10-Q 1 y65329e10vq.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 SEPTEMBER 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

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 Company had a gross carrying amount of $22.3 million of contract-based intangible assets as of September 30, 2002 and 2001, with accumulated amortization of $9.6 million and $14.7 million as of September 30, 2002 and 2001, respectively. Amortization expense was $.2 million for each of the three months ended September 30, 2002 and 2001, and was $.7 million for each of the respective nine-month periods. Intangible assets amortization expense is estimated to be $.2 million for the remainder of 2002, $.9 million in 2003, $.8 million in 2004 and 2005, and $.7 million in 2006 and 2007. 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 September 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 ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES 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. ACCOUNTING FOR STOCK BASED COMPENSATION The Company currently applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation plans, under which there is generally no charge to earnings for employee stock option awards. Alternatively, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), allows companies to recognize compensation expense over the related service period based on the grant-date fair value of the stock-based award. Beginning in 2003, the Company intends to account for stock-based compensation issued with respect to 2003 and thereafter in accordance with the fair-value method prescribed by FAS 123. The Company does not expect this change in accounting principle to have a significant impact on its results of operations, financial condition or liquidity. 8 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. SHAREHOLDER'S EQUITY Statutory capital and surplus of the Company was $407 million at December 31, 2001. The Company is currently subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to its parent without prior approval of insurance regulatory authorities. The Company does not have surplus available to pay dividends to TIC in 2002 without prior approval of the State of Connecticut Insurance Department. 4. COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company is a defendant or co-defendant in various litigation matters incidental to and typical of the businesses in which it is engaged. In the opinion of the Company's management, the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on its results of operations, financial condition or liquidity. 9 THE TRAVELERS LIFE AND ANNUITY COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's narrative analysis of the results of operations is presented in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations, pursuant to General Instruction H(2)(a) of Form 10-Q. The Travelers Life and Annuity Company (the Company) is a wholly owned subsidiary of The Travelers Insurance Company (TIC), an indirect wholly owned subsidiary of Citigroup Inc. (Citigroup). RESULTS OF OPERATIONS ($ in millions)

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 $7.4 million for the three months ended September 30, 2002 versus the prior year period. Net after-tax realized investment losses, were $17.1 million greater than the prior year period, primarily related to impairments of fixed maturity holdings in the energy sector. Operating income, defined as income before net realized investments gains and losses, was $32.5 million for the quarter ended September 30, 2002 up 27.6% from $22.9 million for the same period in the prior year. This increase in operating income, including a one time real estate transaction, is related to net investment income and fee income growth in the individual annuity and individual life lines which reflects increased business volumes, offset partially by lower yields in the investment portfolio related to the declining interest rate environment in 2002 vs. 2001. These increased volumes also caused a 10.6% increase in insurance benefits, a 41.9% increase in interest credited to contractholders and an increase in operating expenses in the third quarter of 2002 over the same period in 2001. Net income decreased $3.2 million for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. Net realized investment losses were $29.0 million in 2002, compared to $12.0 million of gains in 2001. These losses were driven primarily by impairments to fixed maturity holdings, including $12.9 million of WorldCom Inc. in the second quarter and impairments of fixed maturity holdings in the energy sector in the third quarter of 2002. Operating income was $109.3 million in the first nine months of 2002 versus $71.7 million in the prior year period. This $37.6 million increase was driven by individual annuity and individual life business volume growth, a one time real estate transaction and a $19.4 million after-tax reduction to the amortization of deferred acquisition costs in the individual annuity product line resulting from changes in underlying lapse and interest rate assumptions during the first quarter of 2002. These increases were partially offset by lower yields in the fixed income investment portfolio related to the declining interest rate environment in 2002 vs. 2001. The increased volumes caused increases in insurance benefits, interest credited to contractholders and operating expenses over the prior year nine-month period. 10 THE TRAVELERS LIFE AND ANNUITY COMPANY BUSINESS VOLUME ($ IN MILLIONS)

The growth in September 30, 2002 individual annuity account balances over September 30, 2001 reflects strong sales and good in-force policy retention, which were partially offset by declining equity market values. Individual life volumes continued to grow, reflecting strong universal life and traditional life sales through the independent financial professionals channel and SSB. The Company's business is significantly affected by movements in the U.S. equity and fixed income credit markets. U.S. equity and credit market events can have both positive and negative effects on the deposit and revenue performance of the business. A sustained weakness in the equity markets will decrease revenues and earnings in variable products. Declines in credit quality of issuers will have a negative effect on earnings. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 12. 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 annuity sales, resulting from lower yields in the investment portfolio related to the declining interest rate environment in 2002 vs. 2001, were partially offset by increased fixed annuity deposits in both the three and nine months ended September 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 11 THE TRAVELERS LIFE AND ANNUITY COMPANY State of Connecticut Insurance Department. The Company did not pay any dividends to its parent during the nine months ended September 30, 2002. 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. ITEM 4. CONTROLS AND PROCEDURES (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company required to be included in the Company's reports filed or submitted under the Exchange Act. (B) CHANGES IN INTERNAL CONTROLS. Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls. 12 THE TRAVELERS LIFE AND ANNUITY COMPANY PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS.

99.01+ Certification Pursuant to 18 U.S.C. Section 1350. ------------------------ +Filed herewith (B) REPORTS ON FORM 8-K. None. 13 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 November 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) CERTIFICATIONS I, Glenn D. Lammey, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Travelers Life and Annuity Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 14 THE TRAVELERS LIFE AND ANNUITY COMPANY CERTIFICATIONS (continued) 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date November 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) I, George C. Kokulis, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Travelers Life and Annuity Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 15 THE TRAVELERS LIFE AND ANNUITY COMPANY CERTIFICATIONS (continued) 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date November 14, 2002 /s/ George C. Kokulis --------------------------------- -------------------------------- George C. Kokulis Chief Executive Officer 16

TRAVELERS LIFE & ANNUITY CO 10-Q