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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
________________
COMMISSION FILE NUMBER 33-03094
________________
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 PART I PAGE
- ----------- ------ ----
1. Business............................................................................................. 2
A. General........................................................................................... 2
B. Business by Segment
Travelers Life & Annuity..................................................................... 2
Primerica.................................................................................... 4
C. Insurance Regulations............................................................................. 4
2. Properties........................................................................................... 6
3. Legal Proceedings.................................................................................... 6
4. Submission of Matters to a Vote of Security Holders.................................................. 7
PART II
-------
5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 7
6. Selected Financial Data.............................................................................. 7
7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 7
7A. Quantitative and Qualitative Disclosures About Market Risk........................................... 15
8. Financial Statements and Supplementary Data.......................................................... 18
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 64
9A. Controls and Procedures.............................................................................. 64
PART III
10. Directors and Executive Officers of the Registrant................................................... 64
11. Executive Compensation............................................................................... 64
12. Security Ownership of Certain Beneficial Owners and Management....................................... 64
13. Certain Relationships and Related Transactions....................................................... 64
14. Principal Accountant Fees and Services............................................................... 64
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................... 66
Exhibit Index........................................................................................ 67
Signatures........................................................................................... 68
Index to Financial Statements and Financial Statement Schedules...................................... 69
Exhibit 31.01........................................................................................ 74
Exhibit 31.02........................................................................................ 75
Exhibit 32.01........................................................................................ 76
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.
The Company's two reportable business segments are Travelers Life & Annuity and
Primerica. The primary insurance entities of the Company are TIC and its
subsidiaries 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 segment. The consolidated
financial statements include the accounts of the insurance entities of the
Company and Tribeca Citigroup Investments Ltd., among others, on a fully
consolidated basis.
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 14 of Notes to Consolidated Financial
Statements.
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. 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. Among the range of individual products offered are deferred fixed and
variable annuities, payout annuities and term, universal and variable life
insurance. The COLI product is a variable universal life product distributed
through independent specialty brokers. The group products include institutional
pensions, including guaranteed investment contracts (GICs), payout annuities,
group annuities sold to employer-sponsored retirement and savings plans,
structured settlements and funding agreements.
2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Individual deferred 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 annuity products are distributed through affiliated channels and
non-affiliated channels. The affiliated channels include CitiStreet Retirement
Services, a division of CitiStreet LLC, (CitiStreet), a joint venture between
Citigroup and State Street Bank; Smith Barney (SB), a division of Citigroup
Global Markets Inc.; 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 compensation marketplace. CitiStreet's share of
total individual annuity premiums and deposits was 30% in 2003. SB distributes
TLA's individual annuities and individual life products, and accounted for 18%
of total individual annuity premiums and deposits in 2003. Sales by PFS and
Citibank accounted for 16% and 8%, respectively, of total individual annuity
premiums and deposits in 2003. The non-affiliated channels accounted for 28% of
individual annuity premiums and deposits.
Individual life insurance is used to meet estate, business planning and
retirement needs and also to provide protection against financial loss due to
death. Individual life products are primarily marketed by the independent
financial professionals, by SB and by Citibank, who accounted for 81% , 11% and
5%, respectively, of total individual life sales for 2003.
Group annuity products, including fixed and variable rate GICs, 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 primarily as a pension close-out investment for
companies. Structured settlements are purchased as a means of settling certain
indemnity claims and making other payments to policyholders over a period of
time. Funding agreement transactions offer fixed term and fixed or variable 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.
The Company operates Tower Square Securities, Inc., 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, a limited purpose broker-dealer, is the principal underwriter
and distributor for TLA variable products.
3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PRIMERICA
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, 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, the United Kingdom
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. No regulatory
action has been taken by any state insurance department or the NAIC with respect
to IRIS ratios during the two years ended December 31, 2003.
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, 2003, 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), reduced by 25% of the change in net unrealized capital gains,
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 $845 million is available by the end of the year 2004 for such
dividends without prior approval of the State of Connecticut Insurance
Department, depending upon the amount and timing of the payments. In accordance
with the Connecticut statute, TLAC, after reducing its unassigned funds
(surplus) by 25% of the change in unrealized capital gains, may not pay a
dividend to TIC without prior approval of the State of Connecticut Insurance
Department. Primerica may pay up to $242 million to TIC in 2004 without prior
approval of the Commonwealth of Massachusetts Insurance Department.
5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
In February 2004, the Company requested prior approval of the State of
Connecticut Insurance Department to pay a proposed extraordinary dividend in
March 2004. Under Connecticut law, the ordinary dividend limitation amount is
based upon the cumulative total of all dividend payments made within the
preceding twelve months. The Company's proposed dividend payment of $467.5
million payable on March 30 would exceed the ordinary dividend limitation by
approximately $103 million. The State of Connecticut Insurance Department
approved the request on March 12, 2004. The Company may seek approval from the
Connecticut Insurance Department for additional extraordinary dividend payments
during 2004. This statement is a forward-looking statement within the meaning
of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on page 15.
Code of Ethics
The Company has adopted a code of ethics for financial professionals which
applies to the Company's principal executive officer and principal financial and
accounting officer. The code of ethics for financial professionals has been
included as an exhibit to this Form 10-K and can be found on the Citigroup
website by selecting the "Corporate Governance" page.
ITEM 2. PROPERTIES.
The Company's executive offices are located in Hartford, Connecticut. The
Company moved its executive offices to One Cityplace, Hartford, Connecticut,
during the first quarter of 2003. The Company occupies 373,000 square feet at
this location under an operating lease that runs through October 31, 2008. At
December 31, 2002 the Company leased approximately 284,000 square feet from TPC
at One Tower Square, Hartford, Connecticut under a lease that ran through March
31, 2003. The Company previously owned the complex of buildings at One Tower
Square, and sold it as well as a building in Norcross, Georgia housing TPC's
information systems department, to TPC for $68 million in 2002 in connection
with the TPC spin-off from Citigroup. See Note 14 of Notes to Consolidated
Financial Statements.
Other leasehold interests of the Company include approximately 760,000 square
feet of office space in 25 locations throughout the United States.
Management believes that these facilities are suitable and adequate for the
Company's current needs. See Note 10 of Notes to Consolidated Financial
Statements for additional information regarding these facilities.
The preceding discussion does not include information on investment properties.
ITEM 3. LEGAL PROCEEDINGS.
In 2003, several issues in the mutual fund and variable insurance product
industries have come under the scrutiny of federal and state regulators. Like
many other companies in our industry, the Company has received a request for
information from the Securities and Exchange Commission (SEC) and a subpoena
from the New York Attorney General regarding market timing and late trading. In
March 2004 the SEC requested additional information about the Company's variable
product operations on market timing, late trading and revenue sharing. The
Company is cooperating fully with all of these reviews and is not able to
predict their outcomes.
In the ordinary course of business, TIC and its subsidiaries are defendants or
co-defendants in various 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.
Certain of these statements are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 15.
6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
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, 2003. 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 $545 million and $586 million in 2003 and 2002, respectively. See Note
8 of Notes to Consolidated Financial Statements for certain information
regarding dividend restrictions.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction I(2)(a) of Form 10-K.
SEGMENTS
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company) is composed of two business segments, Travelers Life & Annuity (TLA)
and Primerica.
CRITICAL ACCOUNTING POLICIES
The Notes to Consolidated 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.
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 (SFAS)
No. 60, "Accounting and Reporting by Insurance Enterprises" (SFAS 60), SFAS No.
91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long Duration
Contracts and for Realized Gains and Losses from the Sale of Investments" (SFAS
97).
7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
DAC for deferred annuities, both fixed and variable, and payout annuities is
amortized employing a level effective yield methodology per SFAS 91 as indicated
by AICPA Practice Bulletin 8. An amortization rate is developed using the
outstanding DAC balance and projected account balances. This rate 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 at
least annually, and changes in underlying lapse and interest rate assumptions
are to be treated retrospectively. Variances in expected equity market returns
versus actual returns are treated prospectively and a new amortization pattern
is developed so that the DAC balances will be amortized over the remaining
estimated life of the business. DAC for these products is currently being
amortized over 10-15 years.
DAC for universal life and COLI is amortized in relation to estimated gross
profits from surrender charges, investment, mortality, and expense margins per
SFAS 97. Actual profits can vary from management's estimates, resulting in
increases or decreases in the rate of amortization. Re-estimates of gross
profits, performed at least annually, result in retrospective adjustments to
earnings by a cumulative charge or credit to income. DAC for these products is
currently being amortized over 16-25 years.
DAC relating to traditional life, including term insurance, and health insurance
is amortized in relation to anticipated premiums per SFAS 60. Assumptions as to
the anticipated premiums are made at the date of policy issuance or acquisition
and are consistently applied over the life of the policy. DAC for these products
is currently being amortized over 5-20 years.
All DAC is reviewed at least annually to determine if it is recoverable from
future income, including investment income, and, if not recoverable, is charged
to expense. All other acquisition expenses are charged to operations as
incurred.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life products. The annuity payout
reserves are calculated using the mortality and interest assumptions used in the
actual pricing of the benefit. Mortality assumptions are based on 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 7.02% 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. Actuarial
and interest assumptions include a margin for adverse deviation and are based on
the Company's experience. Interest assumptions applicable to traditional life
products range from 2.5% to 7.0%, with a weighted average of 5.23%.
INVESTMENTS IN FIXED MATURITIES
Fixed maturities, which comprise 75% and 72% of total investments at December
31, 2003 and 2002, respectively, include bonds, notes and redeemable preferred
stocks. Fixed maturities, including instruments subject to securities lending
agreements (see Note 3 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 determine
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 a rigorous review each quarter to
identify and evaluate investments that have possible indications of
8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
impairment. An investment in a debt or equity security is impaired if its fair
value falls below its cost and the decline is considered other-than-temporary.
Factors considered in determining whether a loss is temporary include the length
of time and extent to which fair value has been below cost; the financial
condition and near-term prospects of the issuer; and the Company's ability and
intent to hold the investment for a period of time sufficient to allow for any
anticipated recovery. Changing economic conditions - global, regional, or
related to specific issuers or industries - could result in other-than-temporary
losses.
PREMIUMS
Premiums are recognized as revenues when due. Premiums for contracts with a
limited number of premium payments, due over a significantly shorter period than
the period over which benefits are provided, are considered revenue when due.
The portion of premium which is not required to provide for benefits and
expenses is deferred and recognized in revenues in a constant relationship to
insurance benefits in force.
CONSOLIDATED OVERVIEW
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
- -------------------------------- ---- ----
($ in millions)
Revenues $ 6,139 $ 5,234
Insurance benefits and interest credited 3,350 2,931
Operating expenses 960 800
-------- -------
Income before taxes 1,829 1,503
Income taxes 471 421
-------- -------
Net income $ 1,358 $ 1,082
======== =======
Net income in 2003 increased 26% from 2002, primarily attributable to increased
revenues due to better net pre-tax realized investment portfolio gain (loss)
activity, better fee income and higher net investment income (NII) from
increased business volumes and an increased invested asset base. These increases
were partially offset by higher insurance benefits and claims from the increased
business volumes, higher DAC amortization and lower investment yields. Included
in net income are current year realized investment gains of $24 million compared
to prior year investment losses of $209 million. The 2002 loss reflects
impairments to the fixed maturities portfolio related to WorldCom Inc. of $126
million, as well as other fixed maturities and equity investment impairments.
See the detailed description of each business segment for additional
information.
9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
TRAVELERS LIFE & ANNUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
- -------------------------------- ---- ----
($ in millions)
Revenues $4,479 $3,653
Insurance benefits and interest credited 2,816 2,404
Operating expenses 505 364
------ ------
Income before taxes 1,158 885
Income taxes 240 212
------ ------
Net income $ 918 $ 673
====== ======
Net income of $918 million in 2003, which increased 36% from $673 million in
2002, includes net realized investment gains of $20 million compared to net
realized investment losses of $211 million in 2002, largely resulting from the
absence of prior year impairments to the fixed maturities portfolio investments
in WorldCom Inc. of $122 million, as well as other fixed maturities and equity
investment impairments. The increase in 2003 net income was also due to higher
fee revenues and NII from business volumes, and $50 million in tax benefits
related to an adjustment to the Dividends Received Deduction. These increases
were partially offset by higher insurance benefits and claims from the increased
business volumes, higher DAC amortization and lower investment yields.
TLA NII increased 4% to $2,743 million in 2003 from $2,646 million in 2002
despite overall rate deterioration. Fixed maturities suffered from the lower
interest rate environment and credit issues. The increase was driven by a larger
invested asset base from higher business volumes and significant returns from
risk arbitrage activity through the trading portfolio.
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, 2003 and 2002. 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. Deposits
represent a statistic used for measuring business volumes, which management of
the Company uses to manage the life insurance and annuities operations, and may
not be comparable to similarly captioned measurements used by other life
insurance companies.
2003 2002
IN MILLIONS OF DOLLARS Premiums Deposits Premiums Deposits
-------- -------- -------- --------
Individual annuities
Fixed $ - $ 535 $ - $ 1,237
Variable - 3,983 - 4,004
Individual payout 26 28 28 29
------ ------- -------- -------
Total individual annuities 26 4,546 28 5,270
Group annuities 908 6,494 545 5,747
Individual life insurance:
Direct periodic premiums & deposits 140 686 135 636
Single premium deposits - 405 - 285
Reinsurance (40) (99) (28) (85)
------ ------- -------- -------
Total individual life insurance 100 992 107 836
Other 48 - 50 -
------ ------- -------- -------
Total $1,082 $12,032 $ 730 $11,853
====== ======= ======== =======
Individual annuity deposits decreased 14% in 2003 to $4.546 billion from $5.270
billion in 2002. The decrease was primarily driven by a decline in fixed annuity
sales due to competitive pressures and current market perception of fixed rate
products. Variable annuity production declined slightly in 2003, primarily in
the first half of the year, which was the continuation of the weak equity market
conditions from the prior year. Production rebounded in the second half of the
year as equity market conditions improved. Individual annuity account balances
and benefits reserves were $32.9 billion at December 31, 2003, up from $27.5
billion at December 31, 2002. This increase reflects equity market growth in
variable annuity investments of $4.0 billion in 2003 and $1.2 billion of net
sales from good in-force retention.
Group Annuity written premiums increased 67%, primarily related to group payout
sales, which increased 129% due to the sale of a group pension close-out
contract of $290 million. Deposits (excluding the Company's employee pension
plan deposits) in 2003 increased 13% from 2002, reflecting higher fixed and
variable rate guaranteed investment contracts (GIC) sales, including a $1.0
billion fixed rate GIC sale to The Federal Home Loan Bank of Boston. Group
annuity account balances and benefit reserves reached $25.2 billion at December
31, 2003, an increase of $2.9 billion, or 13%, from $22.3 billion at December
31, 2002, reflecting continued strong retention in all products, a $105 million,
or 21%, increase in total structured settlement premiums and deposits, as well
as continued strong GIC and group payout sales.
Deposits for the life insurance business increased 19% from 2002. This increase
was related to a 42% increase in single premium sales and higher direct periodic
deposits for individual life insurance in 2003, driven by independent agent
high-end estate planning, partially offset by a 42% decrease in COLI sales. Life
insurance in force was $89.5 billion at December 31, 2003 up from $82.3 billion
at December 31, 2002.
During 2003, TLA expenses increased primarily due to higher DAC amortization and
volume-related insurance expenses.
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 amortization varies based upon product type. DAC for
deferred annuities, both fixed and variable, and payout annuities employs a
level yield methodology as described in SFAS 91. DAC for universal life (UL) and
COLI is amortized in relation to estimated gross profits as described in SFAS
97, with traditional life, including term insurance and other products amortized
in relation to anticipated premiums as per SFAS 60. The following is a summary
of capitalized DAC by type:
Deferred & Payout Traditional Life
In millions of dollars Annuities UL & COLI & Other Total
- ----------------------------------------------------------------------------------------------------------------
Balance January 1, 2002 $ 1,137 $ 430 $ 106 $ 1,673
Commissions and expenses deferred & other 347 172 26 545
Amortization expense (142) (24) (19) (185)
Underlying lapse and interest rate adjustment 22 -- -- 22
Amortization related to SFAS 91 reassessment (11) -- -- (11)
----------------------------------------------------------
Balance December 31, 2002 1,353 578 113 2,044
Commissions and expenses deferred 340 221 22 583
Amortization expense (212) (33) (21) (266)
----------------------------------------------------------
Balance December 31, 2003 $ 1,481 $ 766 $ 114 $ 2,361
- ---------------------------------------------------------------------------------------------------------------
DAC capitalization increased 5% during 2003, driven by the increase in UL and
COLI, which is consistent with the increase in premiums and deposits for those
lines of business. The increase in amortization expense in 2003 was primarily
attributable to deferred annuities. During the first quarter of 2002, there was
a one-time decrease in deferred annuity DAC amortization of $22 million due to
changes in underlying lapse and interest rate assumptions. In contrast to equity
market performance differences, these adjustments are to be treated
retrospectively as described in SFAS 91 by adjusting the DAC asset through
amortization expense and employing the new assumptions prospectively. In the
fourth quarter of 2002, TLA increased its deferred annuities DAC amortization by
$11 million due to a significant decline in its individual annuity account
balances and benefit reserves, largely resulting from decreases in the stock
market which caused account balances to decline. Under SFAS 91, variances in
expected versus actual market returns are treated prospectively, resulting in a
new amortization pattern over the remaining estimated life of the business. The
2003 UL and COLI amortization also increased 38% over 2002, primarily due to
volume growth.
TLA 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, retirement and estate planning
products sold through established distribution channels.
However, competition in both product pricing and customer service is
intensifying. There has been consolidation within the industry, and among other
financial services organizations that are increasingly involved in the sale
and/or distribution of insurance products. Also, the annuities business is
interest rate and market sensitive. TLA's business is significantly affected by
movements in the U.S. equity and fixed income credit markets.
12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
U.S. equity and credit market events can have both positive and negative effects
on the deposit, revenue and policy retention performance of the business. A
sustained weakness in the equity markets will decrease revenues and earnings in
variable annuity products. Declines in credit quality of issuers will have a
negative effect on earnings.
In order to strengthen its competitive position, TLA expects to maintain a
current product portfolio, further diversify its distribution channels, and
retain its financial position through strong sales growth and maintenance of an
efficient cost structure. Federal and state regulators have focused on, and
continue to devote substantial attention to, the mutual fund and variable
insurance product industries. As a result of publicity relating to widespread
perceptions of industry abuses, there have been numerous proposals for
legislative and regulatory reforms, including mutual fund governance, new
disclosure requirements concerning mutual fund share classes, commission
breakpoints, revenue sharing, advisory fees, market timing, late trading,
portfolio pricing, annuity products, hedge funds, and other issues. It is
difficult to predict at this time whether changes resulting from new laws and
regulations will affect the industries or the Company's businesses, and, if so,
to what degree.
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
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
-------------------------------- ---- ----
($ in millions)
Revenues $1,660 $1,581
Insurance benefits and interest credited 534 527
Operating expenses 455 436
------ ------
Income before taxes 671 618
Income taxes 231 209
------ ------
Net income $ 440 $ 409
====== ======
Net income increased 8% to $440 million from $409 million in 2002. The increase
in net income reflects growth in life insurance in force from $466.8 billion at
December 31, 2002 to $503.6 billion at December 31, 2003 and higher NII from a
larger invested capital base. 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
favorable in 2003, compared to 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.
Net income also includes net realized investment gains of $4 million in 2003
compared to net realized investment gains of $2 million in 2002, including the
impairment of the fixed maturities portfolio investment in WorldCom Inc.
totaling $4 million.
The amortization of capitalized DAC is a significant component of Primerica's
expenses. All of Primerica's DAC is associated with traditional life products.
DAC is amortized in relation to anticipated premiums as per SFAS 60. Amortized
DAC has remained level as a percentage of direct premiums. The increase in the
amount of amortization over 2002 is associated with growth in sales and
in-force.
13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The following is a summary of capitalized DAC:
In millions of dollars
- ------------------------------------------------------------------
Balance January 1, 2002 $ 1,788
Deferred expenses and other 323
Amortization expense (219)
- ------------------------------------------------------------------
Balance December 31, 2002 1,892
- ------------------------------------------------------------------
Deferred expenses and other 377
Amortization expense (235)
- ------------------------------------------------------------------
Balance December 31, 2003 $ 2,034
- ------------------------------------------------------------------
EARNED PREMIUMS, NET OF REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
- ----------------------------------- ---- ----
($ in millions)
Individual term life $1,179 $1,127
Other 66 67
------ ------
$1,245 $1,194
====== ======
The total face amount of term life insurance issued was $82.2 billion in 2003
compared to $79.3 billion in 2002. This increase in term life production
resulted from the increase in licensed life representatives. Life insurance in
force at year-end 2003 reached $503.6 billion, up from $466.8 billion at
year-end 2002, reflecting consistent in-force policy retention and higher volume
of sales.
PRIMERICA 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. 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 Application
of Accounting Standards.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "may increase," "may fluctuate," and similar expressions or future
or conditional verbs such as "will," "should," "would," and "could." These
forward-looking statements involve risks and uncertainties including, but not
limited to, regulatory matters, the resolution of legal proceedings, the impact
that the adoption of recent legislation may have on the demand for life and
annuity products, the potential impact of a decline in credit quality of
investments on earnings; the Company's market risk and the discussions of the
Company's prospects under "Outlook" on the previous pages.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 2003.
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 3
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,
2002. The Company does not anticipate significant changes in the Company's
primary market risk exposures or in how those exposures are managed in future
reporting periods based upon what is known or expected to be in effect in future
reporting periods. The statements above are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" above.
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, 2003 and 2002. The sensitivity analysis model used by the Company produces a
loss in fair value of interest rate sensitive invested assets of approximately
$2.2 billion and $1.9 billion based on a 100 basis point increase in interest
rates as of December 31, 2003 and 2002, respectively.
Liability durations are determined consistently with the determination of
liability fair values. Where fair values are determined by discounting expected
cash flows, the duration is the percentage change in the fair value for a 100
basis point change in the discount rate. Where liability fair values are set
equal to surrender values, option-adjusted duration techniques are used to
calculate changes in fair values. The sensitivity analysis model used by the
Company produces a decrease in fair value of interest rate sensitive insurance
policy and claims reserves of approximately $1.7 billion and $1.5 billion based
on a 100 basis point increase in interest rates as of December 31, 2003 and
2002, respectively. Based on the sensitivity analysis model used by the Company,
the net loss in fair value of market sensitive instruments, including
non-financial instrument liabilities, as a result of a 100 basis point increase
in interest rates as of December 31, 2003 and 2002 is not material.
MARKET RISK SENSITIVE INSTRUMENTS ENTERED INTO FOR TRADING PURPOSES
The Company maintains a trading portfolio consisting of convertible bonds and
common stocks with carrying values of $1,707 million and $1,531 million as of
December 31, 2003 and 2002, respectively, and $637 million and $598 million of
liabilities resulting from common stocks sold not yet purchased (referred to as
short sales) as of December 31, 2003 and 2002, respectively. The primary market
risk to the trading portfolio is equity risk. Assets are reported as trading
securities and liabilities are reported as trading securities sold not yet
purchased.
16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The Company's primary investment strategy is convertible bond arbitrage where
convertible bonds are paired with short sales of the common stocks of companies
issuing the convertible bonds. These positions are established and maintained so
that general changes in equity markets and interest rates should not materially
impact the value of the portfolio.
TABULAR PRESENTATION
The table below provides information about the trading portfolio's financial
instruments that are primarily exposed to equity price risk. This table presents
the fair values of these instruments as of December 31, 2003 and 2002. Fair
values are based upon quoted market prices.
Fair value as of Fair value as of
($ in millions) December 31, 2003 December 31, 2002
- --------------- ----------------- -----------------
ASSETS
Trading securities
Convertible bond arbitrage $ 1,447 $ 1,442
Other 260 89
-------- ---------
$ 1,707 $ 1,531
======== =========
LIABILITIES
Trading securities sold not yet purchased
Convertible bond arbitrage $ 629 $ 520
Other 8 78
-------- --------
$ 637 $ 598
======== ========
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, 2003, 2002 and 2001........................................................ 20
Consolidated Balance Sheets - December 31, 2003 and 2002................................................ 21
Consolidated Statements of Changes in Shareholder's Equity
for the years ended December 31, 2003, 2002 and 2001.................................................... 22
Consolidated Statements of Cash Flows for
the years ended December 31, 2003, 2002 and 2001........................................................ 23
Notes to Consolidated Financial Statements.............................................................. 24-63
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, 2003 and 2002, 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,
2003. 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for variable interest entities in 2003, for
goodwill and intangible assets in 2002, and for derivative instruments and
hedging activities and for securitized financial assets in 2001.
/s/KPMG LLP
Hartford, Connecticut
February 26, 2004
19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in millions)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
---- ---- ----
REVENUES
Premiums $ 2,327 $ 1,924 $ 2,102
Net investment income 3,058 2,936 2,831
Realized investment gains (losses) 37 (322) 125
Fee income 606 560 537
Other revenues 111 136 107
- -------------------------------------------------------------------------------------------------------------------
Total Revenues 6,139 5,234 5,702
- -------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 2,102 1,711 1,862
Interest credited to contractholders 1,248 1,220 1,179
Amortization of deferred acquisition costs 501 393 379
General and administrative expenses 459 407 371
- -------------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 4,310 3,731 3,791
- -------------------------------------------------------------------------------------------------------------------
Income from operations before federal income taxes and cumulative effects of
changes in accounting principles 1,829 1,503 1,911
- -------------------------------------------------------------------------------------------------------------------
Federal income taxes
Current 360 236 471
Deferred 111 185 159
- -------------------------------------------------------------------------------------------------------------------
Total Federal Income Taxes 471 421 630
- -------------------------------------------------------------------------------------------------------------------
Income before cumulative effects of changes in accounting principles 1,358 1,082 1,281
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 $ 1,358 $ 1,082 $ 1,272
===================================================================================================================
See Notes to Consolidated Financial Statements.
20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions)
AT DECEMBER 31, 2003 2002
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value (including $2,170 and $2,687
subject to securities lending agreements) (cost $40,119; $35,428) $42,323 $36,434
Equity securities, at fair value (cost $323; $328) 362 332
Mortgage loans 1,886 1,985
Real estate 96 36
Policy loans 1,135 1,168
Short-term securities 3,603 4,414
Trading securities, at fair value 1,707 1,531
Other invested assets 5,092 4,909
- --------------------------------------------------------------------------------------------------------------------
Total Investments 56,204 50,809
- --------------------------------------------------------------------------------------------------------------------
Cash 149 186
Investment income accrued 567 525
Premium balances receivable 165 151
Reinsurance recoverables 4,470 4,301
Deferred acquisition costs 4,395 3,936
Separate and variable accounts 26,972 21,620
Other assets 2,426 1,467
- --------------------------------------------------------------------------------------------------------------------
Total Assets $95,348 $82,995
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $30,252 $26,634
Future policy benefits and claims 15,964 15,009
Separate and variable accounts 26,972 21,620
Deferred federal income taxes 2,030 1,448
Trading securities sold not yet purchased, at fair value 637 598
Other liabilities 6,136 6,051
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities 81,991 71,360
- --------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized, issued and outstanding 100 100
Additional paid-in capital 5,446 5,443
Retained earnings 6,451 5,638
Accumulated other changes in equity from nonowner sources 1,360 454
- --------------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 13,357 11,635
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $95,348 $82,995
====================================================================================================================
See Notes to Consolidated Financial Statements.
21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
($ in millions)
FOR THE YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------
COMMON STOCK
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 $ 5,443 $ 3,864 $ 3,843
Stock option tax benefit (expense) 3 (17) 21
Capital contributed by parent -- 1,596 --
- ---------------------------------------------------------------------------------------------------
Balance, end of year $ 5,446 $ 5,443 $ 3,864
- ---------------------------------------------------------------------------------------------------
RETAINED EARNINGS
- ---------------------------------------------------------------------------------------------------
Balance, beginning of year $ 5,638 $ 5,142 $ 4,342
Net income 1,358 1,082 1,272
Dividends to parent (545) (586) (472)
- ---------------------------------------------------------------------------------------------------
Balance, end of year $ 6,451 $ 5,638 $ 5,142
- ---------------------------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- ---------------------------------------------------------------------------------------------------
Balance, beginning of year $ 454 $ 74 $ 104
Cumulative effect of accounting for
derivative instruments and hedging activities, net
of tax -- -- (29)
Unrealized gains, net of tax 818 455 68
Foreign currency translation, net of tax 4 3 (3)
Derivative instrument hedging activity losses, net
of tax 84 (78) (66)
- ---------------------------------------------------------------------------------------------------
Balance, end of year $ 1,360 $ 454 $ 74
- ---------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- ---------------------------------------------------------------------------------------------------
Net income $ 1,358 $ 1,082 $ 1,272
Other changes in equity from nonowner sources 906 380 (30)
- ---------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 2,264 $ 1,462 $ 1,242
- ---------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY
- ---------------------------------------------------------------------------------------------------
Changes in total shareholder's equity $ 1,722 $ 2,455 $ 791
Balance, beginning of year 11,635 9,180 8,389
- ---------------------------------------------------------------------------------------------------
Balance, end of year $ 13,357 $ 11,635 $ 9,180
- ---------------------------------------------------------------------------------------------------
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, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 2,335 $ 1,917 $ 2,109
Net investment income received 2,787 2,741 2,430
Other revenues received 335 384 867
Benefits and claims paid (1,270) (1,218) (1,176)
Interest paid to contractholders (1,226) (1,220) (1,159)
Operating expenses paid (1,375) (1,310) (1,000)
Income taxes paid (456) (197) (472)
Trading account investments (purchases), sales, net (232) 76 (92)
Other (84) (105) (227)
- ---------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 814 1,068 1,280
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 7,446 4,459 3,706
Mortgage loans 358 374 455
Proceeds from sales of investments
Fixed maturities 15,078 15,472 14,110
Equity securities 124 212 112
Real estate held for sale 5 26 6
Purchases of investments
Fixed maturities (26,766) (23,623) (22,556)
Equity securities (144) (134) (50)
Mortgage loans (317) (355) (287)
Policy loans, net 34 39 41
Short-term securities purchases, net 814 (1,320) (914)
Other investments (purchases), sales, net 108 (69) 103
Securities transactions in course of settlement, net (618) 529 1,086
- ---------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (3,878) (4,390) (4,188)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 8,326 8,505 8,308
Contractholder fund withdrawals (4,754) (4,729) (4,932)
Capital contribution by parent -- 172 --
Dividends to parent company (545) (586) (472)
- ---------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 3,027 3,362 2,904
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (37) 40 (4)
Cash at December 31, previous year 186 146 150
- ---------------------------------------------------------------------------------------------------------
Cash at December 31, current year $ 149 $ 186 $ 146
=========================================================================================================
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. The Company consolidates entities deemed to be
variable interest entities when the Company is determined to be the primary
beneficiary under Financial Accounting Standards Board (FASB) Interpretation No.
46, "Consolidation of Variable Interest Entities" (FIN 46).
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 14.
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 2003
presentation.
ACCOUNTING CHANGES
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FIN 46, which changes the method of
determining whether certain entities, including securitization 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
Statement of Financial Accounting Standards (SFAS) No. 94, "Consolidation of All
Majority-Owned Subsidiaries" (SFAS 94). A VIE is consolidated by its primary
beneficiary, which is the party involved with the VIE that has a majority of the
expected losses or a majority of the expected residual returns or both.
24
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For any VIEs that must be consolidated under FIN 46 that were created before
February 1, 2003, the assets, liabilities and noncontrolling interest of the VIE
are initially measured at their carrying amounts with any difference between the
net amount added to the balance sheet and any previously recognized interest
being recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date FIN
46 first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE. In October 2003, the FASB announced that the
effective date of FIN 46 was deferred from July 1, 2003 to periods ending after
December 15, 2003 for VIEs created prior to February 1, 2003. TIC elected to
implement the provisions of FIN 46 in the 2003 third quarter, resulting in the
consolidation of VIEs, increasing both assets and liabilities by approximately
$407 million.
The implementation of FIN 46 encompassed a review of numerous entities to
determine the impact of adoption and considerable judgment was used in
evaluating whether or not a VIE should be consolidated. The FASB continues to
provide additional guidance on implementing FIN 46 through FASB Staff Positions.
In December 2003, the FASB released a revision of FIN 46 (FIN 46-R or the
interpretation), which includes substantial changes from the original. The
calculation of expected losses and expected residual returns have both been
altered to reduce the impact of decision maker and guarantor fees in the
calculation of expected residual returns and expected losses. In addition, FIN
46-R changes the definition of a variable interest. The interpretation permits
adoption of either the original or the revised versions of FIN 46 until the
first quarter of 2004, at which time FIN 46-R must be adopted. For 2003
year-end, the Company's consolidated financial statements are in accordance with
the original.
The Company is evaluating the impact of applying FIN 46-R to existing VIEs in
which it has variable interests and has not yet completed this analysis. At this
time, it is anticipated that the effect of adopting FIN 46-R on the Company's
consolidated balance sheet would be immaterial. As the Company continues to
evaluate the impact of applying FIN 46-R, additional entities may be identified
that would need to be consolidated. See Note 3.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." In
particular, this Statement clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative and when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. This Statement is generally effective for contracts
entered into or modified after June 30, 2003 and did not have a significant
impact on the Company's consolidated financial statements.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires that
a liability for costs associated with exit or disposal activities, other than in
a business combination, be recognized when the liability is incurred. Previous
generally accepted accounting principles provided for the recognition of such
costs at the date of management's commitment to an exit plan. In addition, SFAS
146 requires that the liability be measured at fair value and be adjusted for
changes in estimated cash flows. The provisions of the new standard are
effective for exit or disposal activities initiated after December 31, 2002. The
adoption of SFAS 146 did not affect the Company's consolidated financial
statements.
25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
STOCK-BASED COMPENSATION
The Company and its employees participate in stock option plans of Citigroup. On
January 1, 2003, the Company adopted the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
prospectively for all awards granted, modified, or settled after January 1,
2003. The prospective method is one of the adoption methods provided for under
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," issued in December 2002. SFAS 123 requires that compensation cost
for all stock awards be calculated and recognized over the service period
(generally equal to the vesting period). This compensation cost is determined
using option pricing models, intended to estimate the fair value of the awards
at the grant date. 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. Similar to APB 25, an offsetting increase to shareholder's equity under
SFAS 123 is recorded equal to the amount of compensation expense charged.
Had the Company applied SFAS 123 prior to 2003 in accounting for Citigroup stock
options, net income would have been the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
($ in millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Compensation expense related to stock option As reported $ 2 $ - $ -
plans, net of tax Pro forma 7 9 15
- ---------------------------------------------------------------------------------------------------------
Net income As reported $1,358 $1,082 $1,272
Pro forma 1,353 1,073 1,257
- ---------------------------------------------------------------------------------------------------------
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the FASB SFAS No. 141, "Business
Combinations" (SFAS 141) and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). These standards change the accounting for business combinations by,
among other things, prohibiting the prospective use of pooling-of-interests
accounting and requiring companies to stop amortizing goodwill and certain
intangible assets with an indefinite useful life created by business
combinations accounted for using the purchase method of accounting. Instead,
goodwill and intangible assets deemed to have an indefinite useful life will be
subject to an annual review for impairment. Other intangible assets that are not
deemed to have an indefinite useful life will continue to be amortized over
their useful lives. See Note 5.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or
26
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
liabilities in the consolidated balance sheet and measure those instruments at
fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a recognized asset or liability or of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation. The cumulative effect of the adoption of SFAS 133 was an
after-tax charge of $6 million included in net income and an after-tax charge of
$29 million to accumulated other changes in equity from nonowner sources.
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND RETAINED
BENEFICIAL INTERESTS IN SECURITIZED FINANCIAL ASSETS
In April 2001, the Company adopted the FASB Emerging Issues Task Force (EITF)
99-20, "Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" (EITF 99-20). EITF 99-20
establishes guidance on the recognition and measurement of interest income and
impairment on certain investments, e.g., certain asset-backed securities. The
recognition of impairment resulting from the adoption of EITF 99-20 was recorded
as a cumulative catch-up adjustment. Interest income on a beneficial interest
falling within the scope of EITF 99-20 is to be recognized prospectively. As a
result of adopting EITF 99-20, the Company recorded an after-tax charge of $3
million in the consolidated statement of income. The implementation of this EITF
did not have a significant impact on the Company's consolidated financial
statements.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADITIONAL
LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS
In July 2003, Statement of Position 03-01 "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts" (SOP 03-01) was released. SOP 03-01 provides guidance on accounting
and reporting by insurance enterprises for separate account presentation,
accounting for an insurer's interest in a separate account, transfers to a
separate account, valuation of certain liabilities, contracts with death or
other benefit features, contracts that provide annuitization benefits, and sales
inducements to contract holders. SOP 03-01 is effective for financial statements
for fiscal years beginning after December 15, 2003. The adoption of SOP 03-01
will not have a material impact on the Company's consolidated financial
statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB released a revision of FIN 46 (FIN 46-R). See
"Consolidation of Variable Interest Entities" in the "Accounting Changes"
section of this Note for a discussion of FIN 46-R.
27
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING POLICIES
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks. Fixed
maturities, including instruments subject to securities lending agreements (see
Note 3), are classified as "available for sale" and are reported at fair value,
with unrealized investment gains and losses, net of income taxes, credited or
charged directly to shareholder's equity. Fair values of investments in fixed
maturities are based on quoted market prices or dealer quotes. If quoted market
prices are not available, discounted expected cash flows using market rates
commensurate with the credit quality and maturity of the investment are used to
determine fair value. Changes in 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 a rigorous review each quarter
to identify and evaluate investments that have possible indications of
impairment. An investment in a debt or equity security is impaired if its fair
value falls below its cost and the decline is considered other-than-temporary.
Factors considered in determining whether a loss is temporary include the length
of time and extent to which fair value has been below cost; the financial
condition and near-term prospects of the issuer; and the Company's ability and
intent to hold the investment for a period of time sufficient to allow for any
anticipated recovery. Changing economic conditions - global, regional, or
related to specific issuers or industries - could result in other-than-temporary
losses.
Also included in fixed maturities are loan-backed and structured securities
(including beneficial interests in securitized financial assets). Beneficial
interests in securitized financial assets that are rated "A" and below are
accounted for under the prospective method in accordance with EITF 99-20. Under
the prospective method of accounting, the investments effective yield and
impairment for other-than-temporary losses in value are based upon projected
future cash flows. All other loan-backed and structured securities are amortized
using the retrospective method. The effective yield used to determine
amortization is calculated based upon actual historical and projected future
cash flows.
Equity securities, which include common and non-redeemable preferred stocks, are
classified as "available for sale" and 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.
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
impairment 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. These impairments were insignificant at December 31, 2003 and
2002.
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.
28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 equity investments, 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, which is
recorded at cost. See Note 13.
Accrual of investment 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, credit 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 investment strategies. (See Note 11 for a more detailed
description of the Company's derivative use.) Derivative financial instruments
in a gain position are reported in the consolidated balance sheet in other
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.
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, the ineffective portion of the
change in fair value is immediately included in realized investment gains and
losses. The Company primarily hedges foreign-denominated funding agreements and
floating rate available-for-sale securities.
29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
The effectiveness of these hedging relationships is evaluated on a retrospective
and prospective basis using quantitative measures of correlation. If a hedge
relationship is found to be ineffective, it no longer qualifies as a hedge and
any gains or losses attributable to such ineffectiveness as well as subsequent
changes in fair value are recognized in realized investment gains and losses.
For those fair value and cash flow hedge relationships that are terminated,
hedge designations removed, or forecasted transactions that are no longer
expected to occur, the hedge accounting treatment described in the paragraphs
above will no longer apply. For fair value hedges, any changes to the hedged
item remain as part of the basis of the asset or liability and are ultimately
reflected as an element of the yield. For cash flow hedges, any changes in fair
value of the end-user derivative remain in the accumulated other changes in
equity from nonowner sources in shareholder's equity and are included in
earnings of future periods when earnings are also affected by the variability of
the hedged cash flow. If the hedged relationship is discontinued because a
forecasted transaction will not occur when scheduled, the accumulated changes in
fair value of the end-user derivative recorded in shareholder's equity are
immediately reflected in realized investment gains and losses.
The Company enters into derivative contracts that are economic hedges but do not
qualify or are not designated as hedges for accounting purposes. These
derivative contracts are carried at fair value, with changes in value reflected
in realized investment gains and losses.
Financial instruments with embedded derivatives
The Company bifurcates an embedded derivative where the economic characteristics
and risks of the embedded instrument are not clearly and closely related to the
economic characteristics and risks of the host contract, the entire instrument
would not otherwise be remeasured at fair value and a separate instrument with
the same terms of the embedded instrument would meet the definition of a
derivative under SFAS 133.
The Company purchases investments that have embedded derivatives, primarily
convertible debt securities. These embedded derivatives are carried at fair
value with changes in value reflected in realized investment gains and losses.
Derivatives embedded in convertible debt securities are classified in the
consolidated balance sheet as fixed maturity securities, consistent with the
host instruments.
The Company markets certain investment contracts that have embedded derivatives,
primarily variable annuity contracts with put options. These embedded
derivatives are carried at fair value, with changes in value reflected in
realized investment gains and losses. Derivatives embedded in variable annuity
contracts are classified in the consolidated balance sheet as future policy
benefits and claims.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pre-tax
revenues based upon specific identification of the investments sold on the trade
date. Impairments are realized when investment losses in
30
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
value are deemed other-than-temporary. The Company conducts regular reviews to
assess whether other- than-temporary losses exist. Changing economic conditions
- - global, regional, or related to specific issuers or industries - could result
in other-than-temporary losses. Also included 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: SFAS No. 60, "Accounting and Reporting by Insurance Enterprises"
(SFAS 60), SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases" (SFAS
91) and SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long Duration Contracts and for Realized Gains and Losses from the Sale
of Investments" (SFAS 97).
DAC for deferred annuities, both fixed and variable, and payout annuities is
amortized employing a level effective yield methodology per SFAS 91 as indicated
by AICPA Practice Bulletin 8. An amortization rate is developed using the
outstanding DAC balance and projected account balances 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 at least
annually, and changes in underlying lapse and interest rate assumptions are to
be treated retrospectively. Variances in expected equity market returns versus
actual returns are treated prospectively and a new amortization pattern is
developed so that the DAC balances will be amortized over the remaining
estimated life of the business. DAC for these products is currently being
amortized over 10-15 years.
DAC for universal life and COLI is amortized in relation to estimated gross
profits from surrender charges, investment, mortality, and expense margins per
SFAS 97. Actual profits can vary from management's estimates, resulting in
increases or decreases in the rate of amortization. Re-estimates of gross
profits, performed at least annually, result in retrospective adjustments to
earnings by a cumulative charge or credit to income. DAC for these products is
currently being amortized over 16-25 years.
DAC relating to traditional life, including term insurance, and health insurance
is amortized in relation to anticipated premiums per SFAS 60. Assumptions as to
the anticipated premiums are made at the date of policy issuance or acquisition
and are consistently applied over the life of the policy. DAC for these products
is currently being amortized over 5-20 years.
All DAC is reviewed at least annually to determine if it is recoverable from
future income, including investment income, and if not recoverable, is charged
to expenses. All other acquisition expenses are charged to operations as
incurred. See Note 5.
31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
VALUE OF INSURANCE IN FORCE
The value of insurance in force is an asset that 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 5.
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.
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 SFAS No. 141, "Business Combinations" (SFAS 141) and No. 142,
"Goodwill and Other Intangible Assets" (SFAS 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 reviewed
at least annually for indication of impairment in value that in the view of
management would be other-than-temporary. If it is determined that goodwill and
other intangible assets are unlikely to be recovered, impairment is recognized
on a discounted cash flow basis.
Upon adoption of SFAS 141 and SFAS 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 5.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal life,
COLI, pension investment, guaranteed investment contracts (GICs), 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
32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
charged to the contractholder. Interest rates credited to contractholder funds
related to universal life and COLI range from 3.50% to 5.95%, with a weighted
average interest rate of 4.52%.
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 1.00% to 8.05% with a weighted average interest rate of 4.46%.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life products. The annuity payout
reserves are calculated using the mortality and interest assumptions used in the
actual pricing of the benefit. Mortality assumptions are based on Company
experience and are adjusted to reflect deviations such as substandard mortality
in structured settlement benefits. The interest rates range from 2.0% to 9.0%
with a weighted average of 7.02% 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 5.23%. 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.
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, 2003 and 2002, the
Company had a liability of $22.5 million and $22.6 million, respectively, for
guaranty fund assessments and a related premium tax offset recoverable of $4.6
million and $4.2 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
33
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
considered revenue when due. The portion of premium which is not required to
provide for benefits and expenses is deferred and recognized in revenues in a
constant relationship to insurance benefits in force.
FEE INCOME
Fee income is recognized on deferred annuity and 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.
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.
2. 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 deferred fixed and variable 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, structured settlements and funding agreements.
34
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The PRIMERICA business segment consolidates the businesses of Primerica Life,
Primerica Life Insurance Company of Canada, CitiLife and NBL. The Primerica
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). 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)
($ in millions) 2003 2002 2001
- --------------- ---- ---- ----
REVENUES BY SEGMENT
TLA $ 4,479 $ 3,653 $ 4,089
Primerica 1,660 1,581 1,613
------- ------- -------
Total Revenues $ 6,139 $ 5,234 $ 5,702
======= ======= =======
NET INCOME BY SEGMENT
TLA $ 918 $ 673 $ 826
Primerica 440 409 446
------- ------- -------
Net Income $ 1,358 $ 1,082 $ 1,272
======= ======= =======
ASSETS BY SEGMENT
TLA $85,881 $74,562 $69,836
Primerica 9,467 8,433 8,030
------- ------- -------
Total segments $95,348 $82,995 $77,866
======= ======= =======
The following tables contain key segment measurements.
BUSINESS SEGMENT INFORMATION:
FOR THE YEAR
ENDED DECEMBER 31, 2003
($ in millions) TLA PRIMERICA
- ---------------------------------------------------------------------------
Premiums $1,082 $1,245
Net investment income 2,743 315
Interest credited to contractholders 1,248 --
Amortization of deferred acquisition costs 266 235
Expenditures for deferred acquisition costs 583 377
Federal income taxes 240 231
BUSINESS SEGMENT INFORMATION:
FOR THE YEAR
ENDED DECEMBER 31, 2002
($ in millions) TLA PRIMERICA
- ---------------------------------------------------------------------------
Premiums $ 730 $1,194
Net investment income 2,646 290
Interest credited to contractholders 1,220 --
Amortization of deferred acquisition costs 174 219
Expenditures for deferred acquisition costs 556 323
Federal income taxes 212 209
36
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FOR THE YEAR
ENDED DECEMBER 31, 2001
($ in millions) TLA PRIMERICA
- ---------------------------------------------------------------------------
Premiums $ 957 $1,145
Net investment income 2,530 301
Interest credited to contractholders 1,179 --
Amortization of deferred acquisition costs 171 208
Total expenditures for deferred acquisition costs 553 298
Federal income taxes 394 236
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. Deposits represent a statistic integral to managing TLA
operations, which management uses for measuring business volumes, and may not be
comparable to similarly captioned measurements used by other life insurance
companies. For the years ended December 31, 2003, 2002 and 2001, deposits
collected amounted to $12.0 billion, $11.9 billion and $13.1 billion,
respectively.
The Company's revenue was derived almost entirely from U.S. domestic business.
Revenue attributable to foreign countries was insignificant.
The Company had no transactions with a single customer representing 10% or more
of its revenue.
37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities were as
follows:
GROSS GROSS
DECEMBER 31, 2003 AMORTIZED UNREALIZED UNREALIZED FAIR
($ in millions) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 8,061 $ 326 $ 18 $ 8,369
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 2,035 22 12 2,045
Obligations of states, municipalities and
political subdivisions 379 21 2 398
Debt securities issued by foreign governments 690 51 1 740
All other corporate bonds 23,098 1,507 64 24,541
Other debt securities 5,701 377 22 6,056
Redeemable preferred stock 155 20 1 174
- ------------------------------------------------------------------------------------------------------------------
Total Available For Sale $40,119 $2,324 $120 $42,323
- ------------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2002 AMORTIZED UNREALIZED UNREALIZED FAIR
($ 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 -- 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
- ------------------------------------------------------------------------------------------------------------------
38
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Proceeds from sales of fixed maturities classified as available for sale were
$15.1 billion, $15.5 billion and $14.1 billion in 2003, 2002 and 2001,
respectively. Gross gains of $476 million, $741 million and $633 million and
gross losses of $394 million, $309 million and $273 million in 2003, 2002 and
2001, respectively, were realized on those sales. Additional losses of $110
million, $639 million and $153 million in 2003, 2002 and 2001, 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 $6.4 billion and $5.1 billion at
December 31, 2003 and 2002, respectively.
The amortized cost and fair value of fixed maturities at December 31, 2003, by
contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
AMORTIZED
($ in millions) COST FAIR VALUE
- ----------------------------------------------------------------------------------
MATURITY:
Due in one year or less $ 2,532 $ 2,582
Due after 1 year through 5 years 11,559 12,188
Due after 5 years through 10 years 9,866 10,561
Due after 10 years 8,101 8,623
- ---------------------------------------------------------------------------------
32,058 33,954
- ---------------------------------------------------------------------------------
Mortgage-backed securities 8,061 8,369
- ---------------------------------------------------------------------------------
Total Maturity $40,119 $42,323
- ---------------------------------------------------------------------------------
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, 2003 and 2002, the Company held CMOs classified as available for
sale with a fair value of $5.2 billion and $4.7 billion, respectively.
Approximately 30% and 35%, respectively, of the Company's CMO holdings are fully
collateralized by GNMA, FNMA or FHLMC securities at December 31, 2003 and 2002.
In addition, the Company held $3.0 billion and $2.6 billion of GNMA, FNMA or
FHLMC mortgage-backed pass-through securities at December 31, 2003 and 2002,
respectively. All of these securities are rated AAA.
39
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company engages in securities lending transactions whereby certain
securities from its portfolio are loaned to other institutions for short periods
of time. The Company generally receives cash collateral from the borrower, equal
to at least the market value of the loaned securities plus accrued interest, and
invests it in the Company's short-term money market pool (See Note 13). 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, 2003 and 2002, the Company held cash collateral of $2.4
billion and $2.8 billion, respectively.
The Company participates in dollar roll repurchase transactions as a way to
generate investment income. These transactions involve the sale of
mortgage-backed securities with the agreement to repurchase substantially the
same securities from the same counterparty. Cash is received from the sale,
which is invested in the Company's short-term money market pool. The cash is
returned at the end of the roll period when the mortgage-backed securities are
repurchased. The Company will generate additional investment income based upon
the difference between the sale and repurchase prices.
These transactions are recorded as secured borrowings. The mortgage-backed
securities remain recorded as assets. The cash proceeds are reflected in
short-term investments and a liability is established to reflect the Company's
obligation to repurchase the securities at the end of the roll period. The
liability is classified as other liabilities in the consolidated balance sheets
and fluctuates based upon the timing of the repayments. The balances were
insignificant at December 31, 2003 and 2002.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as follows:
EQUITY SECURITIES: GROSS UNREALIZED GROSS UNREALIZED FAIR
($ in millions) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003
Common stocks $109 $27 $ 2 $134
Non-redeemable preferred stocks 214 14 - 228
- ----------------------------------------------------------------------------------------------------------------
Total Equity Securities $323 $41 $ 2 $362
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002
Common stocks $ 48 $ 8 $ 6 $ 50
Non-redeemable preferred stocks 280 9 7 282
- ----------------------------------------------------------------------------------------------------------------
Total Equity Securities $328 $17 $13 $332
- ----------------------------------------------------------------------------------------------------------------
Proceeds from sales of equity securities were $124 million, $212 million and
$112 million in 2003, 2002 and 2001, respectively. Gross gains of $23 million,
$8 million and $10 million and gross losses of $2 million, $4 million and $13
million in 2003, 2002 and 2001, respectively, were realized on those sales.
Additional losses of $11 million, $19 million and $96 million in 2003, 2002 and
2001, respectively, were realized due to other-than-temporary losses in value.
40
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER-THAN-TEMPORARY LOSSES ON INVESTMENTS
At December 31, 2003, the cost of approximately 670 investments in fixed
maturity and equity securities exceeded their fair value by $122 million. Of the
$122 million, $91 million represents fixed maturity investments that have been
in a gross unrealized loss position for less than a year and of these 78% are
rated investment grade. Fixed maturity investments that have been in a gross
unrealized loss position for a year or more total $29 million and 38% of these
are rated investment grade. The gross unrealized loss on equity securities was
$2 million at December 31, 2003.
Management has determined that the unrealized losses on the Company's
investments in fixed maturity and equity securities at December 31, 2003 are
temporary in nature. The Company conducts a rigorous review each quarter to
identify and evaluate investments that have possible indications of impairment.
An investment in a debt or equity security is impaired if its fair value falls
below its cost and the decline is considered other-than-temporary. Factors
considered in determining whether a loss is temporary include the length of time
and extent to which fair value has been below cost; the financial condition and
near-term prospects of the issuer; and the Company's ability and intent to hold
the investment for a period of time sufficient to allow for any anticipated
recovery. The Company's review for impairment generally entails:
- - Identification and evaluation of investments that have possible indications
of impairment;
- - Analysis of individual investments that have fair values less than 80% of
amortized cost, including consideration of the length of time the
investment has been in an unrealized loss position;
- - Discussion of evidential matter, including an evaluation of factors or
triggers that would or could cause individual investments to qualify as
having other-than-temporary impairments and those that would not support
other-than-temporary impairment;
- - Documentation of the results of these analyses, as required under business
policies.
The table below shows the fair value of investments in fixed maturities and
equity securities in an unrealized loss position at December 31, 2003:
Gross Unrealized Losses
---------------------------------------------------
Less Than One Year One Year or Longer Total
------------------------ --------------------- --------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
($ in millions) Value Losses Value Losses Value Losses
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available-for-sale:
Mortgage-backed securities-CMOs and pass-through
securities $1,182 $18 $ 17 $ - $1,199 $ 18
U.S. Treasury securities and obligations of U.S.
Government and government agencies and authorities 1,180 12 - - 1,180 12
Obligations of states, municipalities and political
subdivisions 45 2 - - 45 2
Debt securities issued by foreign governments 55 1 - - 55 1
All other corporate bonds 1,793 39 503 25 2,296 64
Other debt securities 755 18 89 3 844 22
Redeemable preferred stock 12 1 11 1 23 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities $5,022 $91 $620 $29 $5,642 $120
Equity securities $ 25 $ 1 $ 5 $ 1 $ 30 $ 2
- ----------------------------------------------------------------------------------------------------------------------------------
41
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MORTGAGE LOANS AND REAL ESTATE
At December 31, 2003 and 2002, the Company's mortgage loan and real estate
portfolios consisted of the following:
($ in millions) 2003 2002
- ------------------------------------------------------------------------------------------------
Current Mortgage Loans $1,841 $1,941
Underperforming Mortgage Loans 45 44
- ------------------------------------------------------------------------------------------------
Total Mortgage Loans 1,886 1,985
- ------------------------------------------------------------------------------------------------
Real Estate - Foreclosed 63 17
Real Estate - Investment 33 19
- ------------------------------------------------------------------------------------------------
Total Real Estate 96 36
- ------------------------------------------------------------------------------------------------
Total Mortgage Loans and Real Estate $1,982 $2,021
================================================================================================
Underperforming mortgage loans include delinquent mortgage loans over 90 days
past due, loans in the process of foreclosure and loans modified at interest
rates below market.
Aggregate annual maturities on mortgage loans at December 31, 2003 are shown
below. Actual maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations with or without prepayment
penalties.
YEAR ENDING DECEMBER 31,
($ in millions)
- ----------------------------------------------------------------
2004 $ 173
2005 107
2006 347
2007 131
2008 141
Thereafter 987
- ----------------------------------------------------------------
Total $1,886
================================================================
42
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
TRADING SECURITIES
Trading securities of the Company are held primarily in Tribeca Citigroup
Investments Ltd. The assets and liabilities are valued at fair value as follows:
Fair value as of Fair value as of
($ in millions) December 31, 2003 December 31, 2002
- -----------------------------------------------------------------------------------------------------
ASSETS
Trading securities
Convertible bond arbitrage $1,447 $1,442
Other 260 89
------ ------
$1,707 $1,531
====== ======
LIABILITIES
Trading securities sold not yet purchased
Convertible bond arbitrage $ 629 $ 520
Other 8 78
------ ------
$ 637 $ 598
====== ======
The Company's trading portfolio investments and related liabilities are normally
held for periods less than six months. See Note 11.
43
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) 2003 2002
- ------------------------------------------------------------------------
Investment in Citigroup Preferred Stock $3,212 $3,212
Private equity and arbitrage investments 1,315 1,006
Real estate investments 327 390
Derivatives 182 263
Other 56 38
- ------------------------------------------------------------------------
Total $5,092 $4,909
- ------------------------------------------------------------------------
CONCENTRATIONS
At December 31, 2003 and 2002, the Company had an investment in Citigroup
Preferred Stock of $3.2 billion. See Note 13.
The Company both maintains and participates in a short-term investment pool for
its insurance affiliates. See Note 13.
The Company had concentrations of investments, excluding those in federal and
government agencies, primarily fixed maturities at fair value, in the following
industries:
($ in millions) 2003 2002
- ------------------------------------------------------------------------
Finance $5,056 $3,681
Electric Utilities 3,552 3,979
Banking 2,830 1,900
- ------------------------------------------------------------------------
The Company held investments in foreign banks in the amount of $1,018 million
and $869 million at December 31, 2003 and 2002, respectively, which are included
in the table above. The Company defines its below investment grade assets as
those securities rated Ba1 by Moody's Investor Services (or its equivalent) or
below by external rating agencies, or the equivalent by internal analysts when a
public rating does not exist. Such assets include publicly traded below
investment grade bonds and certain other privately issued bonds and notes that
are classified as below investment grade. Below investment grade assets included
in the categories of the preceding table include $1,118 million and $878 million
in Electric Utilities at December 31, 2003 and 2002, respectively. Below
investment grade assets in Finance and Banking were insignificant at December
31, 2003 and 2002. Total below investment grade assets were $5.2 billion and
$3.8 billion at December 31, 2003 and 2002, respectively.
Included in mortgage loans were the following group concentrations:
($ in millions) 2003 2002
- ------------------------------------------------------------------------
STATE
California $ 732 $ 788
PROPERTY TYPE
Agricultural $1,025 $1,212
- ------------------------------------------------------------------------
44
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 $104.4 million and $58.5 million at December 31, 2003 and
2002, respectively.
RESTRUCTURED INVESTMENTS
The Company had mortgage loans and debt securities that were restructured at
below market terms at December 31, 2003 and 2002. The balances of the
restructured investments were insignificant. The new terms typically defer a
portion of contract interest payments to varying future periods. Gross interest
income on restructured assets that would have been recorded in accordance with
the original terms of such loans was insignificant in 2003, 2002 and 2001.
Interest on these assets, included in net investment income, was also
insignificant in 2003, 2002 and 2001.
NET INVESTMENT INCOME
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
($ in millions)
- -----------------------------------------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $2,465 $2,359 $2,328
Mortgage loans 158 167 210
Trading 222 9 131
Other invested assets 58 203 71
Citigroup Preferred Stock 203 178 53
Other, including policy loans 82 104 165
- ----------------------------------------------------------------------------------------------------
Total gross investment income 3,188 3,020 2,958
- ----------------------------------------------------------------------------------------------------
Investment expenses 130 84 127
- ----------------------------------------------------------------------------------------------------
Net Investment Income $3,058 $2,936 $2,831
- ----------------------------------------------------------------------------------------------------
45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the periods were as follows:
FOR THE YEAR ENDED DECEMBER 31,
($ in millions) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------
REALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $(28) $(207) $207
Equity securities 10 (15) (99)
Mortgage loans (14) - 5
Real estate held for sale 1 8 3
Other invested assets 49 (19) -
Derivatives 20 (87) 14
Other (1) (2) (5)
- ----------------------------------------------------------------------------------------------------
Total realized investment gains (losses) $ 37 $(322) $125
- ----------------------------------------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are reported in
accumulated other changes in equity from nonowner sources were as follows:
FOR THE YEAR ENDED DECEMBER 31,
($ in millions) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
UNREALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $1,198 $664 $ 85
Equity securities 35 3 40
Other 6 31 (20)
- ------------------------------------------------------------------------------------------------------------
Total unrealized investment gains (losses) 1,239 698 105
- ------------------------------------------------------------------------------------------------------------
Related taxes 421 243 37
- ------------------------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) 818 455 68
Balance beginning of year 626 171 103
- ------------------------------------------------------------------------------------------------------------
Balance end of year $1,444 $626 $171
- ------------------------------------------------------------------------------------------------------------
VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FIN 46, which changes the method of
determining whether certain entities, including securitization entities, should
be included in the Company's consolidated financial statements.
The implementation of FIN 46 encompassed a review of numerous entities to
determine the impact of adoption and considerable judgment was used in
evaluating whether or not a VIE should be consolidated. In December 2003, the
FASB released a revision of FIN 46 (FIN 46-R or the interpretation), which
includes substantial changes from the original. The calculation of expected
losses and expected residual returns have both been altered to reduce the impact
of decision maker and guarantor fees in the calculation of expected residual
returns and expected losses. In addition, FIN 46-R changes the definition of a
variable interest. The interpretation permits adoption of either the original or
the revised versions of FIN 46 until the first quarter of 2004, at which time
FIN 46-R must be adopted. For 2003 year-end, the Company's consolidated
financial statements are in accordance with the original. (See "Consolidation of
Variable Interest Entities" in the "Accounting Changes" section of Note 1.)
46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table represents the carrying amounts and classification of
consolidated assets that are collateral for VIE obligations. The assets in this
table represent two investment vehicles that the Company was involved with prior
to February 1, 2003. These two VIEs are a collateralized debt obligation and a
real estate joint venture:
$ in millions DECEMBER 31, 2003
- ------------------------------------------------------------
Investments $400
Cash 11
Other 4
----
Total assets of consolidated VIEs $415
----
The debt holders of these VIEs have no recourse to the Company. The Company's
maximum exposure to loss is limited to its investment of approximately $8
million. The Company regularly becomes involved with VIEs through its investment
activities. This involvement is generally restricted to small passive debt and
equity investments.
4. 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 (YRT), 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 the majority of universal life business has been reinsured under an
80%/20% YRT quota share reinsurance program and term life business has been
reinsured under a 90%/10% YRT quota share reinsurance program. Beginning in
September 2002, newly issued term life business has been reinsured under a
90%/10% coinsurance quota share reinsurance program. Maximum retention of $2.5
million is generally reached on policies in excess of $12.5 million for
universal life and $25.0 million for term insurance. For other plans of
insurance, it is the policy of the Company to obtain reinsurance for amounts
above certain retention limits on individual life policies, which limits vary
with age and underwriting classification. Generally, the maximum retention on an
ordinary life risk is $2.5 million. Total in-force business ceded under
reinsurance contracts is $356.3 billion and $321.9 billion at December 31, 2003
and 2002, respectively.
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 $226.8 million, $231.8 million and $233.3
million in 2003, 2002 and 2001, respectively, and earned premiums ceded were
$226.7 million, $233.8 million and $240.1 million in 2003, 2002 and 2001,
respectively.
On January 3, 1995, the Company sold its group life business to The Metropolitan
Life Insurance Company (MetLife) under the form of an indemnity insurance
arrangement. Premiums written and earned in 2003, 2002 and 2001 were
insignificant.
47
TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Prior to April 1, 2001, the Company also reinsured substantially all of the
guaranteed minimum death benefit (GMDB) on its variable annuity product. Total
variable annuity account balances with GMDB were $23.5 billion, of which $12.9
billion, or 55%, was reinsured, and $19.1 billion, of which $12.4 billion, or
65%, was reinsured at December 31, 2003 and 2002, respectively. GMDB is payable
upon the death of a contractholder. When the benefit payable is greater than the
account value of the variable annuity, the difference is called the net amount
at risk (NAR). NAR totals $1.7 billion, of which $1.4 billion, or 81%, is
reinsured and $4.6 billion, of which $3.8 billion, or 82%, is reinsured at
December 31, 2003 and 2002, respectively.
TIC writes workers' compensation business. This business is reinsured through a
100% quota-share agreement with The Travelers Indemnity Company, an insurance
subsidiary of TPC.
A summary of reinsurance financial data reflected within the consolidated
statements of income and balance sheets is presented below ($ in millions):
FOR THE YEARS ENDING DECEMBER 31,
WRITTEN PREMIUMS 2003 2002 2001
- ------------------------------------------------------------------------------------------------------
Direct $2,979 $2,610 $2,848
Assumed 1 - 1
Ceded to:
The Travelers Indemnity Company 2 (83) (146)
Other companies (638) (614) (591)
- -----------------------------------------------------------------------------------------------------
Total Net Written Premiums $2,344 $1,913 $2,112
=====================================================================================================
EARNED PREMIUMS 2003 2002 2001
- ------------------------------------------------------------------------------------------------------
Direct $3,001 $2,652 $2,879
Assumed 1 - 1
Ceded to:
The Travelers Indemnity Company (21) (109) (180)
Other companies (654) (619) (598)
- -----------------------------------------------------------------------------------------------------
Total Net Earned Premiums $2,327 $1,924 $2,102
=====================================================================================================
The Travelers Indemnity Company was an affiliate in 2001 and for part of 2002.
See Note 14.
Reinsurance recoverables at December 31, 2003 and 2002 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
REINSURANCE RECOVERABLES 2003 2002
- -------------------------------------------------------------------------------------
Life and accident and health business $2,885 $2,589
Property-casualty business:
The Travelers Indemnity Company 1,585 1,712
- -------------------------------------------------------------------------------------
Total Reinsurance Recoverables $4,470 $4,301
=====================================================================================
Reinsurance recoverables for the life and accident and health business include
$1,617 million and $1,351 million at December 31, 2003 and 2002, respectively,
from General Electric Capital Assurance Company. Assets collateralizing these
receivables are held in trust for the purpose of paying Company claims.
48
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reinsurance recoverables also include $435 million and $472 million at December
31, 2003 and 2002, respectively, from MetLife.
5. INTANGIBLE ASSETS
The Company's intangible assets are DAC, goodwill and the value of insurance in
force. DAC and the value of insurance in force are amortizable. The following is
a summary of capitalized DAC by type.
Deferred & Payout Traditional Life &
In millions of dollars Annuities UL & COLI Other Total
- -------------------------------------------------------------------------------------------------------------
Balance January 1, 2002 $1,137 $430 $1,894 $3,461
Deferred expenses & other 347 172 349 868
Amortization expense (142) (24) (238) (404)
Underlying lapse and interest
rate adjustment 22 - - 22
Amortization related to SFAS
91 reassessment (11) - - (11)
---------------------------------------------------------------------
Balance December 31, 2002 1,353 578 2,005 3,936
Deferred expenses & other 340 221 399 960
Amortization expense (212) (33) (256) (501)
---------------------------------------------------------------------
Balance December 31, 2003 $1,481 $766 $2,148 $4,395
- ------------------------------------------------------------------------------------------------------------
The value of insurance in force totaled $112 million and $130 million at
December 31, 2003 and 2002, respectively, and is included in other assets.
Amortization expense on the value of insurance in force was $18 million, $25
million and $26 million for the year ended December 31, 2003, 2002 and 2001,
respectively. Amortization expense related to the value of insurance in force is
estimated to be $18 million in 2004, $17 million in 2005, $14 million in 2006,
$12 million in 2007 and $8 million in 2008. 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.
The Company stopped amortizing goodwill on January 1, 2002. During 2001, the
Company reversed $8 million of negative goodwill. Net income adjusted to exclude
the impact of goodwill amortization for the year ended December 31, 2001 is as
follows:
Year Ended
($ in millions) December 31, 2001
-----------------
Net income:
Reported net income $1,272
Negative goodwill reversal (8)
Goodwill amortization 7
------
Adjusted net income $1,271
======
49
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. DEPOSIT FUNDS AND RESERVES
At December 31, 2003 and 2002, the Company had $43.5 billion and $38.8 billion,
respectively, of life and annuity deposit funds and reserves. Of that total,
$24.7 billion and $21.8 billion is not subject to discretionary withdrawal based
on contract terms. The remaining $18.8 billion and $17.0 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 $7.0 billion and $5.7 billion of liabilities that are
surrenderable with market value adjustments. Also included are an additional
$6.1 billion and $5.5 billion of life insurance and individual annuity
liabilities which are subject to discretionary withdrawals, and have an average
surrender charge of 5.0% and 4.7%, respectively. In the payout phase, these
funds are credited at significantly reduced interest rates. The remaining $5.7
billion and $5.8 billion of liabilities are surrenderable without charge.
Approximately 10.0% of these relate to individual life products for each of 2003
and 2002. 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 $14.4 billion. The scheduled maturities for these GICs, including
interest, are $4.808 billion, $1.333 billion, $1.665 billion, $1.182 billion,
$1.149 billion and $2.415 billion in 2004, 2005, 2006, 2007, 2008 and
thereafter, respectively. These GICs have a weighted average interest rate of
4.07% at December 31, 2003.
50
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. FEDERAL INCOME TAXES
EFFECTIVE TAX RATE
($ in millions)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------
Income before federal income taxes $1,829 $1,503 $1,911
Statutory tax rate 35% 35% 35%
- -------------------------------------------------------------------------------------------------
Expected federal income taxes 640 526 669
Tax effect of:
Non-taxable investment income (91) (62) (20)
Tax reserve release (79) (43) (18)
Other, net 1 - (1)
- -------------------------------------------------------------------------------------------------
Federal income taxes $ 471 $ 421 $ 630
=================================================================================================
Effective tax rate 26% 28% 33%
- -------------------------------------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 330 $ 217 $ 424
Foreign 30 19 47
- -------------------------------------------------------------------------------------------------
Total 360 236 471
- -------------------------------------------------------------------------------------------------
Deferred:
United States 108 182 166
Foreign 3 3 (7)
- -------------------------------------------------------------------------------------------------
Total 111 185 159
- -------------------------------------------------------------------------------------------------
Federal income taxes $ 471 $ 421 $ 630
=================================================================================================
Additional tax benefits (expense) attributable to employee stock plans allocated
directly to shareholder's equity for the years ended December 31, 2003, 2002 and
2001 were $3 million, $(17) million and $21 million, respectively.
51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liability at December 31, 2003 and 2002 was comprised of
the tax effects of temporary differences related to the following assets and
liabilities:
($ in millions) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 574 $ 422
Operating lease reserves 52 57
Employee benefits 201 199
Other 392 289
- ---------------------------------------------------------------------------------------------------------------
Total 1,219 967
- ---------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of insurance in force (1,225) (1,097)
Investments, net (1,795) (1,180)
Other (229) (138)
- ---------------------------------------------------------------------------------------------------------------
Total (3,249) (2,415)
- ---------------------------------------------------------------------------------------------------------------
Net Deferred Tax Liability $(2,030) $(1,448)
- ---------------------------------------------------------------------------------------------------------------
The Company and its subsidiaries file a consolidated federal income tax return
with Citigroup. Federal income taxes are allocated to each member of the
consolidated group, according to a Tax Sharing Agreement (the Agreement), on a
separate return basis adjusted for credits and other amounts required by the
Agreement.
TIC had $52 million and $156 million payable to Citigroup at December 31, 2003
and 2002, respectively, related to the Agreement.
At December 31, 2003 and 2002, the Company had no ordinary or capital loss
carryforwards.
The policyholders' surplus account, which arose under prior tax law, is
generally that portion of the gain from operations that has not been subjected
to tax, plus certain deductions. The balance of this account is approximately
$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.
52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. SHAREHOLDER'S EQUITY
Shareholder's Equity and Dividend Availability
The Company's statutory net income, which includes the statutory net income of
all insurance subsidiaries, was $1,104 million, $256 million and $330 million
for the years ended December 31, 2003, 2002 and 2001, respectively. The
Company's statutory capital and surplus was $7.6 billion and $6.9 billion at
December 31, 2003 and 2002, respectively.
Effective January 1, 2001, the Company began preparing its statutory basis
financial statements in accordance with the National Association of Insurance
Commissioners' Accounting Practices and Procedures Manual - version effective
January 1, 2001, subject to any deviations prescribed or permitted by its
domicilary insurance commissioners (see Permitted Statutory Accounting Practices
in Note 1). The impact of this change on the Company's statutory capital and
surplus was not significant. The impact of this change on 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 $845 million is
available by the end of the year 2004 for such dividends without prior approval
of the State of Connecticut Insurance Department, depending upon the amount and
timing of the payments. In accordance with the Connecticut statute, TLAC, after
reducing its unassigned funds (surplus) by 25% of the change in net unrealized
capital gains, may not pay dividends during 2004 without prior approval of the
State of Connecticut Insurance Department. Primerica may pay up to $242 million
to TIC in 2004 without prior approval of the Commonwealth of Massachusetts
Insurance Department. The Company paid dividends of $545 million, $586 million
and $472 million in 2003, 2002 and 2001, 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, postretirement, and post-
employment benefits payable (279)
Deferred tax assets 98
Deferred tax liabilities (779)
------
$1,596
======
See Note 14.
53
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. SHAREHOLDER'S EQUITY
Accumulated Other Changes in Equity from Nonowner Sources, Net of Tax
Changes in each component of Accumulated Other Changes in Equity from Nonowner
Sources were as follows:
NET UNREALIZED ACCUMULATED OTHER
GAIN/LOSS FOREIGN CURRENCY DERIVATIVE CHANGES IN EQUITY
ON INVESTMENT TRANSLATION INSTRUMENTS AND FROM NONOWNER
($ in millions) SECURITIES ADJUSTMENTS HEDGING ACTIVITIES SOURCES
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 $ 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 $74 138 - - 138
Less: Reclassification adjustment for gains
included in net income, net of tax of $(38) (70) - - (70)
Foreign currency translation adjustment, net
of tax of $(2) - (3) - (3)
Less: 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 $167 311 - - 311
Add: Reclassification adjustment for losses
included in net income, net of tax of $78 144 - - 144
Foreign currency translation adjustment, net
of tax of $2 - 3 - 3
Less: 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
- -------------------------------------------------------------------------------------------------------------------------
Unrealized gains on investment securities,
net of tax of $407 793 - - 793
Add: Reclassification adjustment for losses
included in net income, net of tax of $13 25 - - 25
Foreign currency translation adjustment, net
of tax of $3 - 4 - 4
Add: Derivative instrument hedging activity
gains, net of tax of $46 - - 84 84
- -------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 818 4 84 906
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 $1,459 $ 4 $ (103) $ 1,360
- -------------------------------------------------------------------------------------------------------------------------
54
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company participates in a qualified, noncontributory defined benefit pension
plan sponsored by Citigroup. The Company's share of the expense related to this
plan was insignificant in 2003, 2002 and 2001.
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 $5 million in 2003, $10 million
in 2002, and insignificant in 2001.
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
$28 million in 2003, $18 million in 2002 and not significant for 2001.
401(k) Savings Plan
Substantially all of the Company's employees are eligible to participate in a
401(k) savings plan sponsored by Citigroup. The Company's expenses in connection
with the 401(k) savings plan were not significant in 2003, 2002 and 2001. See
Note 13.
10. LEASES
Most leasing functions for the Company are administered by a Citigroup
subsidiary. Net rent expense for the Company was $21 million, $24 million, and
$26 million in 2003, 2002 and 2001, respectively.
YEAR ENDING DECEMBER 31, MINIMUM OPERATING MINIMUM CAPITAL
($ in millions) RENTAL PAYMENTS RENTAL PAYMENTS
- -------------------------------------------------------------------------------------------------
2004 $ 47 $ 5
2005 52 5
2006 58 5
2007 58 6
2008 58 6
Thereafter 83 18
- ------------------------------------------------------------------------------------------
Total Rental Payments $ 355 $45
==========================================================================================
Future sublease rental income of approximately $60 million will partially offset
these commitments. Also, the Company will be reimbursed for 50%, totaling $135
million through 2011, of the rental expense for a particular lease by an
affiliate.
55
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial futures
contracts, swaps, options and forward contracts, as a means of hedging exposure
to interest rate changes, equity price changes, credit 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 investment 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 into 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.
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
56
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
investment. The Company will also enter credit default swaps to reduce exposure
to certain corporate debt security investment exposures that it holds. Under
credit default swaps, the Company agrees with other parties to receive or pay,
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.
Several of the Company's hedging strategies do not qualify or are not designated
as hedges for accounting purposes. This can occur when the hedged item is
carried at fair value with changes in fair value recorded in earnings, the
derivative contracts are used in a macro hedging strategy, the hedge is not
expected to be highly effective, or structuring the hedge to qualify for hedge
accounting is too costly or time consuming.
The Company monitors 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. Additionally, the Company enters
into collateral agreements with its derivative counterparties. As of December
31, 2003, the Company held collateral under these contracts amounting to
approximately $96.9 million.
The following table summarizes certain information related to the Company's
hedging activities for the years ended December 31, 2003 and 2002:
Year Ended Year Ended
In millions of dollars December 31, 2003 December 31, 2002
- -------------------------------------------------------------------------------------
Hedge ineffectiveness recognized
related to fair value hedges $(23.2) $(18.3)
Hedge ineffectiveness recognized
related to cash flow hedges (3.4) 14.8
Net loss recorded in accumulated
other changes in equity from
nonowner sources related to
net investment hedges (33.6) (8.4)
Net loss from economic (1.6) (32.8)
hedges recognized in earnings
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, 2003 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,
2003 is $(90.4) million.
57
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 and joint
ventures. All of these commitments are to unaffiliated entities. The off-balance
sheet risk of fixed and variable rate loan commitments was $253.5 million and
$240.9 million at December 31, 2003 and 2002, respectively. The Company had
unfunded commitments of $527.8 million and $630.0 million to these partnerships
at December 31, 2003 and 2002, 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 SFAS No. 107, "Disclosure
about Fair Value of Financial Instruments," and therefore are not included in
the amounts discussed.
At December 31, 2003 and 2002, investments in fixed maturities had a carrying
value and a fair value of $42.3 billion and $36.4 billion, respectively. See
Notes 1 and 3.
At December 31, 2003, mortgage loans had a carrying value of $1.9 billion and a
fair value of $2.0 billion and at year-end 2002 had a carrying value of $2.0
billion and a fair value of $2.2 billion. In estimating fair value, the Company
used interest rates reflecting the current real estate financing market.
Included in other invested assets are 2,225 shares of Citigroup Cumulative
Preferred Stock Series YYY, carried at cost of $2,225 million at December 31,
2003 and 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 $151 million and $125 million
were received in 2003 and 2002, respectively. 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, 2003
and 2002. 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 each of 2003, 2002 and 2001. 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, 2003, contractholder funds with defined maturities had a
carrying value of $13.5 billion and a fair value of $13.7 billion, compared with
a carrying value and a fair value of $12.5 billion and $13.3 billion at December
31, 2002. The fair value of these contracts is determined by discounting
expected cash flows at an interest rate commensurate with the Company's credit
risk and the expected timing of cash flows. Contractholder funds without defined
maturities had a carrying value of $13.1 billion and a fair value of $12.8
billion at December 31, 2003, compared with a carrying value of $11.1 billion
and a fair value of $10.7 billion at December 31, 2002. These contracts
generally are valued at surrender value.
The carrying values of $698 million and $321 million of financial instruments
classified as other assets approximated their fair values at December 31, 2003
and 2002, respectively. The carrying value of $2.5 billion and $1.5 billion of
financial instruments classified as other liabilities at December 31, 2003 and
2002
58
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
also approximated their fair values at both December 31, 2003 and 2002. Fair
value is determined using various methods, including discounted cash flows, as
appropriate for the various financial instruments.
Both the assets and liabilities of separate accounts providing a guaranteed
return had a carrying value and a fair value of $350 million at December 31,
2003, compared with a carrying value and a fair value of $511 million at
December 31, 2002.
The carrying values of cash, trading securities and trading securities sold not
yet purchased are carried at fair value. The carrying values of short-term
securities and investment income accrued approximated their fair values. The
carrying value of policy loans, which have no defined maturities, is considered
to be fair value.
12. COMMITMENTS AND CONTINGENCIES
Litigation
In 2003, several issues in the mutual fund and variable insurance product
industries have come under the scrutiny of federal and state regulators. Like
many other companies in our industry, the Company has received a request for
information from the Securities and Exchange Commission (SEC) and a subpoena
from the New York Attorney General regarding market timing and late trading. In
March 2004 the SEC requested additional information about the Company's variable
product operations on market timing, late trading and revenue sharing. The
Company is cooperating fully with all of these reviews and is not able to
predict their outcomes.
The Company is a defendant or co-defendant 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 consolidated results of operations, financial condition or liquidity.
Other
The Company is a member of the Federal Home Loan Bank of Boston (the Bank), and
in this capacity has entered into a funding agreement (the agreement) with the
Bank where a blanket lien has been granted to collateralize the Bank's deposits.
The Company maintains control of these assets, and may use, commingle, encumber
or dispose of any portion of the collateral as long as there is no event of
default and the remaining qualified collateral is sufficient to satisfy the
collateral maintenance level. The agreement further states that upon any event
of default, the Bank's recovery is limited to the amount of the member's
outstanding funding agreement. The amount of the Company's liability for funding
agreements with the Bank as of December 31, 2003 is $1 billion, included in
contractholder funds. The Company holds $50 million of common stock of the Bank,
included in equity securities.
The Company has provided a guarantee on behalf of Citicorp International Life
Insurance Company, Ltd. (CILIC), an affiliate. The Company has guaranteed to pay
claims up to $1 billion of life insurance coverage for CILIC. This guarantee
takes effect if CILIC cannot pay claims because of insolvency, liquidation or
rehabilitation. Life insurance coverage in force under this guarantee at
December 31, 2003 is $61 million. The Company does not hold any collateral
related to this guarantee.
59
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. 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, 2003. 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 $55.3 million, $56.9 million and
$43.6 million in 2003, 2002 and 2001, respectively, for these services. The
Company paid TPC $4.9 million, $33.6 million and $30.0 million in 2003, 2002 and
2001, respectively, for these services. The amounts due to affiliates related to
these services, included in other liabilities at December 31, 2003 and 2002,
were insignificant. See Note 14.
The Company has received reimbursements from Citigroup and its affiliates
related to the Company's increased benefit and lease expenses after the TPC
spin-off. These reimbursements totaled $34.3 million in 2003 and $15.5 million
in 2002.
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, 2003 and 2002, the pool
totaled approximately $3.8 billion and $4.2 billion, respectively. The Company's
share of the pool amounted to $3.3 billion and $3.8 billion at December 31, 2003
and 2002, respectively, and is included in short-term securities in the
consolidated balance sheets.
At December 31, 2003 and 2002, the Company had outstanding loaned securities to
its affiliate Smith Barney (SB), a division of Citigroup Global Markets, Inc.,
of $238.5 million and $267.1 million, respectively.
Included in other invested assets is a $3.2 billion investment in Citigroup
Preferred Stock at December 31, 2003 and 2002, carried at cost. Dividends
received on these investments were $204 million in 2003, $178 million in 2002
and $53 million in 2001. See Note 11.
The Company had investments in an affiliated joint venture, Tishman Speyer, in
the amount of $166.3 million and $186.1 million at December 31, 2003 and 2002,
respectively. Income of $18.6 million, $99.7 million and $65.5 million was
earned on these investments in 2003, 2002 and 2001, respectively.
The Company also had an investment in Greenwich Street Capital Partners I, an
affiliated private equity investment, in the amount of $48.3 million and $23.6
million at December 31, 2003 and 2002, respectively. Income (loss) of $33.9
million, $0 million and $(41.6) million were earned on this investment in 2003,
2002 and 2001, respectively.
In the ordinary course of business, the Company purchases and sells securities
through affiliated broker-dealers. These transactions are conducted on an
arm's-length basis.
The Company markets deferred annuity products and life insurance through SB.
Annuity deposits related to these products were $835 million, $1.0 billion, and
$1.5 billion in 2003, 2002 and 2001, respectively. Life premiums were $114.9
million, $109.7 million and $96.5 million in 2003, 2002 and 2001, respectively.
Commissions and fees paid to SB were $70.3 million, $77.0 million and $84.6
million in 2003, 2002 and 2001, respectively.
60
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company also markets individual annuity and life insurance through
CitiStreet Retirement Services, a division of CitiStreet LLC, (CitiStreet), a
joint venture between Citigroup and State Street Bank. Deposits received from
CitiStreet were $1.4 billion in 2003 and $1.6 billion in each of 2002 and 2001.
Commissions and fees paid to CitiStreet were $52.9 million, $54.0 million and
$59.1 million in 2003, 2002 and 2001, respectively.
The Company markets individual annuity products through an affiliate Citibank,
N.A. (together with its subsidiaries, Citibank). Deposits received from Citibank
were $357 million, $321 million and $564 million in 2003, 2002 and 2001,
respectively. Commissions and fees paid to Citibank were $29.8 million, $24.0
million and $37.2 million in 2003, 2002 and 2001, respectively.
Primerica Financial Services (PFS), an affiliate, is a distributor of products
for TLA. PFS sold $714 million, $787 million and $901 million of individual
annuities in 2003, 2002 and 2001, respectively. Commissions and fees paid to PFS
were $58.1 million, $60.4 million and $67.8 million in 2003, 2002 and 2001,
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 2003, 2002,
and 2001 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 14.
TIC has made a solvency guarantee for an affiliate, CILIC. See Note 12.
The Company participates in a stock option plan sponsored by Citigroup that
provides for the granting of stock options in Citigroup common stock to officers
and other employees. To further encourage employee stock ownership, Citigroup
introduced the WealthBuilder stock option program during 1997 and the Citigroup
Ownership Program in 2001. Under these programs, all employees meeting
established requirements have been granted Citigroup stock options. During 2001,
Citigroup introduced the Citigroup 2001 Stock Purchase Program for new
employees, which allowed eligible employees of Citigroup, including the
Company's employees, to enter into fixed subscription agreements to purchase
shares at the market value on the date of the agreements. During 2003 Citigroup
introduced the Citigroup 2003 Stock Purchase Program, which allowed eligible
employees of Citigroup, including the Company's employees, to enter into fixed
subscription agreements to purchase shares at the lesser of the market value on
the first date of the offering period or the market value at the close of the
offering period. Enrolled employees are permitted to make one purchase prior to
the expiration date. The Company's charge to income for these plans was
insignificant in 2003, 2002 and 2001.
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 2003, 2002 and
2001.
61
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 in 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 2003, 2002 and 2001.
14. TRAVELERS PROPERTY CASUALTY SPIN-OFF
On March 27, 2002, TPC, the Company's parent at December 31, 2001, completed its
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, postretirement 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. In March 2003, TPC paid the Company $22.6 million
as a settlement for these benefit-related 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. The Company still receives certain services from TPC on a contract
basis. The Company paid TPC $4.9 million, $33.6 million and $30.0 million in
2003, 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 and
$194 million for 2002 and 2001, respectively.
The Company has a license from TPC to use the names "Travelers Life & Annuity,"
"The Travelers Insurance Company," "The Travelers Life and Annuity Company" and
related names in connection with the Company's business.
62
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
FOR THE YEAR ENDED DECEMBER 31,
($ in millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------
Net Income $ 1,358 $1,082 $ 1,281
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized (gains) losses (37) 322 (125)
Deferred federal income taxes 58 185 159
Amortization of deferred policy
acquisition costs 501 393 379
Additions to deferred policy acquisition (960) (879) (851)
costs
Investment income (503) (119) (493)
Premium balances 8 (7) 7
Insurance reserves and accrued expenses 832 493 686
Other (443) (402) 237
- ---------------------------------------------------------------------------------------
Net cash provided by operations $ 814 $1,068 $ 1,280
- ---------------------------------------------------------------------------------------
16. NON-CASH INVESTING AND FINANCING ACTIVITIES
In 2003, significant non-cash investing and financing activities include the
acquisition of real estate through foreclosures of mortgage loans amounting to
$129 million. In 2002, these 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. In 2001, these activities were
insignificant.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended ("Exchange Act")) as of the end of the period covered by this report.
Based on such evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During 2003 the Securities and Exchange Commission (SEC) changed the definitions
of certain terms used by public companies to categorize and disclose various
types of services performed by independent auditors. The following is a
description of the fees earned by KPMG for services rendered to the Company for
the years ended December 31, 2003 and 2002:
64
AUDIT FEES: Audit fees include fees paid by the Company to KPMG in connection
with the annual audit of the Company's consolidated financial statements, KPMG's
audits of subsidiary financial statements and KPMG's review of the Company's
interim financial statements. Audit fees also include fees for services
performed by KPMG that are closely related to the audit and in many cases could
only be provided by the Company's independent auditors. Such services include
comfort letters and consents related to SEC registration statements and other
capital raising activities and certain reports relating to the Company's
regulatory filings, reports on internal control reviews required by regulators,
due diligence on completed acquisitions, accounting advice on completed
transactions, and certain forensic services in connection with audit services.
The aggregate fees earned by KPMG for audit services rendered to the Company and
its subsidiaries for the years ended December 31, 2003 and December 31, 2002
totaled approximately $1.3 million and $1.1 million, respectively.
AUDIT RELATED FEES: Audit related services include due diligence services
related to contemplated mergers and acquisitions, accounting consultations,
internal control reviews not required by regulators, securitization related
services, employee benefit plan audits and certain attest services as well as
certain agreed upon procedures. The aggregate fees earned by KPMG for audit
related services rendered to the Company and its subsidiaries for the years
ended December 31, 2003 and December 31, 2002 were $37 thousand and $40
thousand, respectively.
TAX FEES: Tax fees include corporate tax compliance, counsel and advisory
services as well as expatriate tax services. The Company did not incur any
charges from KPMG for tax related services rendered to the Company and its
subsidiaries for the years ended December 31, 2003 and December 31, 2002.
ALL OTHER FEES: The Company did not incur any charges from KPMG for other
services rendered to the Company and its subsidiaries for matters such as
general consulting for the years ended December 31, 2003 and December 31, 2002.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES: The Company did
not engage KPMG to provide advice to the Company regarding financial information
systems design and implementation during the years ended December 31, 2003 and
December 31, 2002.
Approval of Independent Auditor Services and Fees
Citigroup's audit and risk management committee has consistently reviewed and
approved all fees charged by Citigroup's independent auditors, and actively
monitored the relationship between audit and non-audit services provided. The
audit and risk management committee has concluded that the provision of services
by KPMG was consistent with the maintenance of the external auditors'
independence in the conduct of its auditing functions. Effective January 1,
2003, Citigroup adopted a policy that it and its subsidiaries would no longer
engage its primary independent auditors for non-audit services other than "audit
related services," as defined by the SEC, certain tax services, and other
permissible non-audit services as specifically approved by the chair of the
audit and risk management committee and presented to the full committee at its
next regular meeting.
Under the Citigroup policy approved by the audit and risk management committee,
the committee must pre-approve all services provided by Citigroup's independent
auditors and fees charged. The committee will consider annually the provision of
audit services and, if appropriate, pre-approve certain defined audit fees,
audit related fees, tax fees and other fees with specific dollar value limits
for each category of service. The audit and risk management committee will also
consider on a case by case basis and, if appropriate, approve specific
engagements that are not otherwise pre-approved. Any proposed engagement that
does not fit within the definition of a pre-approved service may be presented to
the chair of the audit and risk management committee for approval and to the
full audit and risk management committee at its next regular meeting. The policy
includes limitations on hiring of partners or other professional employees of
KPMG that require adjustments to KPMG 's audit approach if there is any apparent
conflict, and at all times we are mindful of the independence requirements of
the SEC in considering employment of these individuals.
Administration of the policy is centralized within, and monitored by, Citigroup
senior corporate financial management, which reports throughout the year to the
audit and risk management committee.
65
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 69 of this report.
(3) Exhibits. See Exhibit Index on page 67.
(b) Reports on Form 8-K:
None
66
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, incorporated by reference to Exhibit 10.04 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
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, incorporated by reference to Exhibit 10.05 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002.
14.01 Citigroup Code of Ethics for Financial Professionals, incorporated by reference to
Exhibit 14.01 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.
21. Subsidiaries of the Registrant:
Omitted pursuant to General Instruction I (2)(b) of Form 10-K.
31.01+ Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.02+ Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.01+ Certification Pursuant to 18 USC Section 1350.
- -------------
+Filed herewith
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 22nd day of March,
2004.
THE TRAVELERS 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 22nd day of March, 2004.
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 L. Preston Director
- --------------------------
(Kathleen L. Preston)
/s/ Marla Berman Lewitus Director
- --------------------------
(Marla Berman Lewitus)
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities pursuant to
Section 12 of the Act: NONE
No Annual Report to Security Holders covering the registrant's last fiscal year
or proxy material with respect to any meeting of security holders has been sent,
or will be sent, to security holders.
68
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 70
Schedule I - Summary of Investments - Other than Investments in Related Parties 2003 71
Schedule III - Supplementary Insurance Information 2001-2003 72
Schedule IV - Reinsurance 2001-2003 73
All other schedules are inapplicable for this filing.
* See index on page 18
69
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company:
Under date of February 26, 2004, we reported on the consolidated balance sheets
of The Travelers Insurance Company and subsidiaries as of December 31, 2003 and
2002, 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, 2003, which are included in the Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated 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 methods of accounting for variable interest entities in 2003, for
goodwill and intangible assets in 2002, and for derivative instruments and
hedging activities and for securitized financial assets in 2001.
/s/ KPMG LLP
Hartford, Connecticut
February 26, 2004
70
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2003
($ in millions)
AMOUNT SHOWN IN
TYPE OF INVESTMENT COST VALUE BALANCE SHEET (1)
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and
authorities $ 6,487 $6,642 $ 6,642
States, municipalities and political subdivisions 379 398 398
Foreign governments 690 740 740
Public utilities 2,702 2,901 2,901
Convertible bonds and bonds with warrants attached 187 208 208
All other corporate bonds 29,519 31,260 31,260
- ---------------------------------------------------------------------------------------------------------------------
Total Bonds 39,964 42,149 42,149
Redeemable preferred stocks 155 174 174
- ---------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 40,119 42,323 42,323
- ---------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Banks, trust and insurance companies 14 16 16
Industrial, miscellaneous and all other 95 118 118
- ---------------------------------------------------------------------------------------------------------------------
Total Common Stocks 109 134 134
Nonredeemable preferred stocks 214 228 228
- ---------------------------------------------------------------------------------------------------------------------
Total Equity Securities 323 362 362
- ---------------------------------------------------------------------------------------------------------------------
Mortgage Loans 1,886 1,886
Real Estate Held For Sale 96 96
Policy Loans 1,135 1,135
Short-Term Securities 3,603 3,603
Trading Securities 1,707 1,707
Other Investments (2) (3) (4) 1,465 1,465
- ---------------------------------------------------------------------------------------------------------------------
Total Investments $50,334 $52,577
=====================================================================================================================
(1) Determined in accordance with methods described in Notes 1 and 3 of the
Notes to Consolidated Financial Statements.
(2) Excludes $3.2 billion of Citigroup Inc. preferred stock. See Note 13 of
Notes to Consolidated Financial Statements.
(3) Also excludes $415 million fair value of investment in affiliated
partnership interests.
(4) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
71
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
($ in millions)
FUTURE
POLICY
BENEFITS, AMORTIZATION
DEFERRED LOSSES, OTHER POLICY OF DEFERRED
POLICY CLAIMS AND CLAIMS AND NET BENEFITS, POLICY OTHER
ACQUISITION LOSS BENEFITS PREMIUM INVESTMENT CLAIMS AND ACQUISITION OPERATING PREMIUMS
COSTS EXPENSES (1) PAYABLE REVENUE INCOME LOSSES (2) COSTS EXPENSES WRITTEN
- ------------------------------------------------------------------------------------------------------------------------------------
2003
Travelers Life & Annuity $ 2,361 $42,023 $ 532 $ 1,082 $ 2,743 $ 2,816 $ 266 $240 $1,093
Primerica 2,034 3,500 161 1,245 315 534 235 219 1,251
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 4,395 $45,523 $ 693 $ 2,327 $ 3,058 $ 3,350 $ 501 $459 $2,344
====================================================================================================================================
2002
Travelers Life & Annuity $ 2,043 $37,774 $ 461 $ 730 $ 2,646 $ 2,404 $ 174 $190 $ 729
Primerica 1,893 3,261 147 1,194 290 527 219 217 1,184
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 3,936 $41,035 $ 608 $ 1,924 $ 2,936 $ 2,931 $ 393 $407 $1,913
====================================================================================================================================
2001
Travelers Life & Annuity $ 1,672 $33,475 $ 368 $ 957 $ 2,530 $ 2,534 $ 171 $154 $ 955
Primerica 1,789 3,044 144 1,145 301 507 208 217 1,157
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 3,461 $36,519 $ 512 $ 2,102 $ 2,831 $ 3,041 $ 379 $371 $2,112
====================================================================================================================================
(1) Includes contractholder funds.
(2) Includes interest credited to contractholders.
72
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
($ in millions)
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- -------------------------------------------------------------------------------------------------------------------------
2003
Life Insurance In Force $593,006 $356,298 $ 3,519 $240,227 1.4%
Premiums:
Life insurance $ 2,672 419 $ 1 $ 2,254 -
Accident and health insurance 308 235 - 73 -
Property casualty 21 21 - - -
-------- -------- -------- -------- ---
Total Premiums $ 3,001 $ 675 $ 1 $ 2,327 -
======== ======== ======== ======== ===
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 -
======== ======== ======== ======== ===
73