10-Q 1 y62939e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO________ ------------------------------- COMMISSION FILE NUMBER 33-58677 ------------------------------- THE TRAVELERS LIFE AND ANNUITY COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CONNECTICUT 06-0904249 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183 (Address of principal executive offices) (Zip Code) (860) 277-0111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----------- ----------- As of the date hereof, there were outstanding 30,000 shares of common stock, par value $100 per share, of the registrant, all of which were owned by The Travelers Insurance Company, an indirect wholly owned subsidiary of Citigroup Inc. REDUCED DISCLOSURE FORMAT The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format. THE TRAVELERS LIFE AND ANNUITY COMPANY TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page ---- ITEM 1. FINANCIAL STATEMENTS ----------------------------- Condensed Statements of Income for the three and six months ended June 30, 2002 and 2001 (unaudited)............................3 Condensed Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001..............................................................4 Condensed Statements of Changes in Shareholder's Equity for the three and six months ended June 30, 2002 and 2001 (unaudited)..........5 Condensed Statements of Cash Flows for the six months ended June 30, 2002 and 2001 (unaudited)............................6 Notes to Condensed Financial Statements (unaudited)............................7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ------------------------------------------------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................9 --------------------------------------------- PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................12 ----------------------------------------- SIGNATURES................................... ................................13 EXHIBIT 99.01.................................................................14 EXHIBIT 99.02.................................................................15 2 THE TRAVELERS LIFE AND ANNUITY COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) ($ in thousands)

See Notes to Condensed Financial Statements. 3 THE TRAVELERS LIFE AND ANNUITY COMPANY CONDENSED BALANCE SHEETS ($ in thousands)

See Notes to Condensed Financial Statements. 4 THE TRAVELERS LIFE AND ANNUITY COMPANY CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED) ($ in thousands)

See Notes to Condensed Financial Statements. 5 THE TRAVELERS LIFE AND ANNUITY COMPANY CONDENSED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH (UNAUDITED) ($ in thousands)

See Notes to Condensed Financial Statements. 6 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The Travelers Life and Annuity Company (the Company) is a wholly owned subsidiary of The Travelers Insurance Company (TIC), an indirect wholly owned subsidiary of Citigroup Inc. (Citigroup). Citigroup is a diversified global financial services holding company whose businesses provide a broad range of financial services to consumer and corporate customers around the world. The condensed financial statements and accompanying footnotes of the Company are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and are unaudited. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and benefits and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the interim financial statements reflect all adjustments necessary (all of which were normal recurring adjustments) for a fair presentation of results for the periods reported. The accompanying condensed financial statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted. Certain prior year amounts have been reclassified to conform to the 2002 presentation. 2. CHANGES IN ACCOUNTING PRINCIPLES AND ACCOUNTING STANDARDS NOT YET ADOPTED ACCOUNTING CHANGES ------------------ BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted the Financial Accounting Standards Board (FASB) Statements of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other Intangible Assets" (FAS 142). These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life created by business combinations accounted for using the purchase method of accounting. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. All goodwill was fully amortized at December 31, 2001 and the Company did not have any other intangible assets with an indefinite useful life. Other intangible assets that are not deemed to have an indefinite useful life will continue to be amortized over their useful lives. The carrying value of other intangible assets with useful lives is $13 million at June 30, 2002. 7 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS Effective January 1, 2002, the Company adopted FASB Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144 establishes a single accounting model for long-lived assets to be disposed of by sale. A long-lived asset classified as held for sale is to be measured at the lower of its carrying amount or fair value less cost to sell. Depreciation (amortization) is to cease. Impairment is recognized only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value of the asset. Long-lived assets to be abandoned, exchanged for a similar productive asset, or distributed to owners in a spin-off are considered held and used until disposed of. Accordingly, discontinued operations are no longer to be measured on a net realizable value basis, and future operating losses are no longer recognized before they occur. The provisions of the new standard are to be applied prospectively. There has been no impact as of June 30, 2002 on the Company's results of operations, financial condition or liquidity and the Company does not expect the impact of this standard to be significant. ACCOUNTING STANDARDS NOT YET ADOPTED ------------------------------------ In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146). FAS 146 requires that a liability for costs associated with exit or disposal activities be recognized when the liability is incurred. Existing generally accepted accounting principles provide for the recognition of such costs at the date of management's commitment to an exit plan. In addition, FAS 146 requires that the liability be measured at fair value and be adjusted for changes in estimated cash flows. The provisions of the new standard are effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the impact of this new standard to be significant. 3. SHAREHOLDER'S EQUITY Statutory capital and surplus of the Company was $407 million at December 31, 2001. The Company is currently subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to its parent without prior approval of insurance regulatory authorities. The Company does not have surplus available to pay dividends to TIC in 2002 without prior approval of the State of Connecticut Insurance Department. 4. COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company is a defendant or co-defendant in various litigation matters incidental to and typical of the businesses in which it is engaged. In the opinion of the Company's management, the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on its results of operations, financial condition or liquidity. 8 THE TRAVELERS LIFE AND ANNUITY COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- Management's narrative analysis of the results of operations is presented in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations, pursuant to General Instruction H(2)(a) of Form 10-Q. The Travelers Life and Annuity Company (the Company) is a wholly owned subsidiary of The Travelers Insurance Company (TIC), an indirect wholly owned subsidiary of Citigroup Inc. (Citigroup). RESULTS OF OPERATIONS ($ in millions)

(1) Includes net after-tax realized investment losses of $12.8 million and $10.2 million for the three and six months ended June 30, 2002 and gains of $.2 million and $13.7 million for the three and six months ended June 30, 2001, respectively. The Company offers fixed and variable deferred annuities and individual life insurance to individuals and small businesses. These products are distributed primarily through Salomon Smith Barney (SSB), Primerica Financial Services (Primerica), affiliates of the Company, a nationwide network of independent financial professionals and non-affiliated broker-dealers. In addition, the Company distributes these products through CitiStreet Retirement Services and Citibank, N.A. (Citibank), affiliates of the Company. Net income decreased $8.8 million for the three months ended June 30, 2002 versus the prior year period. Included in the second quarter of 2002 were $12.9 million of after-tax realized investment losses related to the impairment of investments in debt securities of WorldCom Inc. These realized losses were partially offset by operating income growth of $4.2 million. Operating income, defined as income before net realized investments gains or losses, was $32.2 million for the quarter ended June 30, 2002 up 14.8% from $28.0 million for the same period in the prior year. This increase in operating income is related to net investment income and fee income growth in the individual annuity and individual life lines which reflects increased business volumes. These increased volumes also caused a 12.9% increase in insurance benefits, a 44.9% increase in interest credited to contractholders and a 7.6% increase in amortization of deferred acquisition costs in the second quarter of 2002 over the same period in 2001. Net income increased $4.2 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001. Net realized investment gains decreased $23.9 million, primarily related to the $12.9 million WorldCom Inc. loss during 2002 and various realized investment gains during 2001. This decrease in realized gains was fully offset by a $28.1 million operating income increase. Operating income was $76.9 million in the first six months of 2002 versus $48.8 million in the prior year period. This $28.1 million gain was driven by business volume growth and a $19.4 million after-tax reduction to the amortization of deferred acquisitions costs in the individual annuity product line resulting from changes in underlying lapse and interest rate assumptions during the first quarter of 2002. 9 THE TRAVELERS LIFE AND ANNUITY COMPANY BUSINESS VOLUME ($ IN MILLIONS)

The growth in individual annuity account balances reflects good in-force policy retention. Declining variable annuity sales were partially offset by increased fixed annuity deposits during the three and six months ended June 30, 2002 versus the prior year periods, particularly in the non-affiliated broker-dealer channel. Individual life volumes continued to grow reflecting strong universal life and traditional life sales through the independent financial professionals channel and SSB. PREMIUMS AND DEPOSITS ($ IN MILLIONS)

The majority of the annuity business and a substantial portion of the individual life business written by the Company are accounted for as investment contracts, with the result that the deposits collected from contractholders are reported as liabilities and are not included in revenues. Declining variable sales were partially offset by increased fixed annuity deposits in both the three and six months ended June 30, 2002. INSURANCE REGULATIONS Risk-based capital requirements are used as minimum capital requirements by the National Association of Insurance Commissioners (NAIC) and the states to identify companies that merit further regulatory action. At December 31, 2001, the Company had total adjusted capital in excess of amounts requiring any regulatory action as defined by the NAIC. The Company is subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to its parent without prior approval of insurance regulatory authorities in the state of domicile. The Company does not have surplus available to pay dividends to its parent in 2002 without prior approval of the State of Connecticut Insurance Department. The Company did not pay any dividends to its parent during the six months ended June 30, 2002. 10 THE TRAVELERS LIFE AND ANNUITY COMPANY FUTURE APPLICATION OF ACCOUNTING STANDARDS See Note 2 of Notes to Condensed Financial Statements for a discussion of recently issued accounting pronouncements. FORWARD-LOOKING STATEMENTS Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Company's actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by the words "believe," "expect," "anticipate," "intend," "estimate," "may increase," "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, the resolution of legal proceedings. 11 THE TRAVELERS LIFE AND ANNUITY COMPANY PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------- (a) EXHIBITS. EXHIBIT NO. DESCRIPTION ----------- -------------- 3.01 Charter of The Travelers Life and Annuity Company (the "Company"), as amended on April 10, 1990, incorporated herein by reference to Exhibit 6(a) to the Registration Statement on Form N-4, File No. 33-58131, filed on March 17, 1995. 3.02 By-laws of the Company, as amended on October 20, 1994, incorporated herein by reference to Exhibit 6(b) to the Registration Statement on Form N-4, File No. 33-58131, filed on March 17, 1995. 99.01+ Certification Pursuant to 18 U.S.C. Section 1350. 99.02+ Certification Pursuant to 18 U.S.C. Section 1350. ------------------------ +Filed herewith (b) REPORTS ON FORM 8-K. None. 12 THE TRAVELERS LIFE AND ANNUITY COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE TRAVELERS LIFE AND ANNUITY COMPANY (Registrant) Date August 14, 2002 /s/ Glenn D. Lammey ----------------------- ----------------------------------------- Glenn D. Lammey Executive Vice President, Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) 13

TRAVELERS LIFE & ANNUITY CO 10-Q