ George C. Kokulis Director and 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
(Glenn D. Lammey) Principal Accounting Officer)
/s/ William R. Hogan Director
- -------------------------
(William R. Hogan)
/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.
57
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
The Travelers Insurance Company and Subsidiaries
Independent Auditors' Report *
Consolidated Statements of Income *
Consolidated Balance Sheets *
Consolidated Statements of Changes In Retained Earnings and
Accumulated Other Changes in Equity from Nonowner Sources *
Consolidated Statements of Cash Flows *
Notes to Consolidated Financial Statements *
Independent Auditors' Report 59
Schedule I - Summary of Investments - Other than Investments in Related Parties 2001 60
Schedule III - Supplementary Insurance Information 1999-2001 61
Schedule IV - Reinsurance 1999-2001 62
All other schedules are inapplicable for this filing
* See index on page 15
58
Independent Auditors' Report
The Board of Directors and Shareholder
The Travelers Insurance Company:
Under date of January 17, 2002, except as to Note 16, which is as of February
27, 2002, we reported on the consolidated balance sheets of The Travelers
Insurance Company and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, changes in retained earnings and
accumulated other changes in equity from nonowner sources, and cash flows for
each of the years in the three-year period ended December 31, 2001, which are
included in this Form 10-K. In connection with our audits of the aforementioned
consolidated 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 consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities and for securitized financial assets in 2001.
/s/ KPMG LLP
Hartford, Connecticut
January 17, 2002, except as to
Note 16, which is as of February 27, 2002
59
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2001
($ in millions)
- --------------------------------------------------------------------------------------------------------
Type of Investment Amount Shown in
Cost Value Balance Sheet (1)
- --------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and
authorities $ 5,485 $ 5,447 $ 5,447
States, municipalities and political subdivisions 108 111 111
Foreign governments 810 851 851
Public utilities 3,249 3,280 3,280
Convertible bonds and bonds with warrants attached 343 353 353
All other corporate bonds 21,564 21,855 21,855
- --------------------------------------------------------------------------------------------------------
Total Bonds 31,559 31,897 31,897
Redeemable preferred stocks 171 175 175
- --------------------------------------------------------------------------------------------------------
Total Fixed Maturities 31,730 32,072 32,072
- --------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Banks, trust and insurance companies 9 10 10
Industrial, miscellaneous and all other (2) 30 34 34
- --------------------------------------------------------------------------------------------------------
Total Common Stocks 39 44 44
Nonredeemable preferred stocks 375 371 371
- --------------------------------------------------------------------------------------------------------
Total Equity Securities 414 415 415
- --------------------------------------------------------------------------------------------------------
Mortgage Loans 1,995 1,995
Real Estate Held For Sale 55 55
Policy Loans 1,208 1,208
Short-Term Securities 3,053 3,053
Other Investments (3)(4)(5) 3,077 3,053
- --------------------------------------------------------------------------------------------------------
Total Investments $41,532 $41,851
========================================================================================================
(1) Determined in accordance with methods described in Notes 1 and 4 of the
Notes to Consolidated Financial Statements.
(2) Excludes $57 million related party investment.
(3) Excludes $987 million of Citigroup Inc. preferred stock. See Note 13 of
Notes to Consolidated Financial Statements.
(4) Also excludes $325 million fair value of investment in affiliated
partnership interests.
(5) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
60
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
($ in millions)
- -------------------------------------------------------------------------------------------------
Future
policy
benefits,
Deferred losses, Other policy
policy claims and claims and Net
acquisition loss benefits Premium investment
costs expenses (1) payable revenue income
- -------------------------------------------------------------------------------------------------
2001
Travelers Life & Annuity $1,672 $33,475 $368 $ 957 $2,530
Primerica Life 1,789 3,044 144 1,145 301
- -------------------------------------------------------------------------------------------------
Total $3,461 $36,519 $512 $2,102 $2,831
=================================================================================================
2000
Travelers Life & Annuity $1,291 $29,377 $321 $ 860 $2,450
Primerica Life 1,698 2,856 140 1,106 280
- -------------------------------------------------------------------------------------------------
Total $2,989 $32,233 $461 $1,966 $2,730
=================================================================================================
1999
Travelers Life & Annuity $1,081 $26,958 $280 $ 656 $2,249
Primerica Life 1,607 2,734 158 1,072 257
- -------------------------------------------------------------------------------------------------
Total $2,688 $29,692 $438 $1,728 $2,506
=================================================================================================
- --------------------------------------------------------------------------------
Amortization
Benefits, of deferred
claims policy Other
and acquisition operating Premiums
losses (2) costs expenses written
- --------------------------------------------------------------------------------
2001
Travelers Life & Annuity $2,534 $171 $154 $ 955
Primerica Life 507 208 217 1,157
- --------------------------------------------------------------------------------
Total $3,041 $379 $371 $2,112
================================================================================
2000
Travelers Life & Annuity $2,294 $166 $233 $ 859
Primerica Life 496 181 230 1,115
- --------------------------------------------------------------------------------
Total $2,790 $347 $463 $1,974
================================================================================
1999
Travelers Life & Annuity $1,954 $127 $322 $ 666
Primerica Life 488 188 197 1,080
- --------------------------------------------------------------------------------
Total $2,442 $315 $519 $1,746
================================================================================
(1) Includes contractholder funds.
(2) Includes interest credited to contractholders.
61
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
($ in millions)
- ----------------------------------------------------------------------------------------------------------------------------
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
- ----------------------------------------------------------------------------------------------------------------------------
2001
Life Insurance In Force $510,457 $285,696 $3,636 $228,397 1.6%
Premiums:
Life insurance $ 2,378 $ 352 $ -- $ 2,026 --
Accident and health insurance 321 246 1 76 --
Property casualty 180 180 -- -- --
-------- -------- ------ -------- ---
Total Premiums $ 2,879 $ 778 $ 1 $ 2,102 --
======== ======== ====== ======== ===
2000
Life Insurance In Force $480,958 $252,498 $3,692 $232,152 1.6%
Premiums:
Life insurance $ 2,106 $ 330 $ -- $ 1,776 --
Accident and health insurance 322 132 -- 190 --
Property casualty 216 216 -- -- --
-------- -------- ------ -------- ---
Total Premiums $ 2,644 $ 678 $ -- $ 1,966 --
======== ======== ====== ======== ===
1999
Life Insurance In Force $457,541 $222,522 $3,723 $238,742 1.6%
Premiums:
Life insurance $ 1,768 $ 313 $ -- $ 1,455 --
Accident and health insurance 287 14 -- 273 --
Property casualty 193 193 -- -- --
-------- -------- ------ -------- ---
Total Premiums $ 2,248 $ 520 $ -- $ 1,728 --
======== ======== ====== ======== ===
62