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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM______ TO ______
--------------------------
COMMISSION FILE NUMBER 33-03094
--------------------------
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 CITYPLACE, HARTFORD, CONNECTICUT 06103-3415
(Address of principal executive offices) (Zip Code)
(860) 308-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
As of the date hereof, there were outstanding 40,000,000 shares of common stock,
par value $2.50 per share, of the registrant, all of which were owned by
Citigroup Insurance Holding Corporation, 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 PAGE
- ----------- ----
PART I
1. Business................................................................................................... 2
A. General................................................................................................ 2
B. Business by Segment
Travelers Life & Annuity........................................................................... 2
Primerica Life Insurance........................................................................... 4
C. Insurance Regulations................................................................................... 4
2. Properties................................................................................................. 6
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.................................................................................... 6
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 7
7A. Quantitative and Qualitative Disclosures About Market Risk................................................. 15
8. Financial Statements and Supplementary Data................................................................ 18
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 61
PART III
10. Directors and Executive Officers of the Registrant......................................................... 61
11. Executive Compensation..................................................................................... 61
12. Security Ownership of Certain Beneficial Owners and Management............................................. 61
13. Certain Relationships and Related Transactions............................................................. 61
14. Controls and Procedures.................................................................................... 61
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................... 62
Exhibit Index.............................................................................................. 63
Signatures and Certifications.............................................................................. 64
Index to Financial Statements and Financial Statement Schedules............................................ 67
Exhibit 10.04.............................................................................................. 72
Exhibit 10.05.............................................................................................. 78
Exhibit 14.01.............................................................................................. 82
Exhibit 99.01.............................................................................................. 84
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS.
GENERAL
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company), is a wholly owned subsidiary of Citigroup Insurance Holding
Corporation (CIHC), an indirect wholly owned subsidiary of Citigroup Inc.
(Citigroup). Citigroup is a diversified global financial services holding
company whose businesses provide a broad range of financial services to
consumer and corporate customers around the world. The periodic reports of
Citigroup provide additional business and financial information concerning
it and its consolidated subsidiaries. TIC was incorporated in 1863. With
$83.0 billion of assets and $549.1 billion of life insurance in force at
December 31, 2002, the Company believes that it is one of the largest stock
life insurance groups in the United States as measured by these criteria.
At December 31, 2001, the Company was a wholly owned subsidiary of The
Travelers Insurance Group, Inc. (TIGI). On February 4, 2002, TIGI changed
its name to Travelers Property Casualty Corp. (TPC). TPC completed its
initial public offering (IPO) on March 27, 2002 and on August 20, 2002
Citigroup made a tax-free distribution of the majority of its remaining
interest in TPC, to Citigroup's stockholders. Prior to the IPO, the common
stock of TIC was distributed by TPC to CIHC so that TIC would remain an
indirect wholly owned subsidiary of Citigroup. See Note 15 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 insurance entities of the Company and Tribeca Citigroup
Investments Ltd. on a fully consolidated basis.
Additional information about the Company is available on the Citigroup
website at http://www.citigroup.com by selecting the "Investor Relations"
page and selecting "SEC Filings."
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 TLAC principally under the
Travelers Life & Annuity 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, payout annuities, group annuities sold to
employer-sponsored retirement and savings plans and structured finance
funding agreements. 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.
2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
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 or life contingent 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.
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
(PFS); and Citibank. The non-affiliated channels primarily include a
nationwide network of independent financial professionals and independent
broker-dealers. CitiStreet is a sales organization of personal retirement
planning specialists focused primarily on the qualified periodic deferred
annuity marketplace. CitiStreet's share of total individual annuity
premiums and deposits was 29% in 2002. SSB distributes TLA's individual
annuities and individual life products, and accounted for 19% of total
individual annuity premiums and deposits in 2002. Sales by PFS and Citibank
accounted for 15% and 7% respectively, of total individual annuity premiums
and deposits in 2002. The non-affiliated channels accounted for 30% of
individual annuity premiums and deposits.
Individual life products are primarily marketed by the independent
financial professionals and by SSB, who accounted for 80% and 16%,
respectively, of total individual life sales for 2002.
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. Travelers Distribution LLC is the principal
underwriter and distributor for Travelers Life & Annuity variable products.
3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PRIMERICA LIFE INSURANCE
Primerica Life and its subsidiaries, Primerica Life Insurance Company of
Canada, CitiLife and NBL, are the insurance operations of PFS. Their
primary product is individual term life insurance marketed through a sales
force composed of approximately 107,000 representatives. A great majority
of the domestic licensed sales force works on a part-time basis. NBL also
provides statutory disability benefit insurance and other 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, directly or through its
subsidiaries, is licensed or otherwise authorized to sell and market term
life insurance in all 50 states, the District of Columbia, Puerto Rico,
Guam, the U.S. Virgin Islands, Northern Mariana Islands, Canada and Spain.
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 2001, four IRIS ratios for TLAC had fallen outside of the usual range
due to growth in business volume. For 2001, the regulators have been
satisfied upon follow-up that there was no solvency problem. In 2002, TLAC
had three IRIS ratios fall outside of the usual range. No regulatory action
has been taken by any state insurance department or the NAIC with respect
to IRIS ratios of the primary domestic insurance entities of the Company or
any of its insurance subsidiaries during the two years ended December 31,
2002.
Risk-Based Capital (RBC) Requirements
In order to enhance the regulation of insurer solvency, the NAIC adopted a
formula and model law to implement RBC requirements for most life and
annuity insurance companies, which are designed to determine minimum
capital requirements and to raise the level of protection that statutory
surplus provides for policyholder obligations. For this purpose, an
insurer's total adjusted capital is measured in relation to its specific
asset and liability profiles. A company's risk-based capital is calculated
by applying factors to various asset, premium and reserve items, where the
factor is higher for those items with greater underlying risk and lower for
less risky items.
4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The RBC formula for life insurers measures four major areas of risk:
- asset risk (i.e., the risk of asset default),
- insurance risk (i.e., the risk of adverse mortality and morbidity
experience),
- interest rate risk (i.e., the risk of loss due to changes in
interest rates) and
- business risk (i.e., normal business and management risk).
Under laws adopted by the states, insurers having less total adjusted
capital than that required by the RBC calculation will be subject to
varying degrees of regulatory action, depending upon the level of capital
inadequacy.
The RBC law provides for four levels of regulatory action as defined by the
NAIC. The extent of regulatory intervention and action increases as the
level of total adjusted capital to RBC falls. The first level, the company
action level, requires an insurer to submit a plan of corrective actions to
the regulator if total adjusted capital falls below 200% of the RBC amount.
The second level, the regulatory action 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, 2002, the Company's principal domestic
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 $966 million is available by the end of the year 2003 for such
dividends without prior approval of the State of Connecticut Insurance
Department, depending upon the amount and timing of the payments. TLAC may
not pay a dividend to TIC without such approval. Primerica Life may pay up
to $148 million to TIC in 2003 without prior approval of the Massachusetts
Insurance Department.
5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Code of Ethics
The Company has adopted a code of ethics for financial professionals which
applies to the Company's principal executive officer and principal
financial and accounting officer. The code of ethics for financial
professionals has been included as an exhibit to this Form 10-K.
ITEM 2. PROPERTIES.
The Company's executive offices are located in Hartford, Connecticut. At
December 31, 2002 the Company leased approximately 284,000 square feet from
TPC at One Tower Square, Hartford, Connecticut under a lease that runs
through March 31, 2003. The Company previously owned this building complex,
and sold it as well as a building in Norcross, Georgia housing TPC's
information systems department, to TPC for $68 million as part of the TPC
spin-off from Citigroup on February 28, 2002. See Note 15 of Notes to
Consolidated Financial Statements.
The Company is moving its executive offices to One Cityplace, Hartford,
Connecticut, during the first quarter of 2003. The Company will occupy
373,000 square feet at this location under an operating lease that runs
through October 31, 2008.
Other leasehold interests of the Company include approximately 620,000
square feet of office space in 14 locations throughout the United States.
Management believes that these facilities are suitable and adequate for the
Company's current needs. See Note 11 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.
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 the Company's results of
operations, financial condition or liquidity. This statement is a
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 15.
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, 2002. 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 $586 million and $472 million in 2002 and 2001,
respectively. See Note 9 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.
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company) is a direct subsidiary of Citigroup Insurance Holdings Corporation
(CIHC), an indirect wholly owned subsidiary of Citigroup Inc. (Citigroup).
At December 31, 2001, the Company was a wholly owned subsidiary of The
Travelers Insurance Group, Inc. (TIGI). On February 4, 2002, TIGI changed
its name to Travelers Property Casualty Corp. (TPC). TPC completed its
initial public offering (IPO) on March 27, 2002 and on August 20, 2002
Citigroup made a tax-free distribution of the majority of its remaining
interest in TPC, to Citigroup's stockholders. Prior to the IPO, the common
stock of TIC was distributed by TPC to CIHC so that TIC would remain an
indirect wholly owned subsidiary of Citigroup. See Note 15 of Notes to
Consolidated Financial Statements. The Company is composed of two business
segments, Travelers Life & Annuity and Primerica Life Insurance.
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) under the Travelers Life & Annuity name. Among the range of
individual products offered are fixed and variable deferred annuities,
payout annuities and term, universal and variable life insurance. These
products are primarily distributed through CitiStreet Retirement Services
(CitiStreet), Smith Barney Financial Consultants, Primerica Financial
Services (PFS), Citibank, and a nationwide network of independent agents
and the growing outside broker dealer channel. 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.
Primerica Life and its subsidiaries, Primerica Life Insurance Company of
Canada, CitiLife and NBL, are the insurance operations of PFS. Their
primary product is individual term life insurance marketed through a sales
force composed of approximately 107,000 representatives. A great majority
of the domestic licensed sales force works on a part-time basis. NBL also
provides statutory disability benefit insurance and other 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, directly or through its
subsidiaries is licensed or otherwise authorized to sell and market term
life insurance in all 50 states, the District of Columbia, Puerto Rico,
Guam, the U.S. Virgin Islands, Northern Mariana Islands, Canada and Spain.
CRITICAL 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 critical to
the portrayal of the Company's financial condition, since they require
management to make difficult, complex or subjective judgments, some of
which may relate to matters that are inherently uncertain.
7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks.
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. Fair values of investments in
fixed maturities are based on quoted market prices or dealer quotes. If
quoted market prices are not available, discounted expected cash flows
using market rates commensurate with the credit quality and maturity of the
investment are used to record fair value. Changes in assumptions could
affect the fair values of fixed maturities. Impairments are realized when
investment losses in value are deemed other-than-temporary. The Company
conducts regular reviews to assess whether other-than-temporary impairments
exist. Changing economic conditions - global, regional, or related to
specific issuers or industries - could adversely affect these values.
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life, universal life, COLI, deferred
annuities and payout annuities are deferred. These deferred acquisition
costs (DAC) include principally commissions and certain expenses related to
policy issuance, underwriting and marketing, all of which vary with and are
primarily related to the production of new business. The method for
determining amortization of deferred acquisition costs varies by product
type based upon three different accounting pronouncements: Statement of
Financial Accounting Standards No. 60, "Accounting and Reporting by
Insurance Enterprises" (FAS 60), Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases"
(FAS 91) and Statement of Financial Accounting Standards No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long
Duration Contracts and for Realized Gains and Losses from the Sale of
Investments" (FAS 97).
DAC for deferred annuities, both fixed and variable, and payout annuities
are amortized employing a level effective yield methodology per FAS 91 as
permitted by AICPA Practice Bulletin 8. An amortization rate is developed
using the outstanding DAC balance and projected account balances and is
applied to actual account balances to determine the amount of DAC
amortization. The projected account balances are derived using a model that
contains assumptions related to investment returns and persistency. The
model rate is evaluated periodically, at least annually, and the actual
rate is reset in the following quarter and applied prospectively. A new
amortization pattern is developed so that the DAC balances will be
amortized over the remaining estimated life of the business. DAC for these
products is currently being amortized over 10-15 years.
DAC for universal life and COLI are amortized in relation to estimated
gross profits from surrender charges, investment, mortality, and expense
margins per FAS 97. Actual profits can vary from management's estimates,
resulting in increases or decreases in the rate of amortization. Re-
estimates of gross profits result in retrospective adjustments to earnings
by a cumulative charge or credit to income. DAC for these products is
currently being amortized over 16-25 years.
DAC relating to traditional life, including term insurance, and health
insurance are amortized in relation to anticipated premiums per FAS 60.
Assumptions as to the anticipated premiums are made at the date of policy
issuance or acquisition and are consistently applied over the life of the
policy. DAC for these products is currently being amortized over 5-20
years.
DAC is reviewed to determine if it is recoverable from future income,
including investment income, and, if not recoverable, is charged to
expense. All other acquisition expenses are charged to operations as
incurred.
8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits. The annuity payout reserves are calculated using the mortality
and interest assumptions used in the actual pricing of the benefit.
Mortality assumptions are based on the Company's experience and are
adjusted to reflect deviations such as substandard mortality in structured
settlement benefits. The interest rates range from 2.0% to 9.0%, with a
weighted average rate of 7.1% for these annuity products. Traditional life
products include whole life and term insurance. Future policy benefits for
traditional life products are estimated on the basis of actuarial
assumptions as to mortality, persistency and interest, established at
policy issue. Interest assumptions applicable to traditional life products
range from 2.5% to 7.0%, with a weighted average of 3.6%. Assumptions
established at policy issue as to mortality and persistency are based on
the Company's experience, which, together with interest assumptions,
include a margin for adverse deviation. Appropriate recognition has been
given to experience rating and reinsurance.
PREMIUMS
Premiums are recognized as revenues when due. Premiums for contracts with a
limited number of premium payments, due over a significantly shorter period
than the period over which benefits are provided, are considered income
when due. The portion of premium which is not required to provide for
benefits and expenses is deferred and recognized in income in a constant
relationship to insurance benefits in force.
CONSOLIDATED OVERVIEW
FOR THE YEARS ENDED DECEMBER 31, 2002 2001
- -------------------------------- ---- ----
($ in millions)
Revenues $5,234 $5,702
====== ======
Net income $1,082 $1,272
Net realized (gains) losses 209 (81)
Change in accounting principles - 9
------ ------
Operating income $1,291 $1,200
====== ======
Net income declined 15% to $1.1 billion in 2002 from $1.3 billion in 2001.
This decrease is attributable to net realized investment losses in 2002 of
$209 million after-tax, including after-tax impairments to the fixed
maturities portfolio related to WorldCom Inc. of $126 million, as well
other fixed maturities and equity investment impairments, versus net
realized gains of $81 million after-tax in 2001. Offsetting these declines
from realized investment losses was an 8% increase in operating income.
Operating income was $1.29 billion in 2002 up from $1.20 billion in 2001.
The operating earnings increase was driven by increases in both business
segments. See detailed description of each business segment.
Revenues were down 8%, driven by the $322 million pre-tax realized
investment losses in 2002 versus $125 million pre-tax realized investment
gains in the prior year. Revenues in 2002 also include $125 million of
dividends from Citigroup Series YYY Preferred Stock, contributed from TPC.
See Note 15 of Notes to Consolidated Financial Statements.
9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
TRAVELERS LIFE & ANNUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 2001
- -------------------------------- ---- ----
($ in millions)
Revenues $3,653 $4,089
====== ======
Net income $ 673 $ 826
Net realized (gains) losses 211 (33)
Change in accounting principles - 8
------ ------
Operating income $ 884 $ 801
====== ======
Net income of $673 million in 2002 declined 19% from $826 million in 2001
primarily due to after-tax realized investment losses of $211 million in
2002, including after-tax impairments to the fixed maturities portfolio
related to WorldCom Inc. of $122 million, as well as other fixed
maturities and equity investment impairments, versus $33 million after-tax
realized investment gains in 2001. The 2002 decline was partially offset by
an $83 million increase in operating income. Operating income included a
pre-tax increase in net investment income of $116 million, driven by $125
million of dividends from Citigroup Series YYY Preferred Stock not received
in the prior year. This operating income increase from the Series YYY
dividends was offset by decreased retained investment margins as a result
of lower fixed income returns and a declining equity market, partially
offset by continued strong volumes in the group annuity and individual life
businesses.
TLA investment income of $2,646 million, including Citigroup Preferred
Stock, in 2002 was approximately level with 2001. The decreased investment
margins from the overall rate deterioration in 2002 was offset by a larger
invested asset base from higher business volumes. Fixed maturities suffered
from the lower rate environment and credit issues. Equity investment
returns were below the prior year, but were offset by growth in real estate
income. Real estate is primarily comprised of mortgage loan investments and
real estate joint ventures.
10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The following table shows net written premiums and deposits by product line
for each of the years ended December 31, 2002 and 2001. The majority of the
annuity business and a substantial portion of the life business written by
TLA are accounted for as investment contracts, such that the premiums are
considered deposits and are not included in revenues.
2002 2001
-------------------------------- --------------------------------
IN MILLIONS OF DOLLARS Premiums Deposits Total Premiums Deposits Total
-------- -------- ------- -------- -------- -------
Individual annuities
Fixed $ - $ 2,182 $ 2,182 $ - $ 2,096 $ 2,096
Variable - 3,111 3,111 - 3,982 3,982
Individual payout 28 30 58 22 37 59
-------- -------- ------- -------- -------- -------
Total individual annuities 28 5,323 5,351 22 6,115 6,137
GICS and other annuities 545 5,747 6,292 768 6,300 7,068
Individual life insurance:
Direct periodic premiums & deposits 135 636 771 137 515 652
Single premium deposits - 285 285 - 208 208
Reinsurance (28) (85) (113) (25) (71) (96)
-------- -------- ------- -------- -------- -------
Total individual life insurance 107 836 943 112 652 764
Other 50 - 50 55 - 55
-------- -------- ------- -------- -------- -------
Total $ 730 $ 11,906 $12,636 $ 957 $ 13,067 $14,024
======== ======== ======= ======== ======== =======
Individual annuity net written premiums and deposits decreased 13% in 2002
to $5.351 billion from $6.137 billion in 2001. The decrease was driven by a
decline in variable annuity sales due to current market conditions, but
were partially offset by strong fixed annuity sales increases over the
prior-year period. In 2002, non-affiliated sales channel business grew to
30% of total individual annuity sales in 2002 from 26% in 2001 as TLA
continued to increase its presence in the broker-dealer marketplace.
Individual annuity account balances and benefits reserves were $27.5
billion at December 31, 2002, down from $28.9 billion at December 31, 2001.
These decreases reflect declines in market values of variable annuity
investments of $3.6 billion in 2002 and $2.4 billion in 2001, partially
offset by good in-force retention.
Group Annuity net written premiums and deposits (excluding the Company's
employee pension plan deposits) in 2002 were $6.292 billion, versus $7.068
billion in 2001. The decline of $776 million in 2002 from 2001 reflects
lower fixed guaranteed investment contracts (GIC) and large case employer
pension sales. The decline in fixed GIC net written premiums and deposits
reflects lower European Medium-Term Note sales due to market conditions.
Group annuity account balances and benefit reserves reached $22.3 billion
at December 31, 2002, an increase of $1.3 billion or 6% from $21.0 billion
at December 31, 2001, primarily reflecting continued strong retention in
all products and continued sales momentum in structured settlement
products.
Net written premiums and deposits for the life insurance business were $943
million in 2002, up 23% from $764 million in 2001. This increase was
related to direct periodic premiums and deposits for individual life
insurance in 2002, which were up 18% to $771 million from $652 million in
2001, driven by independent agent high-end estate planning and COLI sales.
Life insurance in force was $82.3 billion at December 31, 2002, up from
$75.7 billion at December 31, 2001.
During 2002, TLA expenses increased primarily due to volume related
insurance expenses, including premium taxes and renewal commissions and
expenses related to the transfer of employee benefit liabilities from the
spin-off of Travelers Property Casualty, which were offset in revenue
related to the assets transferred. During the first quarter of 2002, TLA
had a one-time decrease in DAC amortization of $22 million related to
changes in the underlying lapse and interest rate assumptions in the
individual annuity business. This decrease was mostly offset in the fourth
quarter of 2002, by an increase in amortization expense due to a higher
amortization rate resulting from the decrease in market value of individual
annuity account balances.
11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The amortization of capitalized DAC is a significant component of TLA
expenses. TLA's recording of DAC varies based upon product type. DAC for
deferred annuities, both fixed and variable, and payout annuities employs a
level yield methodology as per FAS 91. DAC for universal life (UL) and COLI
are amortized in relation to estimated gross profits as per FAS 97, with
traditional life, including term insurance and other products amortized in
relation to anticipated premiums as per FAS 60. The following is a summary
of capitalized DAC by type:
Deferred & Payout Traditional
In millions of dollars Annuities UL & COLI Life & Other Total
- ----------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $ 896 $ 299 $ 96 $ 1,291
-----------------------------------------------------------------------
Commissions and expenses deferred 385 142 26 553
Amortization expense (144) (11) (16) (171)
-----------------------------------------------------------------------
Balance December 31, 2001 1,137 430 106 1,673
Commissions and expenses deferred and other 347 172 26 545
Amortization expense (131) (24) (19) (174)
-----------------------------------------------------------------------
Balance December 31, 2002 $ 1,353 $ 578 $ 113 $ 2,044
- ----------------------------------------------------------------------------------------------------------------------
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. Also, the annuities
business is interest rate and market sensitive.
TLA's business is significantly affected by movements in the U.S. equity
and fixed income credit markets. U.S. equity and credit market events can
have both positive and negative effects on the deposit, revenue and policy
retention performance of the business. A sustained weakness in the equity
markets will decrease revenues and earnings in variable products. Declines
in credit quality of issuers will have a negative effect on earnings.
In order to strengthen its competitive position, TLA expects to maintain a
current product portfolio, further diversify its distribution channels, and
retain its financial position through strong sales growth and maintenance
of an efficient cost structure.
President Bush's recent budget proposal (the Budget Proposal) contains a
number of provisions that could impact the Company, including provisions to
eliminate the double taxation of corporate dividends and to create new
types of savings accounts with tax-free earnings. The Budget Proposal is in
its early stages of consideration.
12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
It is not possible to predict whether the Budget Proposal will be enacted,
what form such legislation might take when enacted, or the potential
effects of such legislation on the Company and its competitors. The Company
does not expect the Budget Proposal to have a material impact on its
financial condition or liquidity.
In July 2002, the Accounting Standards Executive Committee (AcSEC) issued a
Proposed Statement of Position (PSOP) on Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts. This PSOP includes accounting and disclosure for
separate account assets, liabilities, gains and losses transferred from the
separate account, as well as accounting and reserving for nontraditional
contracts that contain death and other insurance features. The contracts
containing death and other insurance features are generally referred to as
Guaranteed Minimum Death Benefits (GMDB). The Company reports GMDB reserves
in future policy benefits. These reserves are currently sufficient to cover
the reserves required by this PSOP. The effective date of this PSOP is for
fiscal years beginning after December 15, 2003, with earlier adoption
encouraged. The adoption of this PSOP will not have a significant effect on
the Company's results of operations, financial condition or liquidity.
The statements above are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on page 15.
PRIMERICA LIFE INSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2002 2001
- ------------------------------------ ------ ------
($ in millions)
Revenues $1,581 $1,613
====== ======
Net income $ 409 $ 446
Net realized (gains) (2) (48)
Change in accounting principle - 1
------ ------
Operating income $ 407 $ 399
====== ======
Net income decreased 8% to $409 million due to net realized investment
gains of $2 million, including the impairment of the fixed maturities
portfolio investment in WorldCom Inc. totaling $4 million, net of tax,
compared to $48 million of net realized investments gains in 2001.
Operating income was $407 million in 2002 compared to $399 million in 2001.
The 2% improvement in 2002 reflects growth in life insurance in force and
the discontinuance of goodwill amortization in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," offset by lower portfolio
return due to a declining interest rate environment. The increase in
expense for DAC is the result of an increase in life insurance production.
Other general expense increased slightly consistent with the increase in
in-force. Mortality experience was unchanged in 2002, however, there was an
increase in incurred claims. This increase is provided for by growth in the
in-force, associated premium revenues and policyholders reserve balances.
13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The amortization of capitalized DAC is a significant component of Primerica
Life's expenses. All of Primerica Life's DAC is associated with FAS 60
products. DAC is amortized in relation to anticipated premiums as per FAS
60. Amortized DAC has remained level as a percentage of direct premiums.
The increase in the amount of amortization over 2001 is associated with
growth in sales and in-force.
The following is a summary of capitalized DAC:
In millions of dollars
- ---------------------------------------------------------------
Balance December 31, 2000 $1,698
- ---------------------------------------------------------------
Deferred expenses and other 298
Amortization expense (208)
- ---------------------------------------------------------------
Balance December 31, 2001 1,788
- ---------------------------------------------------------------
Deferred expenses and other 323
Amortization expense (219)
- ---------------------------------------------------------------
Balance December 31, 2002 $1,892
- ---------------------------------------------------------------
EARNED PREMIUMS, NET OF REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2002 2001
- ------------------------------------ ------ ------
($ in millions)
Individual term life $1,127 $1,078
Other 67 67
------ ------
$1,194 $1,145
====== ======
The total face amount of term life insurance issued was $79.3 billion in
2002 compared to $71.5 billion in 2001. This increase in term life
production resulted from the increase in licensed life representatives.
Life insurance in force at year-end 2002 reached $466.8 billion, up from
$434.8 billion at year-end 2001, reflecting consistent good in-force policy
retention and higher volume of sales.
OUTLOOK
Over the last few years, programs including sales and product training have
been 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 15.
14
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, 2002.
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, 2001. 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 page 15.
15
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, 2002 and 2001. The sensitivity analysis model used by the
Company produces a loss in fair value of interest rate sensitive invested
assets of approximately $1.9 billion and $1.7 billion based on a 100 basis
point increase in interest rates as of December 31, 2002 and 2001,
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 $1.5 billion and $1.3 billion based on a 100 basis point
increase in interest rates as of December 31, 2002 and 2001, 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, 2002 and 2001 is not material.
MARKET RISK SENSITIVE INSTRUMENTS ENTERED INTO FOR TRADING PURPOSES
The Company maintains a trading portfolio through Tribeca Citigroup
Investments Ltd. consisting of carrying values of $1,531 million and $1,880
million of convertible bonds and common stocks as of December 31, 2002 and
2001, respectively, and $598 million and $891 million of liabilities
resulting from common stocks sold not yet purchased (referred to as short
sales) as of December 31, 2002 and 2001, respectively. The primary market
risk to the trading portfolio is equity risk. Assets are reported as
trading securities and liabilities are reported as trading securities sold
not yet purchased.
16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The common stocks are paired with short sales, reflecting the Company's
arbitrage strategy where both positions are invested in each of the
companies involved in a merger. The convertible bonds are also paired with
short sales of the common stocks of companies issuing the convertible
bonds. These positions are established and maintained so that general
changes in equity markets and interest rates should not materially impact
the value of the portfolio.
TABULAR PRESENTATION
The table below provides information about the trading portfolio's
financial instruments that are primarily exposed to equity price risk. This
table presents the fair values of these instruments by trading portfolio
type, as designated internally by the Company, as of December 31, 2002 and
2001. Fair values are based upon quoted market prices.
Fair value as of Fair value as of
($ in millions) December 31, 2002 December 31, 2001
- --------------- ----------------- -----------------
ASSETS
Trading securities
Convertible bond arbitrage $1,442 $1,798
Merger arbitrage 47 80
Other 42 2
------ ------
$1,531 $1,880
====== ======
LIABILITIES
Trading securities sold not yet purchased
Convertible bond arbitrage $ 520 $ 836
Merger arbitrage 13 51
Other 65 4
------ ------
$ 598 $ 891
====== ======
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.
17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report...................................................................................... 19
Consolidated Financial Statements:
Consolidated Statements of Income for
the years ended December 31, 2002, 2001 and 2000............................................................... 20
Consolidated Balance Sheets - December 31, 2002 and 2001....................................................... 21
Consolidated Statements of Changes in Shareholder's Equity
for the years ended December 31, 2002, 2001 and 2000........................................................... 22
Consolidated Statements of Cash Flows for
the years ended December 31, 2002, 2001 and 2000............................................................... 23
Notes to Consolidated Financial Statements..................................................................... 24-60
18
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, 2002 and
2001, and the related consolidated statements of income, changes in
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 2002. 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
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 2002 and
2001, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2002, 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 goodwill and other
intangible assets in 2002, and its methods of accounting for derivative
instruments and hedging activities and for securitized financial assets in
2001.
/s/ KPMG LLP
Hartford, Connecticut
January 21, 2003
19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in millions)
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000
------ ------ ------
REVENUES
Premiums $1,924 $ 2,102 $ 1,966
Net investment income 2,936 2,831 2,730
Realized investment gains (losses) (322) 125 (77)
Fee income 560 537 528
Other revenues 136 107 107
- --------------------------------------------------------------------------------------------------------------------------
Total Revenues 5,234 5,702 5,254
- --------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,711 1,862 1,752
Interest credited to contractholders 1,220 1,179 1,038
Amortization of deferred acquisition costs 393 379 347
General and administrative expenses 407 371 463
- --------------------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 3,731 3,791 3,600
- --------------------------------------------------------------------------------------------------------------------------
Income from operations before federal income taxes and cumulative
effects of changes in accounting principles 1,503 1,911 1,654
- --------------------------------------------------------------------------------------------------------------------------
Federal income taxes
Current 236 471 462
Deferred 185 159 89
- --------------------------------------------------------------------------------------------------------------------------
Total Federal Income Taxes 421 630 551
- --------------------------------------------------------------------------------------------------------------------------
Income before cumulative effects of changes in accounting principles 1,082 1,281 1,103
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 $1,082 $ 1,272 $ 1,103
==========================================================================================================================
See Notes to Consolidated Financial Statements.
20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions)
AT DECEMBER 31, 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value (including $2,687 and $2,330
subject to securities lending agreements) (cost $35,428; $31,730) $36,434 $32,072
Equity securities, at fair value (cost $328; $471) 332 472
Mortgage loans 1,985 1,995
Real estate 36 55
Policy loans 1,168 1,208
Short-term securities 4,414 3,053
Trading securities, at fair value 1,531 1,880
Other invested assets 4,909 2,485
- --------------------------------------------------------------------------------------------------------------------------
Total Investments 50,809 43,220
- --------------------------------------------------------------------------------------------------------------------------
Cash 186 146
Investment income accrued 525 487
Premium balances receivable 151 137
Reinsurance recoverables 4,301 4,163
Deferred acquisition costs 3,936 3,461
Separate and variable accounts 21,620 24,837
Other assets 1,467 1,415
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $82,995 $77,866
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $26,634 $22,810
Future policy benefits and claims 15,009 14,221
Separate and variable accounts 21,620 24,837
Deferred federal income taxes 1,448 409
Trading securities sold not yet purchased, at fair value 598 891
Other liabilities 6,051 5,518
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities 71,360 68,686
- --------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized, issued and outstanding 100 100
Additional paid-in capital 5,443 3,864
Retained earnings 5,638 5,142
Accumulated other changes in equity from nonowner sources 454 74
- --------------------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 11,635 9,180
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $82,995 $77,866
==========================================================================================================================
See Notes to Consolidated Financial Statements.
21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
($ in millions)
FOR THE YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCK 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 100 $ 100 $ 100
Changes in common stock - - -
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 100 $ 100 $ 100
==========================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
- --------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 3,864 $ 3,843 $ 3,819
Stock option tax benefit (expense) (17) 21 24
Capital contributed by parent 1,596 - -
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 5,443 $ 3,864 $ 3,843
==========================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
- --------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 5,142 $ 4,342 $ 4,099
Net income 1,082 1,272 1,103
Dividends to parent (586) (472) (860)
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 5,638 $ 5,142 $ 4,342
==========================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- --------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 74 $ 104 $ (398)
Cumulative effect of accounting for
derivative instruments and hedging activities, net
of tax - (29) -
Unrealized gains, net of tax 455 68 501
Foreign currency translation, net of tax 3 (3) 1
Derivative instrument hedging activity losses, net
of tax (78) (66) -
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 454 $ 74 $ 104
==========================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 1,082 $ 1,272 $ 1,103
Other changes in equity from nonowner sources 380 (30) 502
- --------------------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 1,462 $ 1,242 $ 1,605
==========================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY
- --------------------------------------------------------------------------------------------------------------------------
Changes in total shareholders' equity $ 2,455 $ 791 $ 769
Balance, beginning of year 9,180 8,389 7,620
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $11,635 $ 9,180 $ 8,389
==========================================================================================================================
See Notes to Consolidated Financial Statements.
22
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ in millions)
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 1,917 $ 2,109 $ 1,986
Net investment income received 2,741 2,430 2,489
Other revenues received 384 867 865
Benefits and claims paid (1,218) (1,176) (1,193)
Interest credited to contractholders (1,220) (1,159) (1,046)
Operating expenses paid (1,022) (1,000) (970)
Income taxes paid (197) (472) (490)
Trading account investments (purchases), sales, net 76 (92) (143)
Other (393) (227) (258)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,068 1,280 1,240
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 4,459 3,706 4,257
Mortgage loans 374 455 380
Proceeds from sales of investments
Fixed maturities 15,472 14,110 10,840
Equity securities 945 112 397
Real estate held for sale 26 6 244
Purchases of investments
Fixed maturities (23,623) (22,556) (17,836)
Equity securities (867) (50) (7)
Mortgage loans (355) (287) (264)
Policy loans, net 39 41 9
Short-term securities purchases, net (1,320) (914) (810)
Other investments (purchases), sales, net (69) 103 (461)
Securities transactions in course of settlement, net 529 1,086 944
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (4,390) (4,188) (2,307)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 8,505 8,308 6,022
Contractholder fund withdrawals (4,729) (4,932) (4,030)
Capital contribution by parent 172 - -
Dividends to parent company (586) (472) (860)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 3,362 2,904 1,132
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 40 (4) 65
Cash at December 31, previous year 146 150 85
- --------------------------------------------------------------------------------------------------------------------------
Cash at December 31, current year $ 186 $ 146 $ 150
==========================================================================================================================
See Notes to Consolidated Financial Statements.
23
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
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company), is a wholly owned subsidiary of Citigroup Insurance Holding
Corporation (CIHC), an indirect wholly owned subsidiary of Citigroup Inc.
(Citigroup), a diversified global financial services holding company whose
businesses provide a broad range of financial services to consumer and
corporate customers around the world. 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.
At December 31, 2001, the Company was a wholly owned subsidiary of The
Travelers Insurance Group, Inc. (TIGI). On February 4, 2002, TIGI changed
its name to Travelers Property Casualty Corp. (TPC). TPC completed its
initial public offering (IPO) on March 27, 2002 and on August 20, 2002
Citigroup made a tax-free distribution of the majority of its remaining
interest in TPC, to Citigroup's stockholders. Prior to the IPO, the common
stock of TIC was distributed by TPC to CIHC so that TIC would remain an
indirect wholly owned subsidiary of Citigroup. See Note 15.
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 2002
presentation.
ACCOUNTING CHANGES
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the Financial Accounting
Standards Board (FASB) 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 useful life will continue to be amortized over their useful
lives. See Note 6.
24
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company stopped amortizing goodwill on January 1, 2002. During 2001,
the Company reversed $8 million of negative goodwill. Net income adjusted
to exclude the impact of goodwill amortization for the twelve months ended
December 31, 2001 is as follows:
Twelve Months
Ended
($ in millions) December 31, 2001
-----------------
Net income:
Reported net income $1,272
Negative goodwill reversal (8)
Goodwill amortization 7
------
Adjusted net income $1,271
======
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Effective January 1, 2002, the Company adopted the FASB 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
provisions of the new standard are to be applied prospectively.
There has been no impact as of December 31, 2002 on the Company's results
of operations, financial condition or liquidity due to this standard. The
Company does not expect the impact of this standard to be significant in
future reporting periods.
ACCOUNTING STANDARDS NOT YET ADOPTED
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
On January 1, 2003, the Company adopted the FASB Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" (FAS 146). FAS 146 requires that a liability for costs
associated with exit or disposal activities, other than in a business
combination, be recognized when the liability is incurred. Previous
generally accepted accounting principles provided for the recognition of
such costs at the date of management's commitment to an exit plan. In
addition, FAS 146 requires that the liability be measured at fair value and
be adjusted for changes in estimated cash flows. The provisions of the new
standard are effective for exit or disposal activities initiated after
December 31, 2002. It is not expected that FAS 146 will materially affect
the Company's consolidated financial statements.
25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
STOCK BASED COMPENSATION
On January 1, 2003, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123 (FAS
123), prospectively for all awards granted, modified, or settled after
December 31, 2002. The prospective method is one of the adoption methods
provided for under FAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," issued in December 2002. FAS 123 requires that
compensation cost for all stock awards be calculated and recognized over
the service period (generally equal to the vesting period). This
compensation cost is determined using option pricing models, intended to
estimate the fair value of the awards at the grant date. Similar to APB 25,
the alternative method of accounting, an offsetting increase to
stockholders' equity under FAS 123 is recorded equal to the amount of
compensation expense charged.
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,
($ in millions) 2002 2001 2000
- --------------------------------------------------------------------------------------------------
Net income, as reported $ 1,082 $ 1,272 $ 1,103
FAS 123 pro forma adjustments, after tax (9) (15) (19)
- --------------------------------------------------------------------------------------------------
Net income, pro forma $ 1,073 $ 1,257 $ 1,084
- --------------------------------------------------------------------------------------------------
The assumptions used in applying FAS 123 to account for Citigroup stock
options were as follows:
- --------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------
Expected volatility of Citigroup Stock 36.98% 38.31% 41.5%
Risk-free interest rate 3.65% 4.42% 6.23%
- --------------------------------------------------------------------------------------------------
Expected annual dividend per Citigroup share $ 0.92 $ 0.92 $ 0.78
- --------------------------------------------------------------------------------------------------
Expected annual forfeiture rate 7% 5% 5%
- --------------------------------------------------------------------------------------------------
The adoption of this change in accounting principle will not have a
significant impact on the Company's results of operations, financial
condition or liquidity.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). This Interpretation
changes the method of determining whether certain entities should be
included in the Company's Consolidated Financial Statements. An entity is
subject to FIN 46 and is called a variable interest entity (VIE) if it has
(1) equity that is insufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties, or (2) equity investors that cannot make significant decisions
about the entity's operations, or that do not absorb the expected losses or
receive the expected returns of the entity. All other entities are
evaluated for consolidation under FAS No. 94, "Consolidation of All
Majority-Owned Subsidiaries." A VIE is consolidated by its primary
beneficiary, which is the party involved with the VIE that has a majority
of the expected losses or a majority of the expected residual returns or
both.
26
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The provisions of FIN 46 are to be applied immediately to VIEs created
after January 31, 2003, and to VIEs in which an enterprise obtains an
interest after that date. For VIEs in which an enterprise holds a variable
interest that it acquired before February 1, 2003, FIN 46 applies in the
first fiscal period beginning after June 15, 2003. For any VIEs that must
be consolidated under FIN 46 that were created before February 1, 2003, the
assets, liabilities and noncontrolling interest of the VIE would be
initially measured at their carrying amounts with any difference between
the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change.
If determining the carrying amounts is not practicable, fair value at the
date FIN 46 first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. FIN 46 also mandates new
disclosures about VIEs, some of which are required to be presented in
financial statements issued after January 31, 2003.
The Company has investments in entities that may be considered to be
variable interests. The carrying value of investments is approximately $1.3
billion and primarily consists of interests in security and real estate
investment funds, and below investment grade asset-backed and
mortgage-backed securities, and a collateralized bond obligation. The
Company is evaluating the impact of applying FIN 46 to existing VIEs in
which it has variable interests and has not yet completed this analysis.
However, at this time, it is anticipated that the effect on the Company's
Consolidated Balance Sheets could be an increase of less than $1 billion to
assets and liabilities. As the Company continues to evaluate the impact of
applying FIN 46, additional entities may be identified that would need to
be consolidated.
ACCOUNTING POLICIES
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks.
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. Fair
values of investments in fixed maturities are based on quoted market prices
or dealer quotes. If quoted market prices are not available, discounted
expected cash flows using market rates commensurate with the credit quality
and maturity of the investment are used to record fair value. Changes in
assumptions could affect the fair values of fixed maturities. Impairments
are realized when investment losses in value are deemed
other-than-temporary. The Company conducts regular reviews to assess
whether other-than-temporary impairments exist. Changing economic
conditions - global, regional, or related to specific issuers or industries
- could adversely affect these values.
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.
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.
27
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, 2002 and 2001.
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 14.
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.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, swaps, options and forward contracts, as a means of
hedging exposure to interest rate changes, equity price change and foreign
currency risk. The Company also uses derivative financial instruments to
enhance portfolio income and replicate cash market investments. The
Company, through Tribeca Citigroup Investments Ltd., holds and issues
derivative instruments in conjunction with these funding strategies. (See
Note 12 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 assets, derivative financial
instruments in a loss position are reported in the consolidated balance
sheet in other liabilities and derivatives purchased to offset embedded
derivatives on variable annuity contracts are reported in other invested
assets.
To qualify for hedge accounting, the hedge relationship is designated and
formally documented at inception detailing the particular risk management
objective and strategy for the hedge which includes the item and risk that
is being hedged, the derivative that is being used, as well as how
effectiveness is being assessed. A derivative has to be highly effective in
accomplishing the objective of offsetting either changes in fair value or
cash flows for the risk being hedged.
For fair value hedges, in which derivatives hedge the fair value of assets
and liabilities, changes in the fair value of derivatives are reflected in
realized investment gains and losses, together with changes in the fair
value of the related hedged item. The Company primarily hedges
available-for-sale securities.
28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 and
losses. The Company primarily hedges 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 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 and losses.
Derivatives that are used to hedge instruments that are carried at fair
value, do not qualify or are not designated as hedges, are also carried at
fair value with changes in value reflected in realized investment gains and
losses.
The effectiveness of these hedging relationships is evaluated on a
retrospective and prospective basis using quantitative measures of
correlation. If a hedge relationship is found to be ineffective, it no
longer qualifies as a hedge and any gains or losses attributable to such
ineffectiveness as well as subsequent changes in fair value are recognized
in realized investment gains and losses.
For those 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 and losses.
Financial instruments with embedded derivatives:
The Company bifurcates an embedded derivative where the economic
characteristics and risks of the embedded instrument are not clearly and
closely related to the economic characteristics and risks of the host
contract, the entire instrument would not otherwise be remeasured at fair
value and a separate instrument with the same terms of the embedded
instrument would meet the definition of a derivative under 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 and
losses. Derivatives embedded in convertible debt securities are classified
in the consolidated balance sheet as fixed maturity securities, consistent
with the host instruments.
The Company markets certain 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
29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
reflected in realized investment gains and losses. 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 consistently with the
associated risk management strategy. 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
and losses.
Payments to be received or made under interest rate swaps were accrued and
recognized in net investment income. Swaps hedging available for sale
securities were carried at fair value with unrealized gains and 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 reflected in realized investment gains and 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 and
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 and 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. Impairments are realized when investment losses in value are
deemed other-than-temporary. The Company conducts regular reviews to assess
whether other-than-temporary impairments exist. Changing economic
conditions - global, regional, or related to specific issuers or industries
- could adversely affect these investments. Also included in pre-tax
revenues 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 traditional life and health insurance, universal life,
corporate owned life insurance (COLI), deferred annuities and payout
annuities are deferred. These deferred acquisition costs (DAC) include
principally commissions and certain expenses related to policy issuance,
underwriting and marketing, all of which vary with and are primarily
related to the production of new business. The method for determining
amortization of deferred acquisition costs varies by product type based
upon three different accounting pronouncements: Statement of Financial
Accounting Standards No. 60, "Accounting and Reporting by Insurance
Enterprises" (FAS 60), Statement of Financial Accounting Standards No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases" (FAS 91) and Statement
of Financial Accounting Standards No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long Duration Contracts and for Realized
Gains and Losses from the Sale of Investments" (FAS 97).
30
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DAC for deferred annuities, both fixed and variable, and payout annuities
are amortized employing a level effective yield methodology per FAS 91 as
permitted by AICPA Practice Bulletin 8. An amortization rate is developed
using the outstanding DAC balance and projected account balances and is
applied to actual account balances to determine the amount of DAC
amortization. The projected account balances are derived using a model that
contains assumptions related to investment returns and persistency. The
model rate is evaluated periodically, at least annually, and the actual
rate is reset in the following quarter and applied prospectively. A new
amortization pattern is developed so that the DAC balances will be
amortized over the remaining estimated life of the business. DAC for these
products is currently being amortized over 10-15 years.
DAC for universal life and COLI are amortized in relation to estimated
gross profits from surrender charges, investment, mortality, and expense
margins per FAS 97. Actual profits can vary from management's estimates,
resulting in increases or decreases in the rate of amortization.
Re-estimates of gross profits result in retrospective adjustments to
earnings by a cumulative charge or credit to income. DAC for these products
is currently being amortized over 16-25 years.
DAC relating to traditional life, including term insurance, and health
insurance are amortized in relation to anticipated premiums per FAS 60.
Assumptions as to the anticipated premiums are made at the date of policy
issuance or acquisition and are consistently applied over the life of the
policy. DAC for these products is currently being amortized over 5-20
years.
DAC is reviewed to determine if it is recoverable from future income,
including investment income, and if not recoverable, is charged to
expenses. All other acquisition expenses are charged to operations as
incurred. See Note 6.
VALUE OF INSURANCE IN FORCE
The value of insurance in force is an asset that was recorded in 1993 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 and annuities 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 is 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. See Note 6.
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 fair value. Certain
other separate accounts provide guaranteed levels of return or benefits and
the assets of these accounts are primarily carried at fair value.
31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Amounts assessed to the separate account contractholders for management
services are included in revenues. Deposits, net investment income and
realized investment gains and losses for these accounts are excluded from
revenues, and related liability increases are excluded from benefits and
expenses.
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 in the first quarter of 2002, goodwill was
being amortized on a straight-line basis principally over a 40-year period.
The carrying amount of goodwill and other intangible assets 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. See Note 6.
Upon adoption of FAS 141 and FAS 142, the Company stopped amortizing
goodwill and intangible assets deemed to have an infinite useful life.
Instead, these assets are 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 Changes.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal
life, COLI, pension investment, guaranteed investment contracts (GIC), and
certain deferred annuity contracts. For universal life and COLI contracts,
contractholder fund balances are increased by receipts for mortality
coverage, contract administration, surrender charges and interest accrued,
where one or more of these elements are not fixed or guaranteed. These
balances are decreased by withdrawals, mortality charges and administrative
expenses charged to the contractholder. Interest rates credited to
contractholder funds related to universal life and COLI range from 4.1% to
6.6%, with a weighted average interest rate of 4.5%.
Pension investment, GICs and certain annuity contracts do not contain
significant insurance risks and are considered investment type contracts.
Contractholder fund balances are increased by receipts and credited
interest, and reduced by withdrawals and administrative expenses charged to
the contractholder. Interest rates credited to those investment-type
contracts range from 1.45% to 10.0% with a weighted average interest rate
of 4.9%.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits. The annuity payout reserves are calculated using the mortality
and interest assumptions used in the actual pricing of the benefit.
Mortality assumptions are based on Company experience and are adjusted to
reflect deviations such as substandard mortality in structured settlement
benefits. The interest rates range from 2.0% to 9.0% with a weighted
average of 7.1% for these products. Traditional life products include whole
life and term insurance. Future policy benefits for traditional life
products are estimated on the basis of actuarial assumptions as to
mortality, persistency and interest, established at policy issue. Interest
assumptions applicable to traditional life products range from 2.5% to
7.0%, with a weighted average of 3.6%. Assumptions established at policy
issue as to mortality and persistency are based on the Company's
experience, which, together with interest assumptions, include a margin for
adverse deviation. Appropriate recognition has been given to experience
rating and reinsurance.
32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, 2002 and 2001, the Company had a liability of $22.6 million
and $22.3 million, respectively, for guaranty fund assessments and a
related premium tax offset recoverable of $4.2 million and $4.3 million,
respectively. The assessments are expected to be paid over a period of
three to five 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 Company does not have any permitted statutory accounting
practices.
PREMIUMS
Premiums are recognized as revenue when due. Premiums for contracts with a
limited number of premium payments, due over a significantly shorter period
than the period over which benefits are provided, are considered income
when due. The portion of premium which is not required to provide for
benefits and expenses is deferred and recognized in income in a constant
relationship to insurance benefits in force.
FEE INCOME
Fee income is recognized on deferred annuity and universal life contracts
for mortality, administrative and equity protection charges according to
contract due dates. Fee income is recognized on variable annuity and
universal life separate accounts either daily, monthly, quarterly or
annually as per contract terms.
OTHER REVENUES
Other revenues include surrender penalties collected at the time of a
contract surrender, and other miscellaneous charges related to annuity and
universal life contracts recognized when received. Also included are
revenues from unconsolidated non-insurance subsidiaries. Amortization of
deferred income related to reinsured blocks of business are recognized in
relation to anticipated premiums and are reported in other revenues.
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.
33
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, COLI, pension investment, GICs 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.
STOCK-BASED COMPENSATION
Prior to January 1, 2003, the Company applied Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and
related interpretations in accounting for its stock-based compensation
plans. Under APB 25, there is generally no charge to earnings for employee
stock option awards because the options granted under these plans have an
exercise price equal to the market value of the underlying common stock on
the grant date. Alternatively, FAS No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), allows companies to recognize compensation expense
over the related service period based on the grant date fair value of the
stock award.
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 is amortized in relation to
anticipated premiums. After-tax amortization amounted to $20 million, $21
million and $5 million in 2002, 2001 and 2000, respectively. Earned
premiums were $24 million, $25 million and $138 million in 2002, 2001 and
2000, 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, COLI and group annuity insurance products distributed by
TIC and TLAC principally under the Travelers Life & Annuity 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 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,
34
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
with the result that the deposits collected are reported as liabilities and
are not included in revenues.
The PRIMERICA LIFE INSURANCE business segment consolidates 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 sales force of
approximately 107,000 representatives. A great majority of the domestic
licensed sales force works on a part-time basis.
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- 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.
35
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
BUSINESS SEGMENT INFORMATION:
- -------------------------------------------------------------------------------------------------------------------------
AT AND FOR THE YEAR
ENDED DECEMBER 31, 2002 TRAVELERS LIFE PRIMERICA LIFE
($ in millions) & ANNUITY INSURANCE TOTAL
- -------------------------------------------------------------------------------------------------------------------------
Business Volume:
Premiums $ 730 $ 1,194 $ 1,924
Deposits 11,906 - 11,906
------- ------- -------
Total business volume $12,636 $ 1,194 $13,830
Net investment income 2,646 290 2,936
Interest credited to contractholders 1,220 - 1,220
Amortization of deferred acquisition costs 174 219 393
Total expenditures for deferred acquisition costs 556 323 879
Federal income taxes (FIT) on operating income 325 209 534
Operating income (excludes realized gains or
losses and the related FIT) $ 884 $ 407 $ 1,291
Segment Assets $74,562 $ 8,433 $82,995
- -------------------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENT INFORMATION:
- -------------------------------------------------------------------------------------------------------------------------
AT AND FOR THE YEAR
ENDED DECEMBER 31, 2001 TRAVELERS LIFE PRIMERICA LIFE
($ 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 $77,866
- -------------------------------------------------------------------------------------------------------------------------
36
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
AT AND FOR THE YEAR
ENDED DECEMBER 31, 2000 TRAVELERS LIFE PRIMERICA LIFE
($ 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 $70,293
- -------------------------------------------------------------------------------------------------------------------------
37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENT RECONCILIATION:
($ in millions) AT AND FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
BUSINESS VOLUME AND REVENUES 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Total business volume $ 13,830 $ 15,169 $ 13,502
Other revenues, including fee income 696 644 635
Elimination of deposits (11,906) (13,067) (11,536)
------------------------------------
Revenue from external sources 2,620 2,746 2,601
Net investment income 2,936 2,831 2,730
Realized investment gains (losses) (322) 125 (77)
==========================================================================================================================
Total revenues $ 5,234 $ 5,702 $ 5,254
==========================================================================================================================
OPERATING INCOME
- --------------------------------------------------------------------------------------------------------------------------
Total operating income of business segments $ 1,291 $ 1,200 $ 1,153
Realized investment gains (losses), net of tax (209) 81 (50)
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 $ 1,082 $ 1,272 $ 1,103
==========================================================================================================================
ASSETS
- --------------------------------------------------------------------------------------------------------------------------
Total assets of business segments $ 82,995 $ 77,866 $ 70,293
==========================================================================================================================
BUSINESS VOLUME AND REVENUES
- --------------------------------------------------------------------------------------------------------------------------
Individual Annuities $ 6,307 $ 7,166 $ 7,101
Group Annuities 7,285 8,383 6,563
Individual Life and Health Insurance and COLI 3,116 2,970 2,550
Other (a) 432 250 576
Elimination of deposits (11,906) (13,067) (11,536)
- --------------------------------------------------------------------------------------------------------------------------
Total revenue $ 5,234 $ 5,702 $ 5,254
==========================================================================================================================
(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.
38
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, 2002 AMORTIZED UNREALIZED UNREALIZED FAIR
($ in millions) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 6,975 $ 434 $ 2 $ 7,407
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 2,402 39 19 2,422
Obligations of states, municipalities and
political subdivisions 297 22 0 319
Debt securities issued by foreign governments 365 30 2 393
All other corporate bonds 20,894 982 608 21,268
Other debt securities 4,348 229 66 4,511
Redeemable preferred stock 147 1 34 114
- ----------------------------------------------------------------------------------------------------------------------------------
Total Available For Sale $35,428 $ 1,737 $ 731 $36,434
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2001 AMORTIZED UNREALIZED UNREALIZED FAIR
($ 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
- ----------------------------------------------------------------------------------------------------------------------------------
39
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Proceeds from sales of fixed maturities classified as available for sale
were $15.5 billion, $14.1 billion and $10.8 billion in 2002, 2001 and 2000,
respectively. Gross gains of $741 million, $633 million and $213 million
and gross losses of $309 million, $273 million and $407 million in 2002,
2001 and 2000, respectively, were realized on those sales. Additional
losses of $639 million, $153 million and $25 million in 2002, 2001 and
2000, respectively, were realized due to other-than-temporary losses in
value. Impairment activity increased significantly beginning in the fourth
quarter of 2001 and continued throughout 2002. Impairments were
concentrated in telecommunication and energy company investments.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted expected
cash flows using market rates commensurate with the credit quality and
maturity of the investment. The fair value of investments for which a
quoted market price or dealer quote is not available amounted to $5.1
billion and $4.6 billion at December 31, 2002 and 2001, respectively.
The amortized cost and fair value of fixed maturities at December 31, 2002,
by contractual maturity, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------------------------
AMORTIZED
($ in millions) COST FAIR VALUE
- --------------------------------------------------------------------------------------
MATURITY:
Due in one year or less $ 2,572 $ 2,605
Due after 1 year through 5 years 10,162 10,430
Due after 5 years through 10 years 8,591 8,768
Due after 10 years 7,128 7,224
- --------------------------------------------------------------------------------------
28,453 29,027
- --------------------------------------------------------------------------------------
Mortgage-backed securities 6,975 7,407
- --------------------------------------------------------------------------------------
Total Maturity $35,428 $36,434
- --------------------------------------------------------------------------------------
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, 2002 and 2001, the Company held CMOs classified as
available for sale with a fair value of $4.7 billion and $4.5 billion,
respectively. Approximately 35% and 38%, respectively, of the Company's CMO
holdings are fully collateralized by GNMA, FNMA or FHLMC securities at
December 31, 2002 and 2001. In addition, the Company held $2.6 billion and
$2.1 billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities
at December 31, 2002 and 2001, respectively. All of these securities are
rated AAA.
40
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 cash collateral held, representing its obligation to
return the cash collateral related to these loaned securities, and reports
that liability as part of other liabilities in the consolidated balance
sheet. At December 31, 2002 and 2001, the Company held cash collateral of
$2.8 billion and $2.4 billion, respectively.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as
follows:
- -----------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES: GROSS UNREALIZED GROSS UNREALIZED FAIR
($ in millions) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002
Common stocks $ 48 $ 9 $ 7 $ 50
Non-redeemable preferred stocks 280 8 6 282
- -----------------------------------------------------------------------------------------------------------------
Total Equity Securities $328 $17 $13 $332
- -----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
Common stocks $ 96 $11 $ 6 $101
Non-redeemable preferred stocks 375 8 12 371
- -----------------------------------------------------------------------------------------------------------------
Total Equity Securities $471 $19 $18 $472
- -----------------------------------------------------------------------------------------------------------------
Proceeds from sales of equity securities were $945 million, $112 million
and $397 million in 2002, 2001 and 2000, respectively. Gross gains of $8
million, $10 million and $107 million and gross losses of $4 million, $13
million and $9 million in 2002, 2001 and 2000, respectively, were realized
on those sales. Additional losses of $19 million, $96 million and $7
million in 2002, 2001 and 2000, respectively, were realized due to
other-than-temporary losses in value.
MORTGAGE LOANS AND REAL ESTATE
At December 31, 2002 and 2001, the Company's mortgage loan and real estate
portfolios consisted of the following:
- ------------------------------------------------------------------------------------------------
($ in millions) 2002 2001
- ------------------------------------------------------------------------------------------------
Current Mortgage Loans $1,941 $1,976
Underperforming Mortgage Loans 44 19
- ------------------------------------------------------------------------------------------------
Total Mortgage Loans 1,985 1,995
- ------------------------------------------------------------------------------------------------
Real Estate - Foreclosed 17 42
Real Estate - Investment 19 13
- ------------------------------------------------------------------------------------------------
Total Real Estate 36 55
- ------------------------------------------------------------------------------------------------
Total Mortgage Loans and Real Estate $2,021 $2,050
================================================================================================
Underperforming mortgage loans include delinquent mortgage loans over 90
days past due, loans in the process of foreclosure and loans modified at
interest rates below market.
41
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 2002 are
shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to prepay obligations with or without
prepayment penalties.
- ----------------------------------------------------------------
YEAR ENDING DECEMBER 31,
($ in millions)
- ----------------------------------------------------------------
Past Maturity $ 13
2003 183
2004 156
2005 123
2006 198
2007 135
Thereafter 1,177
- ----------------------------------------------------------------
Total $1,985
================================================================
TRADING SECURITIES
Trading securities of the Company are held in Tribeca Citigroup Investments
Ltd. The assets and liabilities are valued at fair value as follows:
Fair value as of Fair value as of
($ in millions) December 31, 2002 December 31, 2001
- --------------- ----------------- -----------------
ASSETS
Trading securities
Convertible bond arbitrage $1,442 $1,798
Merger arbitrage 47 80
Other 42 2
------ ------
$1,531 $1,880
====== ======
LIABILITIES
Trading securities sold not yet purchased
Convertible bond arbitrage $ 520 $ 836
Merger arbitrage 13 51
Other 65 4
------ ------
$ 598 $ 891
====== ======
The Company's trading portfolio investments and related liabilities are
normally held for periods less than six months. See Note 12.
42
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER INVESTED ASSETS
Other invested assets are composed of the following:
- ------------------------------------------------------------------------
($ in millions) 2002 2001
- ------------------------------------------------------------------------
Investment in Citigroup preferred stock $3,212 $ 987
Partnership investments 1,269 949
Real estate joint ventures 390 520
Other 38 29
- ------------------------------------------------------------------------
Total $4,909 $2,485
- ------------------------------------------------------------------------
CONCENTRATIONS
At December 31, 2002 and 2001, the Company had an investment in Citigroup
Preferred Stock of $3.2 billion and $987 million, respectively. See Note
14.
The Company maintains a short-term investment pool for its insurance
affiliates in which the Company also participates. See Note 14.
The Company had concentrations of investments, excluding those in federal
and government agencies, primarily fixed maturities at fair value, in the
following industries:
- ------------------------------------------------------------------------
($ in millions) 2002 2001
- ------------------------------------------------------------------------
Electric Utilities $3,979 $3,883
Finance 3,681 1,633
Banking 1,900 1,944
- ------------------------------------------------------------------------
The Company held investments in foreign banks in the amount of $869 million
and $954 million at December 31, 2002 and 2001, respectively, which are
included in the table above. The Company defines its below investment grade
assets as those securities rated Ba1 by Moody's Investor Services (or its
equivalent) or below by external rating agencies, or the equivalent by
internal analysts when a public rating does not exist. Such assets include
publicly traded below investment grade bonds and certain other privately
issued bonds and notes that are classified as below investment grade. Below
investment grade assets included in the categories of the preceding table
include $878 million and $358 million in Electric Utilities at December 31,
2002 and 2001, respectively, and total below investment grade assets were
$3.8 billion and $2.3 billion at December 31, 2002 and 2001, respectively.
Included in mortgage loans were the following group concentrations:
- ------------------------------------------------------------------------
($ in millions) 2002 2001
- ------------------------------------------------------------------------
STATE
California $ 788 $ 788
PROPERTY TYPE
Agricultural $1,212 $1,131
43
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 amounted to $58.5 million and $27.7 million at
December 31, 2002 and 2001, respectively.
RESTRUCTURED INVESTMENTS
The Company had mortgage loans and debt securities that were restructured
at below market terms at December 31, 2002 and 2001. The balances of the
restructured investments were insignificant. The new terms typically defer
a portion of contract interest payments to varying future periods. Gross
interest income on restructured assets that would have been recorded in
accordance with the original terms of such loans was insignificant in 2002
and 2001. Interest on these assets, included in net investment income, was
also insignificant in 2002 and 2001.
NET INVESTMENT INCOME
- ----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ in millions) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $2,359 $2,328 $2,061
Mortgage loans 167 210 223
Trading 9 131 208
Joint ventures and partnerships 203 71 150
Citigroup preferred stock 178 53 53
Other, including policy loans 104 165 184
- ----------------------------------------------------------------------------------------------------
Total gross investment income 3,020 2,958 2,879
- ----------------------------------------------------------------------------------------------------
Investment expenses 84 127 149
- ----------------------------------------------------------------------------------------------------
Net investment income $2,936 $2,831 $2,730
- ----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the periods were as follows:
- ----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ in millions) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
REALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $ (207) $ 207 $ (219)
Equity securities (15) (99) 91
Mortgage loans - 5 27
Real estate held for sale 8 3 25
Derivatives (77) 14 -
Other (31) (5) (1)
- ----------------------------------------------------------------------------------------------------
Total realized investment gains (losses) $( 322) $ 125 $ (77)
- ----------------------------------------------------------------------------------------------------
44
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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,
($ in millions) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
UNREALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $ 664 $85 $ 891
Equity securities 3 40 (132)
Other 31 (20) 13
- ----------------------------------------------------------------------------------------------------
Total unrealized investment gains (losses) 698 105 772
- ----------------------------------------------------------------------------------------------------
Related taxes 243 37 271
- ----------------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) 455 68 501
Balance beginning of year 171 103 (398)
- ----------------------------------------------------------------------------------------------------
Balance end of year $ 626 $ 171 $ 103
- ----------------------------------------------------------------------------------------------------
5. REINSURANCE
Reinsurance is used 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. Reinsurance involves credit risk and the Company
monitors the financial condition of these reinsurers on an ongoing basis.
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
universal life, and in excess of $25.0 million for term insurance. For
other plans of insurance, it is the policy of the Company to obtain
reinsurance for amounts above certain retention limits on individual life
policies, which limits vary with age and underwriting classification.
Generally, the maximum retention on an ordinary life risk is $2.5 million.
Total in-force business ceded under reinsurance contracts is $321.9 billion
and $285.7 billion at December 31, 2002 and 2001.
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 $231.8 million and $233.3
million in 2002 and 2001, respectively, and earned premiums ceded were
$233.8 million and $240.1 million in 2002 and 2001, respectively.
The Company also reinsures the guaranteed minimum death benefit (GMDB) on
its variable annuity product. Total variable annuity account balances with
GMDB is $19.1 billion, of which $12.4 billion or 65% is reinsured at
December 31, 2002. GMDB is payable upon the death of a contractholder. When
the benefit payable is greater than the account value of the variable
annuity, the difference is called the net amount at risk (NAR). NAR totals
$4.6 billion at December 31, 2002, of which $3.8 billion or 82% is
reinsured. During 2002, substantially all new contracts written were not
reinsured.
Through TIC, the Company writes workers' compensation business. This
business is reinsured through a 100% quota-share agreement with the
insurance subsidiaries of TPC.
45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A summary of reinsurance financial data reflected within the consolidated
statements of income and balance sheets is presented below ($ in millions):
FOR THE YEARS ENDING DECEMBER 31,
WRITTEN PREMIUMS 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Direct $2,610 $2,848 $2,634
Assumed from:
Non-affiliated companies - 1 -
Ceded to:
Travelers Indemnity Company (83) (146) (195)
Non-affiliated companies (614) (591) (465)
- ----------------------------------------------------------------------------------------------------
Total Net Written Premiums $1,913 $2,112 $1,974
====================================================================================================
EARNED PREMIUMS 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Direct $2,652 $2,879 $2,644
Assumed from:
Non-affiliated companies - 1 -
Ceded to:
Travelers Indemnity Company (109) (180) (216)
Non-affiliated companies (619) (598) (462)
- ----------------------------------------------------------------------------------------------------
Total Net Earned Premiums $1,924 $2,102 $1,966
====================================================================================================
Travelers Indemnity Company was an affiliate in 2001, 2000 and for part of
2002. See Note 15.
Reinsurance recoverables at December 31, 2002 and 2001 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
REINSURANCE RECOVERABLES 2002 2001
- -------------------------------------------------------------------------------------
Life and Accident and Health Business:
Non-affiliated companies $2,589 $2,282
Property-Casualty Business:
Travelers Indemnity Company 1,712 1,881
- -------------------------------------------------------------------------------------
Total Reinsurance Recoverables $4,301 $4,163
=====================================================================================
Reinsurance recoverables for the life and accident and health business
include $1,351 million and $1,060 million from General Electric Capital
Assurance Company, and also include $472 million and $500 million, from The
Metropolitan Life Insurance Company at December 31, 2002 and 2001,
respectively.
6. DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE
The Company has two intangible, amortizable assets, DAC and the value of
insurance in force. The following is a summary of capitalized DAC by type.
46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Deferred &
Payout UL & Traditional Life
In millions of dollars Annuities COLI & Other Total
- ------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $ 896 $299 $ 1,794 $2,989
--------------------------------------------------------------------
Deferred expenses
and other 385 142 324 851
Amortization expense (144) (11) (224) (379)
--------------------------------------------------------------------
Balance December 31, 2001 1,137 430 1,894 3,461
Deferred expenses
and other 348 172 348 868
Amortization expense (132) (24) (237) (393)
--------------------------------------------------------------------
Balance December 31, 2002 $1,353 $578 $ 2,005 $3,936
- ------------------------------------------------------------------------------------------------------------
The value of insurance in force totaled $130 million and $144 million at
December 31, 2002 and 2001, respectively, and is included in other assets.
Amortization expense on the value of insurance in force was $25 million and
$26 million for the twelve months ended December 31, 2002 and 2001,
respectively. Amortization expense related to the value of insurance in
force is estimated to be $20 million in 2003, $18 million in 2004, $16
million in 2005, $13 million in 2006 and $12 million in 2007. In 2002 there
was an opening balance sheet reclassification between DAC and the value of
insurance in force in the amount of $11 million. This had no impact on
results of operations or shareholder's equity.
7. DEPOSIT FUNDS AND RESERVES
At December 31, 2002 and 2001, the Company had $38.8 billion and $34.1
billion of life and annuity deposit funds and reserves, respectively. Of
that total, $21.8 billion and $19.1 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $17.0 billion and $15.0
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 $5.7 billion and $4.2 billion of liabilities
that are surrenderable with market value adjustments. Also included are an
additional $5.5 billion and $5.0 billion of life insurance and individual
annuity liabilities which are subject to discretionary withdrawals, and
have an average surrender charge of 4.7% and 4.7%, respectively. In the
payout phase, these funds are credited at significantly reduced interest
rates. The remaining $5.8 billion and $5.8 billion of liabilities are
surrenderable without charge. Approximately 10.0% and 10.2% of these relate
to individual life products for 2002 and 2001, 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.
Included in contractholder funds and in the preceding paragraph are GICs
totaling $10.9 billion. The scheduled maturities for these GICs, including
interest, are $4.5 billion, $1.5 billion, $1.3 billion, $1.4 billion and
$4.0 billion in 2003, 2004, 2005, 2006 and thereafter. These GICs have a
weighted average interest rate of 4.81% at December 31, 2002.
47
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. FEDERAL INCOME TAXES
EFFECTIVE TAX RATE
($ in millions)
- ----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Income before federal income taxes $1,503 $1,911 $1,654
Statutory tax rate 35% 35% 35%
- ----------------------------------------------------------------------------------------------------
Expected federal income taxes 526 669 579
Tax effect of:
Non-taxable investment income (62) (20) (19)
Tax reserve release (43) (18) (12)
Other, net - (1) 3
- ----------------------------------------------------------------------------------------------------
Federal income taxes $ 421 $ 630 $ 551
====================================================================================================
Effective tax rate 28% 33% 33%
- ----------------------------------------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 217 $ 424 $ 429
Foreign 19 47 33
- ----------------------------------------------------------------------------------------------------
Total 236 471 462
- ----------------------------------------------------------------------------------------------------
Deferred:
United States 182 166 96
Foreign 3 (7) (7)
- ----------------------------------------------------------------------------------------------------
Total 185 159 89
- ----------------------------------------------------------------------------------------------------
Federal income taxes $ 421 $ 630 $ 551
====================================================================================================
Additional tax benefits (expense) attributable to employee stock plans
allocated directly to shareholder's equity for the years ended December 31,
2002, 2001 and 2000 were $(17) million, $21 million and $24 million,
respectively.
48
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 2002 and 2001 were
comprised of the tax effects of temporary differences related to the
following assets and liabilities:
- ---------------------------------------------------------------------------------------------------------------
($ in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 422 $ 539
Operating lease reserves 57 62
Employee benefits 199 104
Other 289 158
- ---------------------------------------------------------------------------------------------------------------
Total 967 863
- ---------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of insurance in force (1,097) (968)
Investments, net (1,180) (215)
Other (138) (89)
- ---------------------------------------------------------------------------------------------------------------
Total (2,415) (1,272)
- ---------------------------------------------------------------------------------------------------------------
Net Deferred Tax Liability $ (1,448) $ (409)
- ---------------------------------------------------------------------------------------------------------------
The Company and its subsidiaries file a consolidated federal income tax
return with Citigroup Inc. Federal income taxes are allocated to each
member of the consolidated group, according to the Tax Sharing Agreement,
on a separate return basis adjusted for credits and other amounts required
by the Agreement.
At December 31, 2002 and 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.
49
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. 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 $256 million, $330 million and $981
million for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company's statutory capital and surplus was $6.9 billion and $5.1
billion at December 31, 2002 and 2001, 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 the Company's statutory net
income was $119 million in 2001, 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
$966 million is available by the end of the year 2003 for such dividends
without prior approval of the State of Connecticut Insurance Department,
depending upon the amount and timing of the payments. TLAC may not pay a
dividend to TIC without such approval. Primerica Life may pay up to $148
million to TIC in 2003 without prior approval of the Massachusetts
Insurance Department. The Company paid dividends of $586 million, $472
million and $860 million in 2002, 2001 and 2000, respectively.
In connection with the TPC IPO and distribution, the Company's additional
paid-in capital increased $1,596 million during 2002 as follows:
($ in millions)
- ---------------
Citigroup Series YYY Preferred Stock $2,225
TLA Holdings LLC 142
Cash and other assets 189
Pension, post-retirement, and post-
employment benefits payable (279)
Deferred tax assets 98
Deferred tax liabilities (779)
------
$1,596
======
See Note 15.
50
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. SHAREHOLDER'S EQUITY (CONTINUED)
Accumulated Other Changes in Equity from Nonowner Sources, Net of Tax
Changes in each component of Accumulated Other Changes in Equity from
Nonowner Sources were as follows:
NET UNREALIZED ACCUMULATED OTHER
GAIN (LOSS) ON FOREIGN CURRENCY DERIVATIVE CHANGES IN EQUITY
INVESTMENT TRANSLATION INSTRUMENTS AND FROM NONOWNER
($ in millions) SECURITIES ADJUSTMENTS HEDGING ACTIVITIES SOURCES
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $(397) $ (1) $ - $ (398)
Unrealized gains on investment securities,
net of tax of $297 451 - - 451
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 104 - - 104
Cumulative effect of change in accounting
for derivative instruments and hedging
activities, net of tax of $(16) 14 - (43) (29)
Unrealized gains on investment securities,
net of tax of $80 149 - - 149
Reclassification adjustment for gains
included in net income, net of tax of $44 (81) - - (81)
Foreign currency translation adjustment, net
of tax of $(2) - (3) - (3)
Derivative instrument hedging activity
losses, net of tax of $(35) - - (66) (66)
- --------------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 82 (3) (109) (30)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 186 (3) (109) 74
Unrealized gains on investment securities,
net of tax of $132 246 - - 246
Reclassification adjustment for losses
included in net income, net of tax of $(113) 209 - - 209
Foreign currency translation adjustment, net
of tax of $2 - 3 - 3
Derivative instrument hedging activity losses,
net of tax of $(42) - - (78) (78)
- --------------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 455 3 (78) 380
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ 641 $ - (187) $ 454
- --------------------------------------------------------------------------------------------------------------------------------
51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by Citigroup. The Company's share of the expense
related to this plan was insignificant in 2002, 2001 and 2000.
The Company also participates in a non-qualified, noncontributory defined
benefit pension plan sponsored by Citigroup. During 2002, the Company
assumed TPC's share of the non-qualified pension plan related to inactive
employees of the former Travelers Insurance entities as part of the TPC
spin-off. The Company's share of net expense for this plan was $10 million
in 2002, and insignificant in 2001 and 2000.
In addition, the Company provides certain other postretirement benefits to
retired employees through a plan sponsored by Citigroup. The Company
assumed TPC's share of the postretirement benefits related to inactive
employees of the former Travelers Insurance entities during 2002 as part of
the TPC spin-off. The Company's share of net expense for the other
postretirement benefit plans was $18 million in 2002 and not significant
for 2001 and 2000.
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 2002, 2001
and 2000. See Note 14.
11. LEASES
Most leasing functions for the Company are administered by a Citigroup
subsidiary at December 31, 2002. Net rent expense for the Company was $24
million, $26 million, and $26 million in 2002, 2001 and 2000, respectively.
- ----------------------------------------------------------------------------------------------
YEAR ENDING DECEMBER 31, MINIMUM OPERATING MINIMUM CAPITAL
($ in millions) RENTAL PAYMENTS RENTAL PAYMENTS
- ----------------------------------------------------------------------------------------------
2003 $ 43 $ 5
2004 42 5
2005 47 5
2006 54 5
2007 54 6
Thereafter 131 24
- ----------------------------------------------------------------------------------------------
Total Rental Payments $371 $50
==============================================================================================
Future sublease rental income of approximately $66 million will partially
offset these commitments. Also, the Company will be reimbursed for 50% of
the rental expense for a particular lease, totaling $164 million, by an
affiliate.
52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures contracts, swaps, options and forward contracts, as a means of
hedging exposure to interest rate changes, equity price changes and foreign
currency risk. The Company also uses derivative financial instruments to
enhance portfolio income and replicate cash market investments. The
Company, through Tribeca Citigroup Investments Ltd., holds and issues
derivative instruments in conjunction with these funding strategies.
The Company uses exchange traded financial futures contracts to manage its
exposure to changes in interest rates that arise from the sale of certain
insurance and investment products, or the need to reinvest proceeds from
the sale or maturity of investments. To hedge against adverse changes in
interest rates, the Company enters long or short positions in financial
futures contracts, which offset asset price changes resulting from changes
in market interest rates until an investment is purchased, or a product is
sold. Futures contracts are commitments to buy or sell at a future date a
financial instrument, at a contracted price, and may be settled in cash or
through delivery.
The Company uses equity option contracts to manage its exposure to changes
in equity market prices that arise from the sale of certain insurance
products. To hedge against adverse changes in the equity market prices, the
Company enters long positions in equity option contracts with major
financial institutions. These contracts allow the Company, for a fee, the
right to receive a payment if the Standard and Poor's 500 Index falls below
agreed upon strike prices.
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 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. 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.
53
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 enters into credit default swaps in conjunction with a fixed
income investment to reproduce the investment characteristics of a
different permissible investment. Under credit default swaps, the Company
agrees with other parties to receive, at specified intervals, fixed or
floating rate interest amounts calculated by reference to an agreed
notional principal amount in exchange for the credit default risk of a
specified bond. Swap agreements are not exchange traded so they are subject
to the risk of default by the counterparty.
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 years ended December 31, 2002 and 2001:
Year Ended Year Ended
In millions of dollars December 31, 2002 December 31, 2001
- -------------------------------------- ----------------- -----------------
Hedge ineffectiveness recognized
related to fair value hedges $ (18.3) $ (4.1)
Hedge ineffectiveness recognized
related to cash flow hedges 14.8 (6.2)
Net gain recorded in accumulated
other changes in equity from
nonowner sources related to net
investment hedges (8.4) 0.8
During the year ended December 31, 2002 the Company recorded a gain of $.3
million from discontinued forecasted transactions. During the year ended
December 31, 2001 there were no discontinued forecasted transactions. The
amount expected to be reclassified from accumulated other changes in equity
from nonowner sources into pre-tax earnings within twelve months from
December 31, 2002 is $(27.2) million.
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 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.
54
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 partnerships. All of
these commitments are to unaffiliated entities. The off-balance sheet risk
of fixed and variable rate loan commitments was $240.9 million and $212.2
million at December 31, 2002 and 2001, respectively. The Company had
unfunded commitments of $630.0 million and $661.5 million to these
partnerships at December 31, 2002 and 2001, 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, 2002 and 2001, investments in fixed maturities had a
carrying value and a fair value of $36.4 billion and $32.1 billion,
respectively. See Notes 1 and 4.
At December 31, 2002, mortgage loans had a carrying value of $2.0 billion
and a fair value of $2.2 billion and at year-end 2001 had a carrying value
of $2.0 billion and a fair value of $2.1 billion. In estimating fair value,
the Company used interest rates reflecting the current real estate
financing market.
Included in other invested assets are 2,225 shares of Citigroup Cumulative
Preferred Stock Series YYY, carried at cost of $2,225 million at December
31, 2002, acquired as a contribution from TPC. This Series YYY preferred
stock pays cumulative dividends at 6.767%, 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 February 27, 2022. Dividends totaling $125 million
were received in 2002. There is no established market for this investment
and it is not practicable to estimate the fair value of the preferred
stock.
Included in other invested assets are 987 shares of Citigroup Cumulative
Preferred Stock Series YY, carried at cost of $987 million at December 31,
2002 and 2001. 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 $53 million were received during 2002, 2001 and
2000, 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, 2002, contractholder funds with defined maturities had a
carrying value of $12.5 billion and a fair value of $13.3 billion, compared
with a carrying value and a fair value of $9.5 billion and $10.0 billion at
December 31, 2001. 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 $11.1 billion and
a fair value of $10.7 billion at December 31, 2002, compared with a
carrying value of $10.6 billion and a fair value of $10.3 billion at
December 31, 2001. These contracts generally are valued at surrender value.
The carrying values of $321 million and $495 million of financial
instruments classified as other assets approximated their fair values at
December 31, 2002 and 2001, respectively. The carrying value of $1.5
billion of financial instruments classified as other liabilities at both
December 31, 2002 and 2001 also approximated their fair values at both
December 31, 2002 and 2001. Fair value is determined using various methods,
including discounted cash flows, as appropriate for the various financial
instruments.
55
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The assets of separate accounts providing a guaranteed return had a
carrying value and a fair value of $511 million at December 31, 2002,
compared with a carrying value and a fair value of $507 million at December
31, 2001. The liabilities of separate accounts providing a guaranteed
return had a carrying value and a fair value of $511 million at December
31, 2002, compared with a carrying value and a fair value of $507 million
at December 31, 2001.
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.
13. COMMITMENTS AND CONTINGENCIES
Litigation
TIC and its subsidiaries are defendants or co-defendants in various
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 the Company's results of
operations, financial condition or liquidity.
14. RELATED PARTY TRANSACTIONS
Citigroup and certain of its subsidiaries provide investment management and
accounting services, payroll, internal auditing, benefit management and
administration, property management and investment technology services to
the Company as of December 31, 2002. At December 31, 2001 the majority of
these services were provided by either Citigroup and its subsidiaries or
TPC. The Company paid Citigroup and its subsidiaries $56.9 million and
$43.6 million in 2002 and 2001, respectively, for these services. The
Company paid TPC $33.6 million and $30.0 million in 2002 and 2001,
respectively, for these services. The amounts due from affiliates related
to these services, included in other assets at December 31, 2002, were
insignificant and in 2001 were $88.2 million. See Note 15.
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, 2002 and 2001, the
pool totaled approximately $4.2 billion and $5.6 billion, respectively. The
Company's share of the pool amounted to $3.8 billion and $2.6 billion at
December 31, 2002 and 2001, respectively, and is included in short-term
securities in the consolidated balance sheets.
56
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
At December 31, 2002 and 2001 the Company had outstanding loaned securities
to SSB for $267.1 million and $413.5 million, respectively.
Included in other invested assets is a $3.2 billion and $987 million
investment in Citigroup preferred stock at December 31, 2002 and 2001,
respectively, carried at cost. Dividends received on these investments were
$178 million in 2002, and $53 million in each of 2001 and 2000.
The Company had investments in an affiliated joint venture, Tishman Speyer,
in the amount of $186.1 million and $310.9 million at December 31, 2002 and
2001, respectively. Income of $99.7 million, $65.5 million and $67.0
million was earned on these investments in 2002, 2001 and 2000,
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 at
both December 31, 2002 and 2001. Income (loss) of $0, $(41.6) million and
$8.1 million were earned on this investment in 2002, 2001 and 2000,
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.
The Company markets deferred annuity products and life insurance through
its affiliate, Salomon Smith Barney (SSB). Annuity deposits related to
these products were $1.0 billion, $1.5 billion, and $1.8 billion in 2002,
2001 and 2000, respectively. Life premiums were $109.7 million, $96.5
million and $77.0 million in 2002, 2001 and 2000, 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 in each of 2002, 2001
and $1.8 billion in 2000.
The Company markets individual annuity products through an affiliate
Citibank, N.A. (Citibank). Deposits received from Citibank were $303
million, $564 million and $392 million in 2002, 2001 and 2000,
respectively.
Primerica Financial Services (PFS), an affiliate, is a distributor of
products for TLA. PFS sold $787 million, $901 million and $1.03 billion of
individual annuities in 2002, 2001 and 2000, respectively.
Primerica Life has entered into a General Agency Agreement with PFS, that
provides that PFS will be Primerica Life's general agent for marketing all
insurance of Primerica Life. In consideration of such services, Primerica
Life agreed to pay PFS marketing fees of no less than $10 million per year
based upon U.S. gross direct premiums received by Primerica Life. In each
of 2002, 2001, and 2000 the fees paid by Primerica Life were $12.5 million.
The Company sells structured settlement annuities to the property casualty
subsidiaries of TPC. See Note 15.
57
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 these
programs, 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 for these plans was
insignificant in 2002, 2001 and 2000.
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
for this program was insignificant in 2002, 2001 and 2000.
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 2002, 2001 and 2000.
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.
58
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. TRAVELERS PROPERTY CASUALTY SPIN-OFF
On March 27, 2002, Travelers Property Casualty Corp. (TPC), the Company's
parent at December 31, 2001, completed its initial public offering (IPO).
On August 20, 2002, Citigroup made a tax-free distribution to its
stockholders of a majority portion of its remaining interest in TPC. Prior
to the IPO the following transactions occurred:
- The common stock of the Company was distributed by TPC to CIHC so
the Company would remain an indirect wholly owned subsidiary of
Citigroup.
- The Company sold its home office buildings in Hartford,
Connecticut and a building housing TPC's information systems in
Norcross, Georgia to TPC for $68 million.
- TLA Holdings LLC, a non-insurance subsidiary valued at $142
million, was contributed to the Company by TPC.
- The Company assumed pension, post-retirement and post-employment
benefits payable to all inactive employees of the former Travelers
Insurance entities and received $189 million of cash and other
assets from TPC to offset these benefit liabilities.
- The Company received 2,225 shares of Citigroup's 6.767% Cumulative
Preferred Stock, Series YYY, with a par value of $1.00 per share
and a liquidation value of $1 million per share as a contribution
from TPC.
At December 31, 2001, TPC and its subsidiaries were affiliates of the
Company and provided certain services to the Company. These services
included data processing, facilities management, banking and financial
functions, benefits administration and others. During 2002, the Company
began phasing out these services. At December 31, 2002, the Company still
receives certain services from TPC on a contract basis. The Company paid
TPC $33.6 million and $30.0 million in 2002 and 2001, respectively, for
these services.
The Company sells structured settlement annuities to the property casualty
insurance subsidiaries of TPC. Such premiums and deposits were $159
million, $194 million and $191 million for 2002, 2001 and 2000,
respectively.
The Company has a license from TPC to use the names "Travelers Life &
Annuity," "The Travelers Insurance Company," "The Travelers Life and
Annuity Company" and related names in connection with the Company's
business.
59
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
16. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
- --------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ in millions) 2002 2001 2000
- --------------------------------------------------------------------------------------------
Net Income $ 1,082 $ 1,281 $ 1,103
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized (gains) losses 322 (125) 77
Deferred federal income taxes 185 159 89
Amortization of deferred policy acquisition
costs 393 379 347
Additions to deferred policy acquisition costs (878) (851) (792)
Investment income (119) (493) (384)
Premium balances (7) 7 20
Insurance reserves and accrued expenses 493 686 559
Other (403) 237 221
- --------------------------------------------------------------------------------------------
Net cash provided by operations $ 1,068 $ 1,280 $ 1,240
- --------------------------------------------------------------------------------------------
17. NON-CASH INVESTING AND FINANCING ACTIVITIES
Significant non-cash investing and financing activities include the
contribution of $2,225 million of Citigroup YYY preferred stock and related
deferred tax liability of $779 million; a $17 million COLI asset and $98
million deferred tax asset related to the transfer of $279 million of
pension and postretirement benefits, transferred for $172 million cash; and
the contribution of a non-insurance company, TLA Holdings, LLC, for $142
million.
60
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.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-14 (c) and 15d-14 (c)
under the Exchange Act) as of a date within 90 days prior to the filing
date of this annual report (the Evaluation Date). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in alerting them on a
timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's reports
filed or submitted under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
Since the Evaluation Date, there have not been any significant changes in
the Company's internal controls or in other factors that could
significantly affect such controls.
61
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed:
(1) Financial Statements. See index on page 18 of this report.
(2) Financial Statement Schedules. See index on page 67 of this
report.
(3) Exhibits. See Exhibit Index on page 63.
(b) Reports on Form 8-K:
None
62
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.
10.01 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).
10.02 Trademark License Agreement between Travelers Property
Casualty Corp. and The Travelers Insurance Company,
effective as of August 20, 2002, incorporated by
reference to Exhibit 10.01 to the Company's Quarterly
Report on form 10-Q for the fiscal quarter ended
September 30, 2002.
10.03 Lease for office space at CityPlace, Hartford,
Connecticut, dated March 28, 1996, by and between Aetna
Life and Casualty Company and The Travelers Indemnity
Company, (the "Cityplace Lease"), incorporated by
reference to Exhibit 10.10 to the Registration Statement
on Form S-1 of Travelers Insurance Group Holdings Inc.
(then known as Travelers/Aetna Property Casualty Corp.)
on April 22, 1996 (File No. 333-2254).
10.04* First Amendment, dated May 15, 2001, by and between
Aetna Inc. (formerly Aetna Life and Casualty Company) as
Landlord and The Travelers Indemnity Company, as Tenant,
with respect to the Cityplace Lease.
10.05* Assignment and Assumption Agreement dated as of August
19, 2002, by and between The Travelers Indemnity Company
as Assignor and the Company as Assignee, with respect to
the Cityplace Lease.
14.01* Citigroup Code of Ethics for Financial Professionals
21. Subsidiaries of the Registrant:
Omitted pursuant to General Instruction I(2)(b) of
Form 10-K.
99.01* Certification Pursuant to 18 USC Section 1350.
---------------------------------------------------------------------------
*Filed herewith
63
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
21st day of March, 2003.
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 21st day of March, 2003.
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 Principal Accounting Officer)
(Glenn D. Lammey)
/s/ Kathleen Lynch Preston Director
- --------------------------
(Kathleen Lynch Preston)
/s/ Marla Berman Lewitus Director
- ------------------------
(Marla Berman Lewitus)
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered
Securities pursuant to Section 12 of the Act: NONE
No Annual Report to Security Holders covering the registrant's last fiscal
year or proxy material with respect to any meeting of security holders has
been sent, or will be sent, to security holders.
CERTIFICATIONS
I, Glenn D. Lammey, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of The Travelers Insurance
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
64
CERTIFICATIONS
(continued)
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date March 21, 2003 /s/ Glenn D. Lammey
-------------------------------------------
Glenn D. Lammey
Executive Vice President,
Chief Financial Officer and Chief Accounting Officer
(Principal Financial Officer and Principal
Accounting Officer)
I, George C. Kokulis, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of The Travelers Insurance
Company;
65
CERTIFICATIONS
(continued)
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date March 21, 2003 /s/ George C. Kokulis
-------------------------------------------------
George C. Kokulis
Chief Executive Officer
66
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 Shareholder's Equity *
Consolidated Statements of Cash Flows *
Notes to Consolidated Financial Statements *
Independent Auditors' Report 68
Schedule I - Summary of Investments - Other than Investments in Related Parties 2002 69
Schedule III - Supplementary Insurance Information 2000-2002 70
Schedule IV - Reinsurance 2000-2002 71
All other schedules are inapplicable for this filing.
* See index on page 18
67
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company:
Under date of January 21, 2003, we reported on the consolidated balance
sheets of The Travelers Insurance Company and subsidiaries as of December
31, 2002 and 2001, and the related consolidated statements of income,
changes in shareholder's equity and cash flows for each of the years in the
three-year period ended December 31, 2002, 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 consolidated 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 goodwill and other intangible
assets in 2002, and its methods of accounting for derivative instruments
and hedging activities and for securitized financial assets in 2001.
/s/KPMG LLP
Hartford, Connecticut
January 21, 2003
68
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2002
($ in millions)
- ------------------------------------------------------------------------------------------------------
AMOUNT SHOWN IN
TYPE OF INVESTMENT COST VALUE BALANCE SHEET(1)
- ------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and
Authorities $ 6,416 $ 6,658 $ 6,658
States, municipalities and political subdivisions 297 319 319
Foreign governments 365 393 393
Public utilities 3,261 3,149 3,149
Convertible bonds and bonds with warrants attached 263 269 269
All other corporate bonds 24,679 25,532 25,532
- ------------------------------------------------------------------------------------------------------
Total Bonds 35,281 36,320 36,320
Redeemable preferred stocks 147 114 114
- ------------------------------------------------------------------------------------------------------
Total Fixed Maturities 35,428 36,434 36,434
- ------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Banks, trust and insurance companies 10 10 10
Industrial, miscellaneous and all other 38 40 40
- ------------------------------------------------------------------------------------------------------
Total Common Stocks 48 50 50
Nonredeemable preferred stocks 280 282 282
- ------------------------------------------------------------------------------------------------------
Total Equity Securities 328 332 332
- ------------------------------------------------------------------------------------------------------
Mortgage Loans 1,985 1,985
Real Estate Held For Sale 36 36
Policy Loans 1,168 1,168
Short-Term Securities 4,414 4,414
Trading Securities 1,531 1,531
Other Investments (2)(3)(4) 1,382 1,382
- ------------------------------------------------------------------------------------------------------
Total Investments $ 46,272 $ 47,282
======================================================================================================
(1) Determined in accordance with methods described in Notes 1 and 4 of the
Notes to Consolidated Financial Statements.
(2) Excludes $3.2 billion of Citigroup Inc. preferred stock. See Note 14 of
Notes to Consolidated Financial Statements.
(3) Also excludes $315 million fair value of investment in affiliated
partnership interests.
(4) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
69
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
($ in millions)
- ---------------------------------------------------------------------------------------------------------------
FUTURE
POLICY
BENEFITS,
DEFERRED LOSSES, OTHER POLICY
POLICY AND CLAIMS CLAIMS AND NET BENEFITS,
ACQUISITION LOSS BENEFITS PREMIUM INVESTMENT CLAIMS AND
COSTS EXPENSES(1) PAYABLE REVENUE INCOME LOSSES (2)
- ---------------------------------------------------------------------------------------------------------------
2002
----
Travelers Life & Annuity $ 2,043 $ 37,774 $ 461 $ 730 $ 2,646 $ 2,404
Primerica Life 1,893 3,261 147 1,194 290 527
- -------------------------------------------------------------------------------------------------------------
Total $ 3,936 $ 41,035 $ 608 $ 1,924 $ 2,936 $ 2,931
=============================================================================================================
2001
----
Travelers Life & Annuity $ 1,672 $ 33,475 $ 368 $ 957 $ 2,530 $ 2,534
Primerica Life 1,789 3,044 144 1,145 301 507
- -------------------------------------------------------------------------------------------------------------
Total $ 3,461 $ 36,519 $ 512 $ 2,102 $ 2,831 $ 3,041
=============================================================================================================
2000
----
Travelers Life & Annuity $ 1,291 $ 29,377 $ 321 $ 860 $ 2,450 $ 2,294
Primerica Life 1,698 2,856 140 1,106 280 496
- -------------------------------------------------------------------------------------------------------------
Total $ 2,989 $ 32,233 $ 461 $ 1,966 $ 2,730 $ 2,790
=============================================================================================================
- ----------------------------------------------------------------------------
AMORTIZATION OF
DEFERRED POLICY OTHER
ACQUISITION OPERATING PREMIUMS
COSTS EXPENSES WRITTEN
- ----------------------------------------------------------------------------
2002
----
Travelers Life & Annuity $ 174 $ 190 $ 729
Primerica Life 219 217 1,184
- ----------------------------------------------------------------------------
Total $ 393 $ 407 $ 1,913
============================================================================
2001
----
Travelers Life & Annuity $ 171 $ 154 $ 955
Primerica Life 208 217 1,157
- ----------------------------------------------------------------------------
Total $ 379 $ 371 $ 2,112
============================================================================
2000
----
Travelers Life & Annuity $ 166 $ 233 $ 859
Primerica Life 181 230 1,115
- ----------------------------------------------------------------------------
Total $ 347 $ 463 $ 1,974
============================================================================
(1) Includes contractholder funds.
(2) Includes interest credited to contractholders.
70
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
($ in millions)
- ------------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF
CEDED TO OTHER ASSUMED FROM AMOUNT ASSUMED
GROSS AMOUNT COMPANIES OTHER COMPANIES NET AMOUNT TO NET
- ------------------------------------------------------------------------------------------------------------------------
2002
- ----
Life Insurance In Force $ 549,066 $ 321,940 $ 3,568 $230,694 1.5%
Premiums:
Life insurance $ 2,227 377 $ - $ 1,850 -
Accident and health insurance 316 242 - 74 -
Property casualty 109 109 - - -
--------- --------- -------- -------- -----
Total Premiums $ 2,652 $ 728 $ - $ 1,924 -
========= ========= ======== ======== =====
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 -
========= ======== ======== ======== =====
71