Registration Statement No. 333-64364
811-09215
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
Pre-Effective Amendment No. 2
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Exact Name of Trust: THE TRAVELERS FUND UL III FOR VARIABLE LIFE INSURANCE
-----------------------------------------------------
B. Name of Depositor: THE TRAVELERS INSURANCE COMPANY
-------------------------------
C. Complete Address of Depositor's Principal Executive Offices:
One Tower Square,
Hartford, Connecticut 06183
D. Name and Complete Address of Agent for Service:
Ernest J. Wright, Secretary
The Travelers Insurance Company
One Tower Square
Hartford, Connecticut 06183
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b)
-------
on ___________ pursuant to paragraph (b)
-------
60 days after filing pursuant to paragraph (a)(1)
-------
on __________ pursuant to paragraph (a)(1) of Rule 485.
-------
this post-effective amendment designates a new effective date for
-------
a previously filed post-effective amendment.
E. Title of securities being registered: Variable Life Insurance Policies.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940 the Registrant
hereby declares that an indefinite amount of its Variable Life Insurance
Policies is being registered under the Securities Act of 1933.
F. Approximate date of proposed public offering: As soon as practicable
following the effectiveness of the Registration Statement
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Check the box if it is proposed that this filing will become effective on ____
at ___ pursuant to Rule 487. ______
RECONCILIATION AND TIE BETWEEN
FORM N-8B-2 AND THE PROSPECTUS
Item No. Of
Form N-8B-2 CAPTION IN PROSPECTUS
----------- ---------------------
1 Cover page
2 Cover page
3 Not applicable
4 The Company; Distribution
5 The Travelers Fund UL III for Variable Life Insurance
6 The Travelers Fund UL III for Variable Life Insurance
7 Not applicable
8 Not applicable
9 Legal Proceedings and Opinion
10 Prospectus Summary; The Company; The Travelers Fund UL III for
Variable Life Insurance, The Investment Options; How the
Policy Works; Transfers of Contract Value; The Separate
Account and Valuation; Voting Rights; Disregard of Voting
Rights; Dividends; Lapse and Reinstatement
11 Prospectus Summary; The Investment Options
12 Prospectus Summary; The Investment Options
13 Charges and Deductions; Distribution
14 How the Policy Works
15 Prospectus Summary; Applying Premium Payments
16 The Investment Options; Applying Premium Payments
17 Prospectus Summary; Right to Cancel; The Separate Account and
Valuation; Surrender, Policy Loans; Exchange Rights
18 The Investment Options; Charges and Deductions; Federal Tax
Considerations; Dividends
19 Statements to Policy Owners
20 Not applicable
21 Policy Loans
22 Not applicable
23 Not applicable
24 Not applicable
25 The Company
26 Not applicable
27 The Company
28 The Company; Management
29 The Company
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 The Company; Distribution
36 Not applicable
37 Not applicable
38 Distribution
39 The Company; Distribution
40 Not applicable
41 The Company; Distribution
42 Not applicable
43 Not applicable
44 Applying Premium Payments; Accumulation Unit Values
45 Not applicable
Item No. Of
Form N-8B-2 CAPTION IN PROSPECTUS
----------- ---------------------
46 The Separate Account and Valuation; Access to Contract Values
47 The Investment Options
48 Not applicable
49 Not applicable
50 Not applicable
51 Prospectus Summary; The Company; How the Policy Works; Death
Benefits and Lapse and Reinstatement
52 The Investment Options
53 Federal Tax Considerations
54 Not applicable
55 Not applicable
56 Not applicable
57 Not applicable
58 Not applicable
59 Financial Statements
TRAVELERS
CORPORATE BENEFIT LIFE
PROSPECTUS
This Prospectus describes Travelers Corporate Benefit Life variable universal
(flexible premium) life insurance Policies (the "Policy") offered by The
Travelers Insurance Company (the "Company"). The policy is designed generally
for use by corporations and employers. The Policy Owner ("you") chooses the
amount of life insurance coverage desired with a minimum Stated Amount of
$50,000 and a minimum Target Premium of $10,000 per case. You direct the net
premium payment to one or more of the variable funding options (the "Investment
Options").
During the Policy's Right to Cancel Period, the Applicant may return the Policy
to the Company for a refund. The Right to Cancel Period expires on the latest of
ten days after you receive the Policy, ten days after we mail or deliver to you
a written Notice of Right to Cancel, or 45 days after the Applicant signs the
application for insurance (or later if state laws requires).
The Policy has no guaranteed minimum Contract Value. The Contract Value of the
Policy will vary to reflect the investment performance of the Investment Options
to which you have directed your premium payments. You bear the investment risk
under this Policy. The Contract Value is reduced by the various fees and charges
assessed under the Policy, as described in this Prospectus. The Policy will
remain in effect for as long as the Cash Surrender Value can pay the monthly
Policy charges (subject to the Grace Period provision).
We offer two death benefits under the Policy -- the "Level Option," and the
"Variable Option." Under any option, the death benefit will never be less than
the Amount Insured (less any Indebtedness or Monthly Deduction Amounts due and
unpaid). You choose one at the time you apply for the Policy; however you may
change the death benefit option, subject to certain conditions.
This Policy may be or become a modified endowment Policy under federal tax law.
If so, any partial withdrawal, Policy surrender or loan may result in adverse
tax consequences or penalties.
REPLACING EXISTING INSURANCE WITH THIS POLICY MAY NOT BE TO YOUR ADVANTAGE.
EACH OF THE UNDERLYING FUND PROSPECTUSES ARE INCLUDED WITH THE PACKAGE
CONTAINING THIS PROSPECTUS. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR
FUTURE REFERENCE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAVE APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS COMPLETE OR TRUTHFUL. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
VARIABLE LIFE INSURANCE POLICIES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED
OR GUARANTEED BY ANY BANK, NOR ARE THEY FEDERALLY INSURED OR OTHERWISE PROTECTED
BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY; THEY ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTMENT.
THE DATE OF THIS PROSPECTUS IS OCTOBER 17, 2001.
TABLE OF CONTENTS
<Table>
Glossary of Special Terms............. 3
Prospectus Summary.................... 5
General Description................... 10
The Application..................... 10
How the Policy Works.................. 10
Applying Premium Payments........... 11
The Investment Options................ 11
Policy Benefits and Rights............ 17
Transfers of Contract Value......... 17
Investment Options............... 17
Lapse and Reinstatement............. 17
Right to Cancel..................... 17
Access to Contract Values............. 17
Policy Loans........................ 17
Consequences..................... 18
Policy Surrenders................... 18
Full Surrenders.................. 18
Partial Withdrawals.............. 19
Death Benefit......................... 19
Option 1............................ 19
Option 2............................ 20
Payment of Proceeds................. 20
Payment Options..................... 20
Maturity Benefits..................... 21
Charges and Deductions................ 21
General............................... 21
Charges Against Premium............. 22
Front-End Sales Expense
Charges........................ 22
Monthly Deduction Amount............ 22
Cost of Insurance Charge......... 22
Monthly Policy Charge............ 22
Monthly Per $1,000 Charge........ 22
Case Charge...................... 22
Charges Against the Separate
Account.......................... 22
Mortality and Expense Risk
Charge......................... 22
Underlying Fund Expenses............ 23
Transfer Charge..................... 23
Reduction or Modification of
Charges.......................... 23
The Separate Account and Valuation.... 23
The Travelers Fund UL III for
Variable Life Insurance (Fund UL
III)............................. 23
How the Contract Value Varies.... 24
Accumulation Unit Value.......... 24
Net Investment Factor............ 24
Changes to the Policy................. 25
General............................. 25
Changes in Stated Amount............ 25
Changes in Death Benefit Option..... 25
Additional Policy Provisions.......... 26
Assignment.......................... 26
Limit on Right to Contest and
Suicide Exclusion................ 26
Misstatement as to Sex and Age...... 26
Voting Rights....................... 26
Other Matters......................... 26
Statements to Policy Owners......... 26
Suspension of Valuation............. 27
Dividends........................... 27
Mixed and Shared Funding............ 27
Distribution........................ 27
Legal Proceedings and Opinion....... 28
Experts............................. 28
Federal Tax Considerations............ 28
General............................. 28
Tax Status of the Policy............ 29
Definition of Life Insurance..... 29
Diversification.................. 29
Investor Control................. 29
Tax Treatment of Policy Benefits.... 30
In General....................... 30
Modified Endowment Contracts..... 30
Exchanges........................ 31
Aggregation of Modified Endowment
Contracts...................... 31
Policies Which Are Not Modified
Endowment Contracts............ 31
Treatment of Loan Interest....... 32
The Company's Income Taxes....... 32
The Company........................... 32
Management............................ 32
Directors of The Travelers
Insurance Company.............. 32
Senior Officers of The Travelers
Insurance Company.............. 33
Example of Policy Charges............. 33
Illustrations......................... 34
Appendix A (Performance
Information)........................ A-1
Appendix B (Target Premiums).......... B-1
Appendix C (Cash Value Accumulation
Test Factors)....................... C-1
Financial Statements -- Fund UL III
(annual-unaudited)
Financial Statements -- Fund UL III
(semi-annual-unaudited)
Financial Statements -- The Travelers
Insurance Company (Form 10-K)
Financial Statements -- The Travelers
Insurance Company (Form 10-Q)
</Table>
2
GLOSSARY OF SPECIAL TERMS
--------------------------------------------------------------------------------
ACCUMULATION UNIT -- a standard of measurement used to calculate the values
allocated to the Investment Options.
AGE -- the Insured's age as of the Insured's last birthday.
AMOUNT INSURED -- Under Option 1, the Amount Insured will be equal to the Stated
Amount of the Policy or, if greater, a specified multiple of Contract Value (the
"Minimum Amount Insured"). Under Option 2 the Amount Insured will be equal to
the Stated Amount of the Policy plus the Contract Value (determined as of the
date of the Insured's death) or, if greater, the Minimum Amount Insured.
ANDESA, TPA, INC. -- The third party administrator for this product, located at
1605 North Cedar Crest Blvd., Suite 502, Allentown, PA 18104-2351.
BENEFICIARY(IES) -- the person(s) named to receive the benefits of this Policy
at the Insured's death.
CASE -- a grouping of one or more contracts connected by a non-arbitrary factor.
Every contract issued will be part of a case. A case will have one policy
holder.
CASH SURRENDER VALUE -- the Contract Value less any outstanding Indebtedness.
CONTRACT VALUE -- the current value of Accumulation Units credited to each of
the Investment Options available under the Policy plus the value of the Loan
Account.
COMPANY'S HOME OFFICE -- the principal executive offices of The Travelers
Insurance Company located at One Tower Square, Hartford, Connecticut 06183.
DEATH BENEFIT -- the amount payable to the Beneficiary if the Insured dies while
the policy is in force.
DEDUCTION DATE -- the day in each Policy Month on which the Monthly Deduction
Amount is deducted from the Policy's Contract Value.
DUE PROOF OF THE INSURED'S DEATH -- a copy of a certified death certificate; a
copy of a certified decree of a court of competent jurisdiction as to the
finding of death; a written statement by a medical doctor who attended the
deceased; or any proof satisfactory to us.
GENERAL ACCOUNT -- made up of all our assets other than those held in the
Separate Account.
INDEBTEDNESS -- any amount you owe to us as a result of a policy loan.
Indebtedness consists of principal amount plus any accrued interest.
INSURED -- the person on whose life the Policy is issued and who is named on
Schedule A of the Application.
INVESTMENT OPTIONS -- the segments of the Separate Account to which you may
allocate premiums or Contract Value. Each Investment Option invests directly in
a corresponding Underlying Fund.
ISSUE DATE -- the date on which the Policy is issued by the Company for delivery
to the Policy Owner.
LOAN ACCOUNT -- an account in the Company's General Account to which we transfer
the amount of any Policy loan, and to which we credit a fixed rate of interest.
MATURITY DATE -- The anniversary of the Policy Date on which the Insured is age
100.
MAXIMUM INVESTMENT OPTION DAILY DEDUCTION -- the maximum charge that we deduct
from each Investment Option to cover our mortality and expense charges.
3
MINIMUM AMOUNT INSURED -- the amount of Death Benefit required to qualify this
Policy as life insurance under federal tax law. It is a stated percentage of the
Contract Value determined as of the first day of the Policy month.
MONTHLY DEDUCTION AMOUNT -- the amount of charges deducted from the Policy's
Contract Value which includes cost of insurance charges, administrative charges,
and any charges for benefits associated with any rider(s).
NET AMOUNT AT RISK -- the Amount Insured for the month divided by 1.00327374
(the Death Benefit Investment Factor which accounts for the Cost of Insurance
charges taken out at the beginning of the month) minus the Contract Value.
NET PREMIUM -- the amount of each premium payment, minus the deduction of any
front-end sales expense charges.
OUTSTANDING POLICY LOAN -- Amount owed the Company as a result of policy loans
including both principal and accrued interest.
PLANNED PREMIUM -- the amount of premium which the Policy Owner chooses to pay
to the Company on a scheduled basis, and for which the Company will bill the
Policy Owner.
POLICY ANNIVERSARY -- an anniversary of the Policy Date.
POLICY DATE -- the date on which the Policy, benefits and provisions of the
Policy become effective. This date will not be on the 29th, 30th, or 31st of any
month.
POLICY MONTH -- monthly periods computed from the Policy Date.
POLICY OWNER(S) (YOU, YOUR OR OWNER) -- the person(s) having rights to benefits
under the Policy during the lifetime of the Insured; the Policy Owner may or may
not be the Insured(s).
POLICY YEARS -- annual periods computed from the Policy Date.
SEC -- the Securities and Exchange Commission.
SEPARATE ACCOUNT -- assets set aside by The Travelers Insurance Company, the
investment performance of which is kept separate from that of other assets of
The Travelers Insurance Company; for example, The Travelers Fund UL III for
Variable Life Insurance.
STATED AMOUNT -- the amount originally selected by the Policy Owner used to
determine the Death Benefit, or as may be increased or decreased as described in
this Prospectus.
SURRENDER VALUE -- Cash Surrender Value plus any additional amount paid upon a
full cash surrender.
TARGET PREMIUM -- the level annual premium above which the sales expense charges
are reduced. Refer to Appendix B. The minimum Target Premium per case is
$10,000.
UNDERLYING FUND -- the underlying mutual fund(s) that correspond to each
Investment Option. Each Investment Option invests directly in an Underlying
Fund.
UNDERWRITING PERIOD -- the time period from when we receive a completed
Application (see page 10) until the Issue Date.
VALUATION DATE -- a day on which the Separate Account is valued. A Valuation
Date is any day on which the New York Stock Exchange is open for trading and the
Company is open for business. The value of Accumulation Units will be determined
as of the close of trading on the New York Stock Exchange.
VALUATION PERIOD -- the period between the close of business on successive
Valuation Dates.
WE, US, OUR -- The Travelers Insurance Company.
4
PROSPECTUS SUMMARY
--------------------------------------------------------------------------------
WHAT IS CORPORATE OWNED VARIABLE UNIVERSAL LIFE INSURANCE?
This Flexible Premium Variable Life Insurance Policy is designed for
corporations and employees to provide insurance protection on the life of
Insured employees and to build Contract Value with a minimum Target Premium of
$10,000 per case. In addition, under certain circumstances, individuals may
purchase a Policy. Unlike traditional, fixed-premium life insurance, the Policy
allows you, as the owner, to allocate your premium, or transfer Contract Value
to various Investment Options. These Investment Options include equity, bond,
money market and other types of portfolios. Your Contract Value will change
daily, depending on investment return. No minimum amount is guaranteed as in a
traditional life insurance policy.
SUMMARY OF FEATURES
INVESTMENT OPTIONS: You have the ability to choose from a wide variety of
Investment Options. The Investment Options invest directly in the Underlying
Funds. These professionally managed stock, bond and money market funds cover a
broad spectrum of investment objectives and risk tolerance. The following
Investment Options (subject to state availability) are available currently:
<Table>
EMERGING MARKETS BALANCED
Credit Suisse Warburg Pincus Emerging Markets Fidelity VIP II Asset Manager Portfolio -
Portfolio Initial Class
Janus Aspen Series Balanced Portfolio -
INTERNATIONAL Service Shares
Janus Aspen Series Worldwide Growth Portfolio - MFS Total Return Portfolio
Service Shares Salomon Brothers Variable Total Return Fund
Lazard International Stock Portfolio Smith Barney Fundamental Value Portfolio
Putnam VT International Growth Fund -- Class IB
Smith Barney International All Cap INDEX
Growth Portfolio Deutsche VIT EAFE Equity Index Fund
Deutsche VIT Small Cap Index Fund
SMALL CAP Smith Barney Equity Index Portfolio -- Class 1
Dreyfus Small Cap Portfolio -- Initial Shares
Franklin Small Cap Fund -- Class 2 BOND
Putnam VT Small Cap Value Fund -- Class IB PIMCO Total Return Bond Portfolio
Salomon Brothers Variable Strategic Bond Fund
MID CAP Travelers Convertible Bond Portfolio
Aim Capital Appreciation Portfolio Travelers High Yield Bond Trust
Fidelity VIP III Mid Cap Portfolio -- Service Travelers Quality Bond Portfolio
Class 2 Travelers U.S. Government Securities Portfolio
MFS Emerging Growth Portfolio
MFS Mid Cap Growth Portfolio MONEY MARKET
Salomon Brothers Variable Capital Fund Travelers Money Market Portfolio
Travelers Disciplined Mid Cap Stock Portfolio
Van Kampen Enterprise Portfolio REAL ESTATE
Delaware Investments REIT Series
LARGE CAP
Alliance Growth Portfolio NON-STYLE SPECIFIC
Alliance Premier Growth Portfolio -- Class B Janus Aspen Series Global Technology Portfolio -
Capital Appreciation Fund (Janus) Service Shares
Dreyfus Appreciation Portfolio -
Initial Shares
Equity Income Portfolio (Fidelity)
Fidelity VIP II Contrafund(R) Portfolio -
Service Class 2
Large Cap Portfolio (Fidelity)
MFS Research Portfolio
Putnam VT Voyager II Fund -- Class IB
Salomon Brothers Variable Investors Fund
Smith Barney Aggressive Growth Portfolio
Smith Barney Large Capitalization Growth
Portfolio
Social Awareness Stock Portfolio (Smith Barney)
VP Ultra Fund
</Table>
Additional Investment Options may be added from time to time. For more
information, see "The Investment Options." Refer to each Fund's prospectus for a
complete description of the investment objectives, restrictions and other
material information.
5
PREMIUMS: When applying for your Policy, you state how much you intend to pay,
and whether you will pay annually, semiannually or monthly. You may also make
unscheduled premium payments in any amount, subject to the limitations described
in this prospectus.
You indicate on your application what percentage of each Net Premium you would
like allocated to each Investment Option. You may not allocate less than 5% of
each Net Premium to any Investment Option and allocations must be in whole
percentages. You may change your allocations by writing to the Company or by
calling 1-800-334-4298.
During the Underwriting Period, any premium paid will be held in a non-interest
bearing account. After the Policy Date and until the applicants' Right to Cancel
has expired, your Net Premium will be invested in the Money Market Portfolio
unless you purchase the Contract in a state which permits us to refund Contract
Value. Then you may invest your Net Premium in any Investment Option during the
Right to Cancel period. Otherwise, the Contract Value will be distributed to
each Investment Option in the percentages indicated on your application after
the Right to Cancel period.
RIGHT TO EXAMINE POLICY: You may return your Policy for any reason and receive
a full refund of your premium or Contract Value, as required by state law, by
mailing us the Policy and a written request for cancellation within a specified
period.
DEATH BENEFITS: At time of application, you select a death benefit option.
Under certain conditions you may be able to change the death benefit option at a
later date. The options available are:
- LEVEL OPTION (OPTION 1): the Amount Insured will equal the greater of
the Stated Amount or the Minimum Amount Insured.
- VARIABLE OPTION (OPTION 2): the Amount Insured will equal the greater of
the Stated Amount of the Policy plus the Contract Value or the Minimum
Amount Insured.
POLICY VALUES: As with other types of insurance policies, this Policy can
accumulate a Contract Value. The Contract Value of the Policy will increase or
decrease to reflect the investment experience of the Investment Options. Monthly
charges and any partial surrenders taken will also decrease the Contract Value.
There is no minimum guaranteed Contract Value allocated to the Investment
Options.
- ACCESS TO POLICY VALUES: You may borrow up to 100% of your Policy's Cash
Surrender Value. (See "Policy Loans" for loan impact on coverage and
policy values.)
You may cancel all or a portion of your Policy while the Insured is living and
receive all or a portion of the Cash Surrender Value.
TRANSFERS OF POLICY VALUES: You may transfer all or a portion of your Contract
Value among the Investment Options. You may do this by writing to the Company.
GRACE PERIOD: If the Cash Surrender Value of your Policy becomes less than the
amount needed to pay the Monthly Deduction Amount, you will have 61 days to pay
a premium to cover the Monthly Deduction Amount. If the premium is not paid,
your Policy will lapse.
TAX CONSEQUENCES: Currently, the federal tax law excludes all Death Benefit
payments from the gross income of the Beneficiary. At any point in time, the
Policy may become a modified endowment contract ("MEC"). A MEC has an
income-first taxation of all loans, pledges, collateral assignments or partial
surrenders. A 10% penalty tax may be imposed on such income distributed before
the Policy Owner attains age 59 1/2. The Company has established safeguards for
monitoring whether a Policy may become a MEC.
CHARGES AND DEDUCTIONS: Your Policy is subject to charges, which compensate the
Company for administering and distributing the Policy, as well as paying Policy
benefits and assuming related risks. These charges are summarized below, and
explained in detail under "Charges and Deductions."
6
POLICY CHARGES:
- FRONT-END SALES EXPENSES CHARGES -- We deduct a sales charge from each
premium payment received which is guaranteed never to exceed 15% of such
Target Premium in all years and 12% on amounts in excess of the Target
Premium in all years. On a current basis, the Sales Expense Charge is 12%
of the premiums received up to the Target Premium for Policy Years 1
through 7, and 5.5% thereafter. On a current basis the Sales Expense
Charge on premium received in excess of the Target Premium is 8% for
Policy Years 1 through 7, and 5.5% thereafter. For these purposes an
increase in Stated Amount is treated as a newly issued contract.
Currently, 2.25% of the Sales Expense Charge is designed to compensate us
for state premium taxes owed by the Company associated with the receipt
of premium, which cost is borne by the Policy Owner. These taxes vary
from state to state, and 2.25% is an average. In some states, there may
be no premium taxes associated with premium. Likewise, 1.25% of the Sales
Expense Charge is designed to compensate us for federal taxes associated
with the receipt of premium, which cost is borne by the Policy Owner.
- MONTHLY DEDUCTION -- deductions taken from the value of your Policy each
month to cover:
- cost of insurance charges (varies)
- a current Policy Fee of $17.35 (guaranteed not to exceed $30)
- an administrative expense charge of $0.10 per thousand per month of
Total Per $1000 Death Benefit applied for the first 20 years and for 20
years following an increase in Stated Amount. The Total Per $1,000 Death
Benefit is the lessor of the Initial Death Benefit or 20 times the Target
Premium.
- a Case Charge which is currently $40 per month per Case (guaranteed not
to exceed $60 per month per case) -- the Case Charge is allocated equally
to each policy in a case
- charges for optional riders, if any
- SURRENDER CHARGE -- There is no surrender charge
- TRANSFER CHARGE -- We reserve the right to limit free transfers among
Investment Options to six times per Policy in any Policy Year and to
charge $10 for each additional transfer that we allow
ASSET-BASED CHARGES:
- MORTALITY AND EXPENSE RISK CHARGE -- applies to the assets of the
Investment Options on a daily basis which currently equals an annual rate
of 0.55% for Policy Years 1 through 25, and 0.25% thereafter. It is
guaranteed not to exceed 0.75% in all years.
- UNDERLYING FUND FEES -- the Separate Account purchases shares of the
Underlying Funds on a net asset value basis. The shares purchased already
reflect the deduction of investment advisory fees and other expenses.
These Underlying Fund Fees are summarized below.
UNDERLYING FUND FEES
(as a percentage of average daily net assets of the Underlying Fund as of
December 31, 2000, unless otherwise noted)
<Table>
<Caption>
TOTAL ANNUAL
OPERATING
MANAGEMENT FEE OTHER EXPENSES EXPENSES
(AFTER EXPENSE 12B-1 (AFTER EXPENSE (AFTER EXPENSE
FUNDING OPTIONS: REIMBURSEMENT) FEES REIMBURSEMENT) REIMBURSEMENT)
---------------- -------------- ----- -------------- --------------
CAPITAL APPRECIATION FUND (JANUS)............ 0.81% 0.02% 0.83%
HIGH YIELD BOND TRUST........................ 0.56% 0.27% 0.83%
MONEY MARKET PORTFOLIO....................... 0.38% 0.02% 0.40%
ALLIANCE VARIABLE PRODUCT SERIES FUND, INC.
Premier Growth Portfolio -- Class B*......... 1.00% 0.25% 0.05% 1.30%
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
VP Ultra Fund................................ 1.00% -- 0.00% 1.00%(14)
CREDIT SUISSE WARBURG PINCUS TRUST
Emerging Markets Portfolio................... 1.09% 0.31% 1.40%(1)
DELAWARE GROUP PREMIUM FUND
REIT Series.................................. 0.57% 0.28% 0.85%(2)
DEUTSCHE ASSET MANAGEMENT VIT FUNDS
EAFE(R) Equity Index Fund.................... 0.45% 0.20% 0.65%(3)
Small Cap Index Fund......................... 0.35% 0.10% 0.45%(3)
</Table>
7
<Table>
<Caption>
TOTAL ANNUAL
OPERATING
MANAGEMENT FEE OTHER EXPENSES EXPENSES
(AFTER EXPENSE 12B-1 (AFTER EXPENSE (AFTER EXPENSE
FUNDING OPTIONS: REIMBURSEMENT) FEES REIMBURSEMENT) REIMBURSEMENT)
---------------- -------------- ----- -------------- --------------
DREYFUS VARIABLE INVESTMENT FUND
Appreciation Portfolio -- Initial Shares..... 0.75% 0.03% 0.78%(4)
Small Cap Portfolio -- Initial Shares........ 0.75% 0.03% 0.78%(4)
FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST
Franklin Small Cap Fund -- Class 2*.......... 0.49% 0.25% 0.28% 1.02%(5)()
GREENWICH STREET SERIES FUND
Equity Index Portfolio -- Class I............ 0.21% 0.02% 0.23%(6)
Fundamental Value Portfolio.................. 0.75% -- 0.04% 0.79%(6)
JANUS ASPEN SERIES
Balanced Portfolio -- Service Shares*........ 0.65% 0.25% 0.02% 0.92%
Global Technology Portfolio -- Service
Shares*.................................... 0.65% 0.25% 0.04% 0.94%
Worldwide Growth Portfolio -- Service
Shares*.................................... 0.65% 0.25% 0.05% 0.95%
PIMCO VARIABLE INSURANCE TRUST
Total Return Bond Portfolio.................. 0.25% 0.40% 0.65%(7)
PUTNAM VARIABLE TRUST
Putnam VT International Growth Fund -- Class
IB Shares*................................. 0.76% 0.25% 0.18% 1.19%
Putnam VT Small Cap Value Fund -- Class IB
Shares*.................................... 0.80% 0.25% 0.30% 1.35%
Putnam VT Voyager II Fund -- Class IB
Shares*.................................... 0.70% 0.25% 0.30% 1.25%(8)
SALOMON BROTHERS VARIABLE SERIES FUND INC.
Capital Fund................................. 0.58% 0.42% 1.00%(9)
Investors Fund............................... 0.70% 0.21% 0.91%
Strategic Bond Fund.......................... 0.36% 0.64% 1.00%(9)
Total Return Fund............................ 0.46% 0.54% 1.00%(9)
THE TRAVELERS SERIES TRUST
Convertible Bond Portfolio................... 0.66% 0.14% 0.80%(10)
Disciplined Mid Cap Stock Portfolio.......... 0.76% 0.12% 0.88%
Equity Income Portfolio...................... 0.75% 0.07% 0.82%(11)
Large Cap Portfolio.......................... 0.75% 0.07% 0.82%(11)
Lazard International Stock Portfolio......... 0.89% 0.14% 1.02%
MFS Emerging Growth Portfolio................ 0.81% 0.05% 0.86%
MFS Mid Cap Growth Portfolio................. 0.86% 0.04% 0.90%
MFS Research Portfolio....................... 0.86% 0.06% 0.92%
Quality Bond Portfolio....................... 0.38% 0.11% 0.49%
Social Awareness Stock Portfolio............. 0.71% 0.04% 0.75%
U.S. Government Securities Portfolio......... 0.39% 0.09% 0.48%
TRAVELERS SERIES FUND INC.
AIM Capital Appreciation Portfolio........... 0.80% 0.03% 0.83%(12)
Alliance Growth Portfolio.................... 0.80% 0.01% 0.81%(12)
MFS Total Return Portfolio................... 0.80% 0.04% 0.84%(12)
Smith Barney Aggressive Growth Portfolio..... 0.80% -- 0.19% 0.99%(12)
Smith Barney International All Cap Growth
Portfolio.................................. 0.90% 0.08% 0.98%(12)
Smith Barney Large Capitalization Growth
Portfolio.................................. 0.75% 0.02% 0.77%()(12)
Van Kampen Enterprise Portfolio.............. 0.70% 0.03% 0.73%(12)
VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio -- Initial Class..... 0.53% 0.08% 0.61%
Contrafund(R) Portfolio -- Service Class
2*......................................... 0.57% 0.25% 0.10% 0.92%(13)
VARIABLE INSURANCE PRODUCTS FUND III
Mid Cap Portfolio -- Service Class 2*........ 0.57% 0.25% 0.17% 0.99%(13)
</Table>
---------------
* The 12b-1 fees deducted from these classes cover certain distribution,
shareholder support and administrative services provided by intermediaries
(the insurance company, broker dealer or other service providers).
8
1 Fee waivers, expense reimbursements, or expense credits reduced expenses for
the EMERGING MARKETS PORTFOLIO during 2000, but this may be discontinued at
any time. Without such arrangements, the Management Fees, Other Expenses and
Total Annual Operating Expenses would equal 1.25%, 0.42% and 1.67%,
respectively. The Other Expenses are based on annualized estimates of
expenses for the fiscal year ending December 31, 2000, net of any fee waivers
or expense reimbursements.
2 The Adviser for the REIT SERIES is Delaware Management Company ("DMC").
Effective through April 30, 2001, DMC has voluntarily agreed to waive its
management fee and reimburse the Series for expenses to the extent that total
expenses will not exceed 0.85%. Without such an arrangement, Total Annual
Operating Expenses would have been 1.03%.
3 These fees reflect a voluntary expense reimbursement arrangement whereby the
Adviser has agreed to reimburse the funds. Without such arrangement, Other
Expenses and Total Annual Operating Expenses for the EAFE(R) EQUITY INDEX
FUND and the SMALL CAP INDEX FUND would have been 0.47% and 0.92%, and 0.34%
and 0.69%, respectively.
4 Total Annual Operating Expenses for the SMALL CAP PORTFOLIO -- INITIAL SHARES
and the APPRECIATION PORTFOLIO -- INITIAL SHARES do not include interest
expense, loan commitment fees, and dividends on securities sold short. These
figures are for the year ended December 31, 2000. Actual expenses in future
years may be higher or lower than the fees given.
5 The Fund's Class 2 distribution plan or "rule 12b-1 plan" is described in the
Fund's prospectus. Total Annual Operating Expenses differ from the ratio of
expenses to average net assets shown in the Financial Highlights table
included in the Fund's Annual Report to Shareholders for the fiscal year
ended December 31, 2000 because they have been restated due to a new
management agreement effective May 1, 2000. The manager has agreed in advance
to reduce its fee to reflect reduced services resulting from the Fund's
investment in a Franklin Templeton money fund. This reduction is required by
the Fund's Board of Trustees and an order of the Securities and Exchange
Commission. Without this reduction, Management Fees, 12b-1 Fees, Other
Expenses, and Total Annual Operating Expenses for the FRANKLIN SMALL CAP
FUND -- CLASS 2 would have been 0.53%, 0.25%, 0.28%, and 1.06%, respectively.
6 The Management Fee includes 0.06% for fund administration for Equity Index
Portfolio and 0.20% for fund administration for Fundamental Value Portfolio.
7 "Other Expenses" reflects a 0.25% administrative fee and 0.01% representing
organizational expenses and pro rata Trustees' fees for the TOTAL RETURN BOND
PORTFOLIO. PIMCO has contractually agreed to reduce Total Annual Operating
Expenses to the extent they would exceed, due to the payment of
organizational expenses and Trustees' fees, 0.65% of average daily net assets
for the TOTAL RETURN BOND PORTFOLIO. Without such reductions, Total Annual
Operating Expenses for the fiscal year ended December 31, 2000 would have
been 0.66%. Under the Expense Limitation Agreement, PIMCO may recoup these
waivers and reimbursements in future periods, not exceeding three years,
provided total expenses, including such recoupment, do not exceed the annual
expense limit.
8 The Total Annual Operating Expenses for the VT VOYAGER FUND II -- CLASS IB
SHARES are based on estimated expenses. This fund commenced operations on
September 1, 2000.
9 The Adviser has waived all or a portion of its Management Fees for the year
ended December 31, 2000. If such fees were not waived or expenses reimbursed,
the Management Fee, Other Expenses, and Total Annual Operating Expenses would
have been as follows: .85%, 0.42%, and 1.27%, respectively for the CAPITAL
FUND; 0.75%, 0.64%, and 1.39%, respectively for the STRATEGIC BOND FUND; and
0.80%, 0.54%, and 1.34%, respectively for the TOTAL RETURN FUND.
10 Travelers Insurance Company has agreed to reimburse the CONVERTIBLE BOND
PORTFOLIO for expenses for the period ended December 31, 2000 which exceeded
0.80%. Without such voluntary arrangements, the actual annualized Total
Annual Operating Expenses would have been 0.90%.
11 TAMIC or the fund has entered into varying arrangements with third parties
who either paid or reduced a portion of the fund's expenses. Without such
expense reductions, Total Annual Operating Expenses for the EQUITY INCOME
PORTFOLIO and the LARGE CAP PORTFOLIO would have been 0.87% and 0.84%,
respectively.
12 Expenses are as of October 31, 2000 (the Fund's fiscal year end). There were
no fees waived or expenses reimbursed for these funds in 2000.
13 Actual annual operating expenses were lower because a portion of the
brokerage commissions that the fund paid was used to reduce the fund's
expenses, and/or because through arrangements with the fund's custodian,
credits realized as a result of uninvested cash balances were used to reduce
a portion of the fund's custodian expenses. Without such reduction, Total
Annual Operating Expenses for the CONTRAFUND(R) PORTFOLIO -- SERVICE CLASS 2
and the MID CAP PORTFOLIO -- SERVICE CLASS 2 would have been 0.90% and 0.94%,
respectively.
14 VP Ultra will pay the advisor a unified fee of 1.00% of the first $20 billion
of average net assets, and 0.95% of average net assets over $20 billion. Out
of that fee, the advisor pays all expenses of managing and operating the fund
except for brokerage expenses, taxes, interest, fees and expenses of the
independent directors and extraordinary expenses.
9
GENERAL DESCRIPTION
--------------------------------------------------------------------------------
This prospectus describes a flexible premium variable life insurance policy with
a minimum Target Premium of $10,000 per case offered by The Travelers Insurance
Company to corporations and employers and individuals under certain
circumstances. It provides life insurance protection on the life (of an
Insured), and pays policy proceeds when the Insured dies while the policy is in
effect. The policy offers:
- Flexible premium payments (you select the timing and amount of the
premium)
- A selection of investment options
- A choice between two death benefit options
- Loans and partial withdrawal privileges
- The ability to increase or decrease the Policy's face amount of insurance
- Additional benefits, if any through the use of an optional rider
This Policy is both an insurance product and a security. The Policy is first and
foremost a life insurance Policy with death benefits, Contract Values and other
features traditionally associated with life insurance. The Policy is a security
because the Contract Value and, under certain circumstances, the Amount Insured,
and Death Benefit may increase or decrease depending on the investment
experience of the Investment Options chosen.
There may be differences in your Policy (such as differences in fees, charges
and benefits) from the one described in this prospectus because of the
requirements of the state where we issued your Policy. Consult your Policy for
its specific terms.
THE APPLICATION. In order to become a policy owner, you must submit an
application with information about the proposed insured. The insured must sign a
life insurance consent form and provide evidence of insurability, as required.
On the application, you will also indicate:
- the amount of insurance desired (the "stated amount"); minimum of $50,000
- your choice between two death benefit options
- the beneficiary(ies), and whether or not the beneficiary is irrevocable
- your choice of Investment Options.
Our underwriting staff will review the completed application, and, if approved,
we will issue the Policy.
HOW THE POLICY WORKS
--------------------------------------------------------------------------------
You make premium payments and direct them to one or more of the available
Investment Options. The Policy's Contract Value will increase or decrease
depending on the performance of the Investment Options you select. In the case
of Death Benefit Option 2, the Death Benefit will also vary based on the
Investment Options' performance.
If your Policy is in effect when the Insured dies, we will pay your beneficiary
the Death Benefit plus any additional rider Death Benefit. Your Policy will stay
in effect as long as the Policy's Cash Surrender Value can pay the Policy's
monthly charges.
Your Policy becomes effective once our underwriting staff has approved the
application and once the first premium payment has been made. The Policy Date is
the date we use to determine all future transactions on the policy, for example,
the deduction dates, policy months, policy years. The Policy Date may be before
or the same date as the Issue Date (the date the policy was issued). During the
underwriting period, any premium paid will be held in a non-interest bearing
account.
10
APPLYING PREMIUM PAYMENTS
We apply the first premium on the later of the Issue Date or the date we receive
it at our Home Office. During the Right to Cancel Period, we allocate Net
Premiums to the Money Market Portfolio unless state law permits us to refund
Contract Value. If state law permits us to refund Contract Value, then your Net
Premium may be invested in any available Investment Option during the Right to
Cancel Period. Otherwise, at the end of the Right to Cancel Period, we direct
the Net Premiums to the Investment Option(s) selected on the application, unless
you give us other directions.
Any premium allocation must be at least 5% and must be in whole percentages. You
may make additional payments at any time while your Policy is in force. We
reserve the right to require evidence of insurability before accepting
additional premium payments which result in an increased Net Amount at Risk. We
will return any additional premium payments which would exceed the limits
prescribed by federal income tax laws or regulations which would prevent the
Policy from qualifying as life insurance.
The Investment Options are segments of the Separate Account. They correspond to
Underlying Funds with the same names. The available Investment Options are
listed below.
We credit your policy with accumulation units of the Investment Option(s) you
have selected. We calculate the number of Accumulation Units by dividing your
Net Premium Payment by each Investment Option's Accumulation Unit Value computed
after we receive your payment.
THE INVESTMENT OPTIONS
--------------------------------------------------------------------------------
The Investment Options currently available under Fund UL III are listed below.
There is no assurance that an Investment Option will achieve its stated
objectives. We may, add, withdraw or substitute Investment Options from time to
time. Any changes will comply with applicable state and federal laws. We would
notify you before making such a change. For more detailed information on the
investment advisers and their services and fees, please refer to the Underlying
Fund's prospectuses which are included with and must accompany this prospectus.
The Company has entered into agreements with either the investment adviser or
distributor of certain of the Underlying Funds in which the adviser or
distributor pays us a fee for providing administrative services, which fee may
vary. The fee is ordinarily based upon an annual percentage of the average
aggregate net amount invested in the Underlying Funds on behalf of the Separate
Account. Please read carefully the complete risk disclosure in each Underlying
Fund's prospectus before investing.
<Table>
<Caption>
INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
----------------- -------------------- -----------------------------
Capital Appreciation Fund Seeks growth of capital through the Travelers Asset Management
use of common stocks. Income is not an International Company LLC
objective. The Fund invests ("TAMIC")
principally in common stocks of small Subadviser: Janus Capital
to large companies which are expected Corp.
to experience wide fluctuations in
price in both rising and declining
markets.
High Yield Bond Trust Seeks generous income. The assets of TAMIC ]
the High Yield Bond Trust will be
invested in bonds which, as a class,
sell at discounts from par value and
are typically high risk securities.
Money Market Portfolio Seeks high current income from short- TAMIC
term money market instruments while
preserving capital and maintaining a
high degree of liquidity.
</Table>
11
<Table>
<Caption>
INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
----------------- -------------------- -----------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
VP Ultra Fund Seeks long-term capital growth by American Century Investment
looking for stocks of large companies Management, Inc.
that the manager believes will
increase in time, using a growth
investment strategy developed by
American Century.
ALLIANCE VARIABLE PRODUCT SERIES FUND
Premier Growth Portfolio Seeks long-term growth of capital by Alliance Capital Management
Class B investing primarily in equity
securities of a limited number of
large, carefully selected, high
quality U.S. companies that are judged
likely to achieve superior earning
momentum.
CREDIT SUISSE WARBURG PINCUS TRUST
Emerging Markets Seeks long-term growth of capital by Credit Suisse Asset
Portfolio investing primarily in equity Management, LLC
securities of non-U.S issuers
consisting of companies in emerging
securities markets.
DELAWARE GROUP PREMIUM FUND
REIT Series Seeks to achieve maximum long-term Delaware Management Company,
total return. Capital appreciation is Inc.
a secondary objective. The Series Subadviser: Lincoln
seeks to achieve its objectives by Investment Management, Inc.
investing in securities of companies
primarily engaged in the real estate
industry. Under normal circumstances,
at least 65% of the Series total
assets will be invested in equity
securities of real estate investment
trusts ("REITs"). The Series operates
as a nondiversified fund as defined by
the Investment Company Act of 1940.
DEUTSCHE ASSET MANAGEMENT VIT FUNDS
EAFE Equity Index Fund Seeks to replicate, before deduction Deutsche Asset Management
of expenses, the total return
performance of the EAFE index.
Small Cap Index Fund Seeks to replicate, before deduction Deutsche Asset Management
of expenses, the total return
performance of the Russell 2000 index.
DREYFUS VARIABLE
INVESTMENT FUND
Appreciation Portfolio - Seeks primarily to provide long-term The Dreyfus Corporation
Initial Shares capital growth consistent with the Subadviser: Fayez Sarofim &
preservation of capital; current Co.
income is a secondary investment
objective. The portfolio invests
primarily in the common stocks of
domestic and foreign issuers.
</Table>
12
<Table>
<Caption>
INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
----------------- -------------------- -----------------------------
DREYFUS VARIABLE INVESTMENT FUND (CONT'D)
Small Cap Portfolio - Seeks to maximize capital The Dreyfus Corporation
Initial Shares appreciation. To pursue this goal, the
portfolio primarily invests in
small-cap companies with total market
values of less than $2 billion at the
time of purchase.
FRANKLIN TEMPLETON
VARIABLE INSURANCE
PRODUCTS TRUST
Franklin Small Cap Fund - Seeks long-term capital growth; the Franklin Advisers, Inc.
Class 2 Fund seeks to accomplish its objective Subadviser: Templeton
by investing primarily (normally at Investment Counsel, Inc.
least 65% of its assets) in equity
securities of smaller capitalization
growth companies.
GREENWICH STREET SERIES
FUND
Equity Index Portfolio - Seeks to replicate, before deduction Travelers Investment
Class I Shares of expenses, the total return Management Company ("TIMCO")
performance of the S&P 500 Index.
Fundamental Value Seeks long-term capital growth with SBFM
Portfolio current income as a secondary
objective.
JANUS ASPEN SERIES
Balanced Portfolio - Seeks current income and long-term Janus
Service Shares growth of capital, consistent with
preservation of capital and balanced
by current income. It pursues its
objective by normally investing 40-60%
of its assets in securities selected
primarily for their growth potential
and 40-60% of its assets in securities
selected primarily for their income
potential. This Portfolio normally
invests at least 25% of its assets in
fixed-income securities.
Global Technology Seeks long-term growth of capital. It Janus
Portfolio - Service pursues its objective by investing
Shares primarily in equity securities of US
and foreign companies selected for
their growth potential. Normally, it
invests at least 65% of its total
assets in securities of companies that
the portfolio manager believes will
benefit significantly from advances or
improvements in technology.
Worldwide Growth Seeks long-term growth of capital in a Janus
Portfolio - Service manner consistent with the
Shares preservation of capital. It pursues
its objective by investing primarily
in common stocks of companies of any
size throughout the world. The
Portfolio normally invests in issuers
from at least five different
countries, including the United
States. The Portfolio may at times
invest in fewer than five countries or
even a single country.
</Table>
13
<Table>
<Caption>
INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
----------------- -------------------- -----------------------------
PIMCO VARIABLE INSURANCE TRUST
Total Return Bond Seeks maximum total return, consistent Pacific Investment Management
Portfolio with preservation of capital and Company
prudent investment management, by
investing primarily in
investment-grade debt securities.
PUTNAM VARIABLE TRUST
Putnam VT International Seeks capital appreciation by Putnam Investment Management,
Growth Fund -- Class IB investing mostly in common stocks of Inc. ("Putnam")
Shares companies outside the United States.
Putnam VT Small Cap Value Seeks capital appreciation by Putnam
Fund -- Class IB Shares investing mainly in common stocks of
U.S. companies with a focus on value
stocks.
Putnam VT Voyager II Seeks capital appreciation by Putnam
Fund -- Class IB Shares investing mainly in common stocks of
U.S. companies with a focus on growth
stocks.
SALOMON BROTHERS VARIABLE
SERIES FUND INC.
Capital Fund Seeks capital appreciation through Salomon Brothers Asset
investments primarily in common stock, Management ("SBAM")
or securities convertible to common
stocks, which are believed to have
above-average price appreciation
potential and which may also involve
above-average risk.
Investors Fund Seeks long-term growth of capital. SBAM
Current income is a secondary
objective.
Strategic Bond Fund Seeks high level of current income. As SBAM
a secondary objective, the Portfolio
will seek capital appreciation.
Total Return Fund Seeks above-average income (compared SBAM
to a portfolio invested entirely in
equity securities). Secondarily, seeks
opportunities for growth of capital
and income.
TRAVELERS SERIES FUND INC.
AIM Capital Appreciation Seeks capital appreciation by Travelers Investment Advisers
Portfolio investing principally in common stock, ("TIA")
with emphasis on medium-sized and Subadviser: AIM Capital
smaller emerging growth companies. Management, Inc.
Alliance Growth Portfolio Seeks long-term growth of capital by TIA
investing predominantly in equity Subadviser: Alliance Capital
securities of companies with a Management L.P.
favorable outlook for earnings and
whose rate of growth is expected to
exceed that of the U.S. economy over
time. Current income is only an
incidental consideration.
MFS Total Return Seeks to obtain above-average income TIA
Portfolio (compared to a portfolio entirely Subadviser: Massachusetts
invested in equity securities) Financial Services Company
consistent with the prudent employment ("MFS")
of capital. Generally, at least 40% of
the Portfolio's assets will be
invested in equity securities.
</Table>
14
<Table>
<Caption>
INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
----------------- -------------------- -----------------------------
TRAVELERS SERIES FUND INC. (CONT'D)
Smith Barney Aggressive Seeks capital appreciation investing SBFM
Growth Portfolio primarily in common stocks of
companies that are experiencing, or
have the potential to experience,
growth of earnings, or that exceed the
average earnings growth rate of
companies whose securities are
included in the S&P 500.
Smith Barney Seeks total return on assets from SBFM
International All Cap growth of capital and income by
Growth Portfolio investing at least 65% of its assets
in a diversified portfolio of equity
securities of established non-U.S.
issuers.
Smith Barney Large Seeks long-term growth of capital by SBFM
Capitalization Growth investing in equity securities of
Portfolio companies with large market
capitalizations.
Van Kampen Enterprise Seeks capital appreciation through SBFM
Portfolio investment in securities believed to Subadviser: Van Kampen Asset
have above-average potential for Management, Inc.
capital appreciation. Any income
received on such securities is
incidental to the objective of capital
appreciation.
TRAVELERS SERIES TRUST
Convertible Bond Seeks current income and capital TAMIC
Portfolio appreciation by investing in
convertible securities and in
combinations of nonconvertible
fixed-income securities and warrants
or call options that together resemble
convertible securities ("synthetic
convertible securities").
Disciplined Mid Cap Stock Seeks growth of capital by investing TAMIC
Portfolio primarily in a broadly diversified Subadviser: TIMCO
portfolio of common stocks.
Equity Income Portfolio Seeks reasonable income by investing TAMIC
at least 65% in income-producing Subadviser: Fidelity
equity securities. The balance may be Management & Research Company
invested in all types of domestic and ("FMR")
foreign securities, including bonds.
The Portfolio seeks to achieve a yield
that exceeds that of the securities
comprising the S&P 500. The Subadviser
also considers the potential for
capital appreciation.
Large Cap Portfolio Seeks long-term growth of capital by TAMIC
investing primarily in equity Subadviser: FMR
securities of companies with large
market capitalizations.
Lazard International Seeks capital appreciation by TAMIC
Stock Portfolio investing primarily in the equity Subadviser: Lazard Asset
securities of non-United States Management
companies (i.e., incorporated or
organized outside the United States).
MFS Emerging Growth Seeks long-term growth of capital. TAMIC
Portfolio Dividend and interest income from Subadviser: MFS
portfolio securities, if any, is
incidental.
</Table>
15
<Table>
<Caption>
INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
----------------- -------------------- -----------------------------
THE TRAVELERS SERIES TRUST (CONT'D)
MFS Mid Cap Growth Seeks to obtain long-term growth of TAMIC
Portfolio capital by investing under normal Subadviser: MFS
market conditions, at least 65% of its
total assets in equity securities of
companies with medium market
capitalization which the investment
adviser believes have above-average
growth potential.
MFS Research Portfolio Seeks to provide long-term growth of TAMIC
capital and future income. Subadviser: MFS
Travelers Quality Bond Seeks current income, moderate capital TAMIC
Portfolio volatility and total return.
Social Awareness Stock Seeks long-term capital appreciation SBFM
Portfolio and retention of net investment
income. The Portfolio seeks to fulfill
this objective by selecting
investments, primarily common stocks,
which meet the social criteria
established for the Portfolio. Social
criteria currently excludes companies
that derive a significant portion of
their revenues from the production of
tobacco, tobacco products, alcohol, or
military defense systems, or in the
provision of military defense related
services or gambling services.
U.S. Government Seeks to select investments from the TAMIC
Securities Portfolio point of view of an investor concerned
primarily with highest credit quality,
current income and total return. The
assets of the U.S. Government
Securities Portfolio will be invested
in direct obligations of the United
States, its agencies and
instrumentalities.
VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio - Seeks high total return with reduced FMR
Initial Class risk over the long-term by allocating
its assets among stocks, bonds and
short-term fixed-income instruments.
Contrafund Portfolio - Seeks long-term capital appreciation FMR
Service Class 2 by investing primarily in common
stocks of companies whose value the
advisor believes is not fully
recognized by the public.
VARIABLE INSURANCE PRODUCTS FUND III
Mid Cap Portfolio -- Seeks long-term growth of capital and FMR
Service Class 2 income by investing primarily in
income-producing equity securities,
including common stocks and
convertible securities.
</Table>
16
POLICY BENEFITS AND RIGHTS
--------------------------------------------------------------------------------
TRANSFERS OF CONTRACT VALUE
INVESTMENT OPTIONS
As long as the Policy remains in effect, you may make transfers of Contract
Value between Investment Options. We reserve the right to restrict the number of
free transfers to six times per Policy in any Policy Year and to charge $10 per
Policy for each additional transfer; however, we do not currently charge for
transfers.
We calculate the number of Accumulation Units involved using the Accumulation
Unit Values on the Valuation Date on which we receive the transfer request.
LAPSE AND REINSTATEMENT
The Policy will remain in effect until the Cash Surrender Value of the Policy
can no longer cover the Monthly Deduction Amount. If this happens, we will
notify you in writing that if the amount shown in the notice is not paid within
61 days (the "Late Period"), the Policy may lapse. The amount shown will be
enough to pay the deduction amount due. The Policy will continue through the
Late Period, but if no payment is received by us, it will terminate at the end
of the Late Period. If the Insured dies during the Late Period, the Death
Benefit payable will be reduced by the Monthly Deduction Amount due plus the
amount of any Indebtedness. (See "Death Benefit.")
If the Policy lapses, you may reinstate the Policy by paying the reinstatement
premium (and any applicable charges) stated in the lapse notice. You may request
reinstatement within three years of lapse (unless a different period is required
under applicable state law). Upon reinstatement, the Policy's Contract Value
will equal the Net Premium. In addition, we reserve the right to require
satisfactory evidence of insurability of the Insured.
RIGHT TO CANCEL
An Applicant may cancel the Policy by returning it via mail or personal delivery
to the Company or to the agent who sold the Policy. The Policy must be returned
by the latest of
(1) 10 days after delivery of the Policy to the Policy Owner,
(2) 45 days of completion of the Policy application, or
(3) 10 days after the Notice of Right to Cancel has been mailed or
delivered to the Applicant whichever is latest, or
(4) later if required by state law.
We will refund the premium payments paid, or the sum of (1) the difference
between the premium paid, including any fees or charges, and the amounts
allocated to the Investment Option(s), (2) the value of the amounts allocated to
the Investment Option(s) on the date on which the Company receives the returned
Policy, and (3) any fees and other charges imposed on amounts allocated to the
Investment Option(s), depending on state law. We will make the refund within
seven days after we receive your returned policy.
ACCESS TO CONTRACT VALUES
--------------------------------------------------------------------------------
POLICY LOANS
You may borrow up to 100% of the Policy's Cash Surrender Value less
indebtedness. This amount will be determined on the day we receive the loan
request in writing in a form acceptable to us.
17
We reserve the right to limit loan requests to at least $500 (subject to state
law). We will make the loan within seven days of our receipt of the written loan
request. The annual effective loan interest rate charged is 5.00%. The annual
effective loan interest rate credited is 4.20% in years 1 - 25 and 4.50% in
years 26 plus.
If you have a loan outstanding and request a second loan, we will add the amount
of the outstanding loan to the loan request. Interest on the outstanding amount
of the loan(s), is charged daily and is payable at the end of each Policy Year.
We will transfer the amount of the loan from each Investment Option on a pro
rata basis, as of the date the loan is made unless otherwise specified. We
transfer the loan amount to the Loan Account, and credit the Loan Account with a
fixed annual rate as shown in the Policy. Amounts held in the Loan Account will
not be affected by the investment performance of the Investment Options. As you
repay the loan, we deduct the amount of the loan repayment from the Loan Account
and reallocate the payments among the Investment Options according to your
current instructions. You may repay all or any part of a loan secured by the
Policy while the Policy is still in effect.
CONSEQUENCES. Your Cash Surrender Value is reduced by the amount of any
Indebtedness. If a loan is not repaid, it permanently decreases the Cash
Surrender Value, which could cause the Policy to lapse. Additionally, the Death
Benefit payable will be decreased because of an outstanding loan. Also, even if
a loan is repaid, the Death Benefit and Cash Surrender Value may be permanently
affected since you do not receive any investment experience on the outstanding
loan amount held in the Loan Account.
POLICY SURRENDERS
You may withdraw all or a portion of the Contract Value from the Policy on any
day that the Company is open for business.
FULL SURRENDERS. As long as the Policy is in effect, you may surrender the
Policy and receive its Cash Surrender Value. (You may request a surrender
without the beneficiary's consent provided the beneficiary has not been
designated "irrevocable." If so, you will need the beneficiary's consent.) The
Cash Surrender Value will be determined as of the date we receive the written
request at our Home Office. The Cash Surrender Value is the Contract Value,
minus any Indebtedness.
For full surrenders, we will pay you within seven days after we receive the
request, or on the date you specify, whichever is later. The Policy will
terminate on the deduction date following our receipt of the surrender request
(or following the date you specified, if later).
If the Policy has not been assigned at any time and is not part of a tax free
exchange and a full surrender is requested in the first four Policy Years, we
will pay an additional amount at the time of surrender as follows:
<Table>
------------------------------------------------------------------------------------------
POLICY YEAR OF FULL SURRENDER ADDITIONAL PAYMENT
------------------------------------------------------------------------------------------
1 8% of first year premium received
------------------------------------------------------------------------------------------
2 6% of the sum of premium received in each of
the first two Policy Years
------------------------------------------------------------------------------------------
3 3% of the sum of premium received in each of
the first three Policy Years
------------------------------------------------------------------------------------------
4 0.5% of the sum of premium received in each
of the first four Policy Years
------------------------------------------------------------------------------------------
</Table>
18
PARTIAL WITHDRAWALS. You may request a partial withdrawal from the Policy at
any time after the first policy year. We reserve the right to limit partial
withdrawals to at least $500. We will deduct the amount surrendered pro rata
from all Investment Options, unless you give us other written instructions.
In addition to reducing the Policy's Contract Value, partial withdrawals will
reduce the Death Benefit payable under the Policy. We will reduce the Stated
Amount by the amount necessary to prevent any increase in the Net Amount at
Risk. We may require you to return the Policy to record this reduction.
DEATH BENEFIT
--------------------------------------------------------------------------------
The Death Benefit under the Policy is the amount paid to the Beneficiary upon
the death of the Insured. The Death Benefit will be reduced by any unpaid
Monthly Deduction Amount and any Indebtedness. All or part of the Death Benefit
may be paid in cash or applied to one or more of the payment options described
in the following pages.
You may elect one of these Death Benefit options. As long as the Policy remains
in effect, the Company guarantees that the Death Benefit under any option will
be at least the current Stated Amount of the Policy less any Indebtedness and
unpaid Monthly Deduction Amount. The Amount Insured under any option may vary
with the Contract Value of the Policy. Under Option 1 (the "Level Option"), the
Amount Insured will be equal to the Stated Amount of the Policy or, if greater,
a specified multiple of Contract Value (the "Minimum Amount Insured"). Under
Option 2 (the "Variable Option"), the Amount Insured will be equal to the Stated
Amount of the Policy plus the Contract Value (determined as of the date of the
last Insured's death) or, if greater, the Minimum Amount Insured.
The Minimum Amount Insured is the amount required to qualify the Policy as a
life insurance Policy under the current federal tax law. Under that law, the
Minimum Amount Insured equals a stated percentage of the Policy's Contract Value
determined as of the first day of each Policy Month. The Policy uses the Cash
Value Accumulation Test as the definition of life insurance under Section 7702.
The percentages differ according to the attained age of the Insured. The Minimum
Amount Insured is set forth in the Policy and may change as federal income tax
laws or regulations change. In the Cash Value Accumulation Test, the factors at
the end of a Policy Year are set forth in Appendix C.
The following examples demonstrate the relationship between the Death Benefit,
the Cash Surrender Value and the Minimum Amount Insured under each Death Benefit
Option. The examples assume an Insured of age 40, a Minimum Amount Insured of
332.495% of Contract Value (assuming the preceding table is controlling as to
Minimum Amount Insured), and no outstanding Policy loan.
OPTION 1 -- LEVEL DEATH BENEFIT
In the following examples of an Option 1 Level Death Benefit, the Death Benefit
under the Policy is generally equal to the Stated Amount of $50,000. Since the
Policy is designed to qualify as a life insurance Policy, the Death Benefit
cannot be less than the Minimum Amount Insured (or, in this example, 332.495% of
the Contract Value).
EXAMPLE ONE. If the Contract Value of the Policy equals $10,000, the Minimum
Amount Insured would be $33,250 ($10,000 x 332.495%). Since the Death Benefit in
the Policy is the greater of the Stated Amount ($50,000) or the Minimum Amount
Insured ($33,250), the Death Benefit would be $50,000.
EXAMPLE TWO. If the Contract Value of the Policy equals $40,000, the Minimum
Amount Insured would be $132,998 ($40,000 x 332.495%). The resulting Death
Benefit would be
19
$132,998 since the Death Benefit is the greater of the Stated Amount ($50,000)
or the Minimum Amount Insured ($132,998).
OPTION 2 -- VARIABLE DEATH BENEFIT
In the following examples of an Option 2 Variable Death Benefit, the Death
Benefit varies with the investment experience of the applicable Investment
Options and will generally be equal to the Stated Amount plus the Contract Value
of the Policy (determined on the date of the Insured's death). The Death Benefit
cannot, however, be less than the Minimum Amount Insured (or, in this example,
332.495% of the Contract Value).
EXAMPLE ONE. If the Contract Value of the Policy equals $10,000, the Minimum
Amount Insured would be $33,250 ($10,000 x 332.495%). The Death Benefit
($60,000) would be equal to the Stated Amount ($50,000) plus the Contract Value
($10,000), unless the Minimum Amount Insured ($33,250) was greater.
EXAMPLE TWO. If the Contract Value of the Policy equals $60,000, then the
Minimum Amount Insured would be $199,497 ($60,000 x 332.495%). The resulting
Death Benefit would be $199,497 because the Minimum Amount Insured ($199,497) is
greater than the Stated Amount plus the Contract Value ($50,000 + $60,000 =
$110,000).
PAYMENT OF PROCEEDS
Death Benefits are payable within seven days after we receive satisfactory proof
of the Insured's death. The amount of Death Benefit paid may be adjusted to
reflect any unpaid Monthly Deduction Amount, any Indebtedness, any material
misstatements in the Policy application as to age or sex of the Insured, and any
amounts payable to an assignee under a collateral assignment of the Policy. (See
"Assignment".) If no beneficiary is living when the Insured has died, the Death
Benefit will be paid to the Policy Owner, if living, otherwise, the Death
Benefit will be paid to the Policy Owner's estate.
Subject to state law, if the Insured commits suicide within two years following
the Issue Date limits on the amount of Death Benefit paid will apply. (See
"Limit on Right to Contest and Suicide Exclusion") In addition, if the Insured
dies during the 61-day period after the Company gives notice to the Policy Owner
that the Cash Surrender Value of the Policy is insufficient to meet the Monthly
Deduction Amount due against the Contract Value of the Policy, then the Death
Benefit actually paid to the Policy Owner's Beneficiary will be reduced by the
amount of the Deduction Amount that is due and unpaid. (See "Contract Value and
Cash Surrender Value," for effects of partial surrenders on Death Benefits.)
PAYMENT OPTIONS
We will pay policy proceeds in a lump sum, unless you or the Beneficiary selects
one of the Company's payment options. We may defer payment of proceeds which
exceed the Contract Value for up to six months from the date of the request for
the payment. A combination of options may be used. The minimum amount that may
be placed under a payment option is $5,000 unless we consent to a lesser amount.
Proceeds applied under an option will no longer be affected by the investment
experience of the Investment Options.
The following payment options are available under the Policy:
OPTION 1 -- Payments of a Fixed Amount
OPTION 2 -- Payments for a Fixed Period
OPTION 3 -- Amounts Held at Interest
OPTION 4 -- Monthly Life Income
20
OPTION 5 -- Joint and Survivor Level Amount Monthly Life Income
OPTION 6 -- Joint and Survivor Monthly Life Income-Two-thirds to Survivor
OPTION 7 -- Joint and Last Survivor Monthly Life Income-Monthly Payment
Reduces on Death of First Person Named
OPTION 8 -- Other Options
We will make any other arrangements for periodic payments as may be agreed upon.
If any periodic payment due any payee is less than $50, we may make payments
less often. If we have declared a higher rate under an option on the date the
first payment under an option is due, we will base the payments on the higher
rate.
MATURITY BENEFITS
--------------------------------------------------------------------------------
The maturity date is the anniversary of the Policy Date on which the Insured is
age 100. If the Insured is living on the Maturity Date, the Company will pay you
the Policy's Contract Value, less any Indebtedness or unpaid Deduction Amount
and any amount payable to an assignee under a collateral assignment of the
Policy. You must surrender the Policy to us before we make a payment, at which
point the Policy will terminate and we will have no further obligations under
the Policy.
CHARGES AND DEDUCTIONS
--------------------------------------------------------------------------------
GENERAL
We deduct the charges described below. The charges are for service and benefits
we provide, costs and expenses we incur, and risks we assume under the Policies,
services and benefits we provide include:
- the ability for you to make withdrawals and surrenders under the
Policies;
- the ability for you to obtain a loan under the Policies;
- the Death Benefit paid on the death of the Insured;
- the available funding options;
- administration of the various elective options available under the
Policies; and
- the distribution of various reports to policy owners.
Costs and expenses we incur include:
- expenses associated with underwriting applications and increases in the
Stated Amount;
- losses associated with various overhead and other expenses associated
with providing the services and benefits provided by the Policies;
- sales and marketing expenses including commission payments to your sales
agent; and
- other costs of doing business.
Risks we assume include:
- that Insureds may live for a shorter period of time than estimated
resulting in the payment of greater Death Benefits than expected; and
- that the costs of providing the services and benefits under the Policies
will exceed the charges deducted.
21
The amount of a charge may not necessarily correspond to the costs associated
with providing the services or benefits indicated by the designated charge. We
also may profit on one or more of the charges. We may use any such profits for
any corporate purpose, including the payment of sales expenses.
CHARGES AGAINST PREMIUM
- FRONT-END SALES EXPENSE CHARGES. When we receive a Premium Payment, and
before allocation of the payment among the Investment Options, we deduct
a front-end sales charge. The current charge is 12% of the premiums
received up to the Target Premium for Policy Years 1 through 7, and 5.5%
thereafter. The current charge on premium received in excess of the
Target Premium is 8% for Policy Years 1 through 7, and 5.5% thereafter.
The sales charge is guaranteed not to exceed 15% of such Target Premium
payments in all Contract Years and 12% on amounts in excess of the Target
Premium. For these purposes an increase in Stated Amount is treated as a
newly issued contract. Currently, 2.25% of the Sales Expense Charge is
designed to compensate us for state premium taxes owed by the Company
associated with the receipt of premium, which cost is borne by the Policy
Owner. These taxes vary from state to state, and 2.25% is an average. In
some states, there may be no premium taxes associated with premium.
Likewise, 1.25% of the Sales Expense Charge is designed to compensate us
for federal taxes associated with the receipt of premium, which cost is
borne by the Policy Owner.
MONTHLY DEDUCTION AMOUNT
We will deduct a Monthly Deduction Amount to cover certain charges and expenses
incurred in connection with the Policy. The Monthly Deduction Amount is deducted
pro rata from each of the Investment Options attributable to the Policy. The
amount is deducted on the first day of each Policy Month (the "Deduction Date"),
beginning on the Policy Date. The dollar amount of the Monthly Deduction Amount
will vary from month to month. The Monthly Deduction Amount consists of the Cost
of Insurance Charge, Monthly Policy Fee, Monthly Administrative Per $1,000
Charge, Case Charge and charges for any Rider(s).
COST OF INSURANCE CHARGE. The Cost of Insurance Charge is a significant charge
under your Policy because it is the primary charge for the death benefit we
provide you. We determine the Cost of Insurance in a manner that reflects the
anticipated mortality of the Insured. Because the Cost of Insurance depends on a
number of factors (age, gender (where applicable), policy duration), the cost
will vary from policy to policy. The amount of the Cost of Insurance deduction
also depends on the amount of insurance coverage on the date of the deduction
and the current cost per dollar for insurance coverage. The cost per dollar of
insurance coverage varies annually and is based on age, sex, risk class of the
Insured and duration from issue.
MONTHLY POLICY FEE. This current $17.35 charge is used to cover expenses
associated with maintaining the policy. This charge is guaranteed not to exceed
$30.
MONTHLY ADMINISTRATIVE PER $1,000 CHARGE. An administrative expense charge of
$0.10 per thousand per month of Total Per $1000 Death Benefit applied for the
first 20 years and for 20 years following an increase in Stated Amount. The
Total Per $1,000 Death Benefit is the lessor of the Initial Death Benefit and 20
times the Target Premium.
CASE CHARGE. This current $40 per month per case charge is used to cover
expenses associated with maintaining the policies. This charge is guaranteed not
to exceed $60. The Case Charge is allocated equally to each policy in a case.
CHARGES AGAINST THE SEPARATE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. We deduct a daily charge applied against the
assets in the Investment Options for mortality and expense risks. This current
charge is at an annual rate of 0.55% for Policy Years 1-25, and 0.25%
thereafter. It is guaranteed not to exceed 0.75% for all
22
years. This charge compensates us for various risks assumed, benefits provided
and expenses incurred including commissions paid to your sales agent.
UNDERLYING FUND EXPENSES
When you allocate money to the Investment Options, the Separate Account
purchases shares of the corresponding Underlying Funds at net asset value. The
net asset value reflects investment advisory fees and other expenses already
deducted. The investment advisory fees and other expenses paid by each of the
Underlying Funds are described in the individual Underlying Fund prospectuses.
These are not direct charges under the Policy; they are indirect because they
affect each Investment Option's accumulation unit value.
The Company also reserves the right to charge the assets of each Investment
Option for a reserve for any income taxes payable by the Company on the assets
attributable to that Investment Option. (See "Federal Tax Considerations.")
TRANSFER CHARGE
There is currently no charge for transfers between Investment Options. We
reserve the right to limit free transfers of Contract Value to six times per
Policy in any Policy Year, and to charge $10 per Policy for any additional
transfers.
REDUCTION OR MODIFICATION OF CHARGES
The policy is available for purchase by individuals, corporations and other
groups. The Company may reduce or modify certain charges (sales load, surrender
charge, monthly administrative charge, monthly cost of insurance charge, or
other charges), where the size or nature of the group results in savings in
sales, underwriting, administrative or other costs, to the Company. These
charges may be reduced or modified in certain group, sponsored arrangements or
special programs. Eligibility for reduction or modification in charges and the
amount is determined by a number of factors, including:
- the number of insureds;
- the total premium expected to be paid;
- total assets under management for the policy owner;
- the nature of the relationship among individual insureds;
- the purpose for which the policies are being purchased;
- the expected persistency of individual policies; and
- any other circumstances which are expected to reduce expenses.
The extent and nature of modifications may change from time to time. The charge
structure may vary. Variations are determined in a manner not unfairly
discriminatory to policy owners which reflects differences in costs of service.
THE SEPARATE ACCOUNT AND VALUATION
--------------------------------------------------------------------------------
THE TRAVELERS FUND UL III FOR VARIABLE LIFE INSURANCE (FUND UL III)
The Travelers Fund UL III for Variable Life Insurance was established on January
15, 1999 under the insurance laws of the state of Connecticut. It is registered
with the SEC as a unit investment trust under the Investment Company Act of
1940. A Registration Statement has been filed with the SEC under the Securities
Act of 1933, as amended. This Prospectus does not contain all information set
forth in the Registration Statement, its amendments and exhibits. You may access
the SEC's website (http://www.sec.gov) to view the entire Registration
Statement. This registration does not mean that the SEC supervises the
management or the investment practices or policies of the Separate Account.
23
The assets of Fund are invested exclusively in shares of the Investment Options.
The operations of Fund are also subject to the provisions of Section 38a-433 of
the Connecticut General Statutes which authorizes the Connecticut Insurance
Commissioner to adopt regulations under it. Under Connecticut law, the assets of
Fund UL III will be held for the exclusive benefit of Policy Owners. The assets
held in Fund UL III are not chargeable with liabilities arising out of any other
business which the Company may conduct. Any obligations arising under the Policy
are general corporate obligations of the Company.
All investment income of and other distributions to each Investment Option are
reinvested in shares of corresponding underlying fund at net asset value. The
income and realized gains or losses on the assets of each Investment Option are
separate and are credited to or charged against the Investment Option without
regard to income, gains or losses from any other Investment Option or from any
other business of the Company. The Company purchases shares of the Underlying
Funds in connection with the Investment Options associated with premium payments
allocated at the Policy Owners' directions, and redeems Fund UL III units to
meet Policy obligations. We will also make adjustments in reserves, if required.
The Investment Options are required to redeem Underlying Fund shares at net
asset value and to make payment within seven days.
HOW THE CONTRACT VALUE VARIES. We calculate the Policy's Contract Value each
day the New York Stock Exchange is open for trading (a "valuation date") and we
are open for business. A Policy's Contract Value reflects a number of factors,
including Premium Payments, partial withdrawals, loans, Policy charges, and the
investment experience of the Investment Option(s) chosen. The Policy's Contract
Value on a valuation date equals the sum of all accumulation units for each
Investment Option chosen, plus the Loan Account Value.
The Separate Account purchases shares of the Underlying Funds at net asset value
(i.e., without a sales charge). The Separate Account receives all dividends and
capital gains distributions from each Underlying Fund, and reinvests in
additional shares of that fund. The Accumulation Unit Value reflects the
reinvestment of any dividends or capital gains distributions declared by the
Underlying Fund. The Separate Account will redeem Underlying Fund shares at
their net asset value, to the extent necessary to make payments under the
Policy.
In order to determine Contract Value, Cash Surrender Value, policy loans and the
number of Accumulation Units to be credited, we use the values calculated as of
the close of business on each valuation date we receive the written request, or
payment in good order, at our Home Office.
ACCUMULATION UNIT VALUE. Accumulation Units measure the value of the Investment
Options. The value for each Investment Option's Accumulation Unit is calculated
on each valuation date. The value equals the Accumulation Unit value for the
preceding valuation period multiplied by the Underlying Fund's Net Investment
Factor during the next Valuation Period. (For example, to calculate Monday's
valuation date price, we would multiply Friday's Accumulation Unit Value by
Monday's Net Investment Factor.)
The Accumulation Unit Value may increase or decrease. The number of Accumulation
Units credited to your Policy will not change as a result of the Investment
Option's investment experience.
NET INVESTMENT FACTOR. For each Investment Option, the value of its
Accumulation Unit depends of the net rate of return for the corresponding
Underlying Fund. We determine the net rate of return at the end of each
Valuation Period (that is, the period of time beginning at the close of the New
York Stock Exchange, and ending at its close of business on the next Valuation
Date). The net rate of return reflects the investment performance of the
Investment Option, includes any dividends or capital gains distributed, and is
net of the Separate Account and underlying Investment Option charges.
24
CHANGES TO THE POLICY
--------------------------------------------------------------------------------
GENERAL
Once the policy is issued, you may make certain changes. Some of these changes
will not require additional underwriting approval; some changes will. Certain
requests must be made in writing, as indicated below:
WRITTEN CHANGES REQUIRING UNDERWRITING APPROVAL:
- increases in the stated amount of insurance;
WRITTEN CHANGES NOT REQUIRING UNDERWRITING APPROVAL:
- decreases in the stated amount of insurance
- changing the death benefit option
- changes to the way your premiums are allocated
- changing the beneficiary (unless irrevocably named)
Written requests for changes should be sent to the Company c/o Andesa, TPA, Inc.
CHANGES IN STATED AMOUNT
After the first policy year, a Policy Owner may request in writing an increase
or decrease in the Policy's Stated Amount, provided that the Stated Amount after
any decrease may not be less than the minimum amount of $50,000. For purposes of
determining the Cost of Insurance Charge, a decrease in the Stated Amount will
reduce the Stated Amount in the following order:
1) against the most recent increase in the Stated Amount;
2) to other increases in the reverse order in which they occurred;
3) to the initial Stated Amount.
A decrease in Stated Amount in a substantially funded Policy may cause a cash
distribution that is includable in the gross income of the Policy Owner.
For increases in the Stated Amount, we may require a new application and
evidence of insurability as well as an additional premium payment. The effective
date of any increase will be shown on the new Policy Summary which we will send.
The effective date of any increase in the Stated Amount will generally be the
Deduction Date next following either the date of a new application or, if
different, the date requested by the Applicant. There is no additional charge
for a decrease in Stated Amount.
CHANGES IN DEATH BENEFIT OPTION
After the first policy year, if the Insured is alive you may change the Death
Benefit Option by sending a written request to the Company. The following
changes in Death Benefit Options are permissible:
Options 1-2
Options 2-1
If the Option is changed from Option 1 to Option 2 the Stated Amount will be
reduced by the amount of the Contract Value at the time of the change. If the
Option is changed from Option 2 to Option 1 the Stated Amount will be increased
by the amount of the Contract Value at the time of the Option change. There is
no other direct consequence of changing a Death Benefit option, except as
described under "Tax Treatment of Policy Benefits." However, the change could
affect future values of Net Amount At Risk. The cost of insurance charge which
is based on the Net Amount At Risk may be different in the future.
25
ADDITIONAL POLICY PROVISIONS
--------------------------------------------------------------------------------
ASSIGNMENT
The Policy may be assigned as collateral for a loan or other obligation. The
Company is not responsible for any payment made or action taken before receipt
of written notice of such assignment. Proof of interest must be filed with any
claim under a collateral assignment.
LIMIT ON RIGHT TO CONTEST AND SUICIDE EXCLUSION
The Company may not contest the validity of the Policy after it has been in
effect during the lifetime or the Insured for two years from the Issue Date.
Subject to state law, if the Policy is reinstated, the two-year period will be
measured from the date of reinstatement. Each requested increase in Stated
Amount is contestable for two years from its effective date (subject to state
law). In addition, if the Insured commits suicide during the two-year period
following issue, subject to state law, the Death Benefit will be limited to the
premiums paid less (i) the amount of any partial surrender, (ii) the amount of
any Indebtedness, and (iii) the amount of any unpaid Deduction Amount due.
During the two-year period following an increase, the Death Benefit in the case
of suicide will be limited to an amount equal to the Deduction Amount paid for
such increase.
MISSTATEMENT AS TO SEX AND AGE
If there has been a misstatement with regard to sex or age, benefits payable
will be adjusted to what the Policy would have provided with the correct
information. A misstatement with regard to sex or age in a substantially funded
Policy may cause a cash distribution that is includable in whole or in part in
the gross income of the Policy Owner.
VOTING RIGHTS
The Company is the legal owner of the underlying fund shares. However, we
believe that when an underlying fund solicits proxies, we are required to obtain
from policy owners who have chosen those investment options instructions on how
to vote those shares. When we receive those instructions, we will vote all of
the shares we own in proportion to those instructions. This will also include
any shares we own on our own behalf. If we determine that we no longer need to
comply with this voting method, we will vote on the shares in our own right.
OTHER MATTERS
--------------------------------------------------------------------------------
STATEMENTS TO POLICY OWNERS
We will maintain all records relating to the Separate Account and the Investment
Options. At least once each Policy Year, we will send you a statement containing
the following information:
- the Stated Amount and the Contract Value of the Policy (indicating the
number of Accumulation Units credited to the Policy in each Investment
Option and the corresponding Accumulation Unit Value);
- the date and amount of each premium payment;
- the date and amount of each Monthly Deduction;
- the amount of any outstanding Policy loan as of the date of the
statement, and the amount of any loan interest charged on the Loan
Account;
- the date and amount of any partial cash surrenders and the amount of any
partial surrender charges;
26
- the annualized cost of any supplemental benefits purchased under the
Policy; and
- a reconciliation since the last report of any change in Contract Value
and Cash Surrender Value.
We will also send any other reports required by any applicable state or federal
laws or regulations.
SUSPENSION OF VALUATION
We reserve the right to suspend or postpone the date of any payment of any
benefit or values associated with the Separate Account for any Valuation Period
(1) when the New York Stock Exchange ("Exchange") is closed; (2) when trading on
the Exchange is restricted; (3) when the SEC determines so that disposal of the
securities held in the Underlying Funds is not reasonably practicable or the
value of the Investment Option's net assets cannot be determined; or (4) during
any other period when the SEC, by order, so permits for the protection of
security holders.
DIVIDENDS
No dividends will be paid under the Policy.
MIXED AND SHARED FUNDING
It is conceivable that in the future it may not be advantageous for variable
life insurance and variable annuity Separate Accounts to invest in the
Investment Options simultaneously. This is called mixed funding. Certain
Underlying Funds may be available to variable products of other companies not
affiliated with Travelers. This is called "shared funding." Although we -- and
the Underlying Funds -- do not anticipate any disadvantages either to variable
life insurance or to variable annuity Policy Owners, the Underlying Funds'
Boards of Directors intend to monitor events to identify any material conflicts
that may arise and to determine what action, if any, should be taken. If any of
the Underlying Funds' Boards of Directors conclude that separate mutual funds
should be established for variable life insurance and variable annuity Separate
Accounts, the Company will bear the attendant expenses, but variable life
insurance and variable annuity Policy Owners would no longer have the economies
of scale resulting from a larger combined mutual fund. Please consult the
prospectuses of the Underlying Funds for additional information.
DISTRIBUTION
The Company intends to sell the Policies in all jurisdictions where it is
licensed to do business and where the Policy is approved. Any sales
representative or employee associated with a broker-dealer who sells the
Contracts will be qualified to sell variable life insurance under applicable
federal and state laws. Each broker-dealer is registered with the SEC under the
Securities Exchange Act of 1934, and all are members of the NASD. The Policy is
offered through both affiliated and non-affiliated broker-dealers.
The principal underwriter of the Policies is Travelers Distribution LLC, One
Tower Square, Hartford, Connecticut 06183, an affiliated broker-dealer.
The maximum commission payable by the Company for distribution to the
broker-dealer will not exceed 35% of the premium paid in the first Contract Year
or 20% of the premium paid in Contract Years 2-4. After Contract Year 4, the
maximum commission will not exceed 10% of the premiums paid plus 1.00% of the
current Contract Value. From time to time, the Company may pay or permit other
promotional incentives, in cash, credit or other compensation.
27
LEGAL PROCEEDINGS AND OPINION
There are no pending material legal proceedings affecting the Separate Account.
THE TRAVELERS INSURANCE COMPANY
In March 1997, a purported class action entitled Patterman v. The Travelers,
Inc., et al. was commenced in the Superior Court of Richmond County, Georgia,
alleging, among other things, violations of the Georgia RICO statute and other
state laws by an affiliate of the Company, Primerica Financial Services, Inc.
and certain of its affiliates. Plaintiffs seek unspecified compensatory and
punitive damages and other relief. From February 1998 through April 2000,
various motions for transfer of the lawsuit were heard and appealed. In April
2000, the matter was remanded to the Superior Court of Richmond County by the
Georgia Supreme Court. Also, in April 2000 defendants moved for summary
judgement on all counts of the complaint. Discovery commenced in May 2000.
Defendants intend to vigorously contest the litigation.
Legal matters in connection with the federal laws and regulations affecting the
issue and sale of the Contract described in this prospectus, as well at the
organization of the Company, its authority to issue variable annuity contracts
under Connecticut law and the validity of the forms of the variable annuity
contracts under Connecticut law, have been passed on by the Deputy General
Counsel of the Company.
EXPERTS
The consolidated financial statements and schedules of The Travelers Insurance
Company and subsidiaries as of December 31, 2000 and 1999, and for each of the
years in the three-year period ended December 31, 2000, have been included
herein and in the registration statement in reliance upon the reports of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements of the Travelers Fund UL III for Variable Life
Insurance as of December 31, 2000, and for the years ended December 31, 2000 and
the period from September 8, 1999 (date operations commenced) to December 31,
1999, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, upon the authority of said firm as experts in accounting and
auditing.
FEDERAL TAX CONSIDERATIONS
--------------------------------------------------------------------------------
GENERAL
The following is a general discussion of the federal income tax considerations
relating to the Policies. This discussion is based upon the Company's
understanding of the federal income tax laws as they are currently interpreted
by the Internal Revenue Service ("IRS"). These laws are complex, and tax results
may vary among individuals. A person contemplating the purchase of or the
exercise of elections under a Policy should seek competent tax advice.
IT SHOULD BE UNDERSTOOD THAT THIS IS NOT AN EXHAUSTIVE DISCUSSION OF ALL TAX
QUESTIONS THAT MIGHT ARISE UNDER THE POLICIES. NO ATTEMPT HAS BEEN MADE TO
ADDRESS ANY FEDERAL ESTATE TAX OR STATE AND LOCAL TAX CONSIDERATIONS WHICH MAY
ARISE IN CONNECTION WITH A POLICY. FOR COMPLETE INFORMATION, A QUALIFIED TAX
ADVISOR SHOULD BE CONSULTED.
THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF ANY POLICY AND THE FOLLOWING
TAX DISCUSSION IS BASED ON THE COMPANY'S UNDERSTANDING OF FEDERAL INCOME TAX
LAWS AS THEY ARE CURRENTLY INTERPRETED. THE COMPANY CANNOT GUARANTEE THAT THOSE
LAWS OR INTERPRETATIONS WILL REMAIN UNCHANGED.
28
TAX STATUS OF THE POLICY
DEFINITION OF LIFE INSURANCE
Section 7702 of the IRS Code ("Code") sets forth a definition of a life
insurance contract for federal tax purposes. Guidance as to how Section 7702 is
to be applied, however, is limited. Although the Secretary of the Treasury (the
"Treasury") is authorized to prescribe regulations implementing Section 7702,
and while proposed regulations and other limited, interim guidance has been
issued, final regulations have not been adopted. If a Policy were determined not
to be a life insurance contract for purposes of Section 7702, such Policy would
not provide the tax advantages normally provided by a life insurance policy.
With respect to a Policy issued on the basis of a standard rate class, the
Company believes (largely in reliance on IRS Notice 88-128 and the proposed
regulations under Section 7702) that such a Policy should meet the Section 7702
definition of a life insurance contract. There is less guidance on the
application of the rules with respect to a Policy that is issued on a
substandard basis (i.e., a premium class involving higher than standard
mortality risk). Thus, it is not clear whether such a Policy would satisfy
Section 7702, particularly if the Policy Owner pays the full amount of premiums
permitted under the Policy.
The Company reserves the right to make changes in the Policy if such changes are
deemed necessary to attempt to assure its qualification as a life insurance
contract for tax purposes.
DIVERSIFICATION
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund, the shares of which are owned by separate accounts
of insurance companies) underlying the Policy must be "adequately diversified"
in accordance with Treasury regulations in order for the Policy to qualify as
life insurance. The Treasury Department has issued regulations prescribing the
diversification requirements in connection with variable contracts. The Separate
Account, through the Investment Options, intends to comply with these
requirements. Although the Company does not control the Investment Options, it
intends to monitor the investments of the Investment Options to ensure
compliance with the diversification requirements prescribed by the Treasury
Department.
INVESTOR CONTROL
In certain circumstances, owners of variable life insurance contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contract. In those circumstances, income
and gains from the separate account assets would be includable in the variable
contract owner's gross income each year. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
has also announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the Policy Owner), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular Investment Options without being treated as owners of
the underlying assets." As of the date of this prospectus, no such guidance has
been issued.
The ownership rights under the Policy are similar to, but different in certain
respects from, those described by the IRS in rulings in which it determined that
the policy owners received the desired tax benefits because they were not owners
of separate account assets. For example, a Policy Owner of this Policy has the
choice of more investment options to which to allocate premium payments and cash
values and may be able to transfer among investment options more frequently than
in such rulings. In addition, the Policy Owner may have the choice of certain
investment
29
options which may be more similar to each other in their investment objective
and policies than in such rulings. These differences could result in the Policy
Owner being treated as the owner of the assets of the Separate Account. In
addition, the Company does not know what standard will be set forth in the
regulations or rulings which the Treasury is expected to issue, nor does the
Company know if such guidance will be issued. The Company therefore reserves the
right to modify the Policy as necessary to attempt to prevent the Policy Owner
from being considered the owner of a pro rata share of the assets of the
Separate Account.
The remaining tax discussion assumes that the Policy qualifies as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL
The Company believes that the proceeds and Contract value increases of a Policy
should be treated in a manner consistent with a fixed-benefit life insurance
policy for federal income tax purposes. Thus, the Death Benefit under the Policy
should be excludable from the gross income of the Beneficiary.
In addition, the Policy Owner will generally not be deemed to be in constructive
receipt of the Contract Value, including increments thereof, until there is a
distribution. The tax consequences of distribution from, and loans taken from or
secured by, a Policy depend on whether the Policy is classified as a "Modified
Endowment Contract." However, whether a Policy is or is not a Modified Endowment
Contract, upon a complete surrender or lapse of a Policy or when benefits are
paid at a Policy's maturity date, if the amount received plus the amount of
indebtedness exceeds the total investment in the Policy, the excess will
generally be treated as ordinary income subject to tax.
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's Death Benefit Option, a Policy loan, a partial withdrawal, a surrender,
a change in ownership, or an assignment of the Policy may have federal income
tax consequences. In addition, federal, state and local transfer, and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Owner or beneficiary. Therefore, it is important to check
with a tax adviser prior to the purchase of a policy.
MODIFIED ENDOWMENT CONTRACTS
A modified endowment contract is defined under tax law as any policy that
satisfies the present legal definition of a life insurance contract but which
fails to satisfy a 7-pay test. This failure could occur with contracts entered
into after June 21, 1988, or with certain older contracts materially changed
after that date. A Section 1035 exchange of an older contract into a contract
after that date will not by itself cause the new contract to be a modified
endowment contract if the older contract had not become one prior to the
exchange. However, the new contract must be re-tested under the 7-pay test
rules.
A contract fails to satisfy the 7-pay test if the cumulative amount of premiums
paid under the contract at any time during the first seven contract years
exceeds the sum of the net level premiums that would have been paid on or before
such time had the contract provided for paid-up future benefits after the
payment of seven level annual premiums. If a material change in the contract
occurs either during the first seven contract years, or later, a new seven-year
testing period is begun. A decrease to Stated Amount made in the first seven
years will cause a retest of the cumulative amount of premiums. Decreases made
after the first seven contract years are not considered a material change,
provided no other material changes have occurred prior. Tax regulations or other
guidance will be needed to fully define those transactions which are material
changes. The Company has established safeguards for monitoring whether a
contract may become a modified endowment contract.
Loans and partial withdrawals from, as well as collateral assignments of,
Policies that are modified endowment contracts will be treated as distributions
to the Policy Owner for tax purposes. All pre-
30
death distributions (including loans, partial withdrawals and collateral
assignments) from these Policies will be included in gross income on an
income-first basis to the extent of any income in the Policy (the cash value
less the Policy Owner's investment in the Policy) immediately before the
distribution.
The law also imposes a 10% penalty tax on pre-death distributions (including
loans, collateral assignments, partial withdrawals and complete surrenders) from
modified endowment contracts to the extent they are included in income, unless a
specific exception to the penalty applies. The penalty does not apply to amounts
which are distributed on or after the date on which the taxpayer attains age
59 1/2, because the taxpayer is disabled, or as substantially equal periodic
payments over the taxpayer's life (or life expectancy) or over the joint lives
(or joint life expectancies) of the taxpayer and his or her beneficiary.
Furthermore, if the loan interest is capitalized by adding the amount due to the
balance of the loan, the amount of the capitalized interest will be treated as
an additional distribution subject to income tax as well as the 10% penalty tax,
if applicable, to the extent of income in the Policy.
The Death Benefit of a modified endowment contract remains excludable from the
gross income of the Beneficiary to the extent described above in "Tax
Consequences of Life Insurance Contracts." Furthermore, no part of the
investment growth of the Contract Value of a modified endowment contract is
includable in the gross income of the Contract Owner unless the contract
matures, is distributed or partially surrendered, is pledged, collaterally
assigned, or borrowed against, or otherwise terminates with income in the
contract prior to death. A full surrender of the contract after age 59 1/2 will
have the same tax consequences as noted above in "Tax Consequences of Life
Insurance Contracts."
EXCHANGES
Any Policy issued in exchange for a modified endowment contract will be subject
to the tax treatment accorded to modified endowment contracts. However, the
Company believes that any Policy received in exchange for a life insurance
contract that is not a modified endowment contract will generally not be treated
as a modified endowment contract if the face amount of the Policy is greater
than or equal to the death benefit of the policy being exchanged. The payment of
any premiums at the time of or after the exchange may, however, cause the Policy
to become a modified endowment contract. A prospective purchaser should consult
a qualified tax advisor before authorizing the exchange of his or her current
life insurance contract for a Policy.
AGGREGATION OF MODIFIED ENDOWMENT CONTRACTS
In the case of a pre-death distribution (including a loan, partial withdrawal,
collateral assignment or complete surrender) from a Policy that is treated as a
modified endowment contract, a special aggregation requirement may apply for
purposes of determining the amount of the income on the Policy. Specifically, if
the Company or any of its affiliates issues to the same Policy Owner more than
one modified endowment contract within a calendar year, then for purposes of
measuring the income on the Policy with respect to a distribution from any of
those Policies, the income on the Policy for all those Policies will be
aggregated and attributed to that distribution.
POLICIES WHICH ARE NOT MODIFIED ENDOWMENT CONTRACTS
Unlike loans from modified endowment contracts, a loan from a Policy that is not
a modified endowment contract will be considered indebtedness of the Owner and
no part of a loan will constitute income to the Owner.
Pre-death distributions from a Policy that is not a modified endowment contract
will generally not be included in gross income to the extent that the amount
received does not exceed the Policy Owner's investment in the Policy. (An
exception to this general rule may occur in the case of a decrease or change
that reduces the benefits provided under a Policy in the first 15 years after
the Policy is issued and that results in a cash distribution to the Policy
Owner. Such a cash distribution may be taxed in whole or in part as ordinary
income to the extent of any gain in the Policy.)
31
Further, the 10% penalty tax on pre-death distributions does not apply to
Policies that are not modified endowment contracts.
Certain changes to Policies that are not modified endowment contracts may cause
such Policies to be treated as modified endowment contracts. A Policy Owner
should therefore consult a tax advisor before effecting any change to a Policy
that is not a modified endowment contract.
TREATMENT OF LOAN INTEREST
If there is any borrowing against the Policy, the interest paid on loans may not
be tax deductible.
THE COMPANY'S INCOME TAXES
The Company is taxed as a life insurance company under federal income tax law.
Presently, the Company does not expect to incur any income tax or the earnings
or the realized capital gains attributable to Fund UL III. However, the Company
may assess a charge against the Investment Options for federal income taxes
attributable to those accounts in the event that the Company incurs income or
capital gains or other tax liability attributable to Fund UL III under future
tax law.
THE COMPANY
--------------------------------------------------------------------------------
The Travelers Insurance Company (the "Company") is a stock insurance company
chartered in 1864 in Connecticut and has been engaged in the insurance business
since that time. The Company writes individual life insurance and individual and
group annuity contracts on a non-participating basis, and acts as depositor for
the Separate Account assets. The Company is licensed to conduct life insurance
business in all states of the United States, the District of Columbia, Puerto
Rico, Guam, the U.S. and British Virgin Islands, and the Bahamas. The Company's
obligations as depositor for Fund UL III may not be transferred without notice
to and consent of Policy Owners.
The Company is an indirect wholly owned subsidiary of Citigroup Inc., a
financial services holding company. The Company's principal executive offices
are located at One Tower Square, Hartford, Connecticut 06183, telephone number
(860) 277-0111.
The Company is subject to Connecticut law governing insurance companies and is
regulated and supervised by the Connecticut Commissioner of Insurance. An annual
statement in a prescribed form must be filed with the Commissioner on or before
March 1 in each year covering the operations of the Company for the preceding
year and its financial condition on December 31 of such year. The Company's
books and assets are subject to review or examination by the Commissioner, and a
full examination of its operations is conducted at least once every four years.
In addition, the Company is subject to the insurance laws and regulations of any
jurisdiction in which it sells its insurance Policies, as well as to various
federal and state securities laws and regulations.
MANAGEMENT
--------------------------------------------------------------------------------
DIRECTORS OF THE TRAVELERS INSURANCE COMPANY
The following are the Directors and Executive Officers of The Travelers
Insurance Company. Unless otherwise indicated, the principal business address
for all individuals is the Company's Home Office at One Tower Square, Hartford,
Connecticut 06183. References to Citigroup include prior to December 31, 1993,
Primerica Corporation or its predecessors, and prior to October 8, 1998,
Travelers Group Inc.
32
<Table>
<Caption>
DIRECTOR
NAME AND POSITION SINCE PRINCIPAL BUSINESS
----------------- -------- ------------------
George C. Kokulis.......... 1996 President and Chief Executive Officer since April
2000,
Director Executive Vice President (7/1999-3/2000), Senior Vice
President (1995-1999), Vice President (1993-1995) of
The Travelers Insurance Company.
William R. Hogan........... 2001 Senior Vice President of The Travelers Insurance
Director Company since June 2000; Vice President and Chief
Actuary (1997-2000), Second Vice President and Actuary
(1996-1997), Actuary (1991-1996), Assistant Actuary
(1988-1991) of The Travelers Insurance Company.
Glenn D. Lammey............ 2000 Executive Vice President since May 2000, and Chief
Director Financial Officer, Chief Accounting Officer and
Controller since March 2000 of The Travelers Insurance
Company; Executive Vice President, Claim Services
(1997-2000), Senior Vice President (1996-1997) of
Travelers Property Casualty Corp.; Vice President and
Chief Financial Officer (1992) Personal Lines of The
Travelers Insurance Company.
Marla Berman Lewitus....... 2000 Senior Vice President and General Counsel since August
Director 1999 of The Travelers Insurance Company; Associate
General Counsel (1998-1999), Assistant General Counsel
(1995-1998), Senior Counsel (1991-1995) of Citigroup
Inc.
</Table>
SENIOR OFFICERS OF THE TRAVELERS INSURANCE COMPANY
The following are the Senior Officers of The Travelers Insurance Company other
than the Directors listed above, as of the date of this Prospectus. Unless
otherwise indicated, the principal business address for all individuals listed
is One Tower Square, Hartford, Connecticut 06183.
<Table>
<Caption>
NAME POSITION WITH INSURANCE COMPANY
---- -------------------------------
Stuart Baritz........................ Senior Vice President
William H. Heyman*................... Senior Vice President
Madelyn Lankton...................... Senior Vice President
Brendan M. Lynch..................... Senior Vice President
Warren H. May........................ Senior Vice President
Laura Pantaleo....................... Senior Vice President
Kathleen A. Preston.................. Senior Vice President
Robert J. Price*..................... Senior Vice President
David A. Tyson....................... Senior Vice President
F. Denney Voss*...................... Senior Vice President
</Table>
---------------
* Principal business address: 399 Park Avenue, New York, New York 10043
EXAMPLE OF POLICY CHARGES
--------------------------------------------------------------------------------
The following chart illustrates the Monthly Deduction Amounts that would apply
under a Policy based on the assumptions listed below. Monthly Deduction Amounts
generally will be higher for an Insured who is older than the assumed Insured,
and lower for an Insured who is younger (assuming the Insureds have the same
risk classification). Cost of insurance rates go up each year as the Insured
becomes a year older.
33
Male, Age 45
Preferred
Non-smoker
Annual Premium: $25,000 for seven years
Hypothetical Gross Annual Investment
Rate of Return: 8%
Face Amount: $436,577
Level Death Benefit Option
Current Charges
Number of Lives in Case: 1
<Table>
<Caption>
TOTAL MONTHLY DEDUCTION
FOR THE POLICY YEAR
---------------------------
COST OF
POLICY CUMULATIVE INSURANCE ADMINISTRATIVE PER $1,000
YEAR PREMIUMS SALES LOAD CHARGES CHARGES CHARGE
------ ---------- ---------- --------- -------------- ----------
1... $ 25,000 $3,000 $267 $688 $524
2... $ 50,000 $3,000 $371 $688 $524
3... $ 75,000 $3,000 $457 $688 $524
5... $125,000 $3,000 $453 $688 $524
10.. $175,000 $ 0 $848 $688 $524
</Table>
Hypothetical results shown above are illustrative only and are based on the
Hypothetical Gross Annual Investment Rate of Return shown above. This
Hypothetical Gross Annual Investment Rate of Return should not be deemed to be a
representation of past or future investment results. Actual investment results
may be more or less than those shown. No representations can be made that the
hypothetical rates assumed can be achieved for any one year or sustained over a
period of time.
ILLUSTRATIONS
--------------------------------------------------------------------------------
The following pages are intended to illustrate how the Contract Value, Surrender
Value and Death Benefit can change over time for Policies issued to a 45 year
old male. The illustrations assume that premiums are paid as indicated, no
Policy loans are made, no increases or decreases to the Stated Amount are
requested, no partial surrenders are made, and no charges for transfers between
funds are incurred.
For all illustrations, there are two pages of values. One page illustrates the
assumption that the maximum Guaranteed Cost of Insurance Rates, the monthly
administrative charge, monthly load per $1,000 of stated amount, mortality and
expense risk charge, and sales expense charge allowable under the Policy are
charged in all years. The other page illustrates the assumption that the current
scale of Cost of Insurance Rates and other charges are charged in all years. The
Cost of Insurance Rates charged vary by age, sex and underwriting classification
and number of years from Policy issue, and the per $1,000 load per Stated Amount
varies by age, amount of insurance and smoker/non-smoker classification for
current charges. The current illustrations reflect a deduction from each Target
Premium of 12% for years 1-7 and 5.5% thereafter. The current illustrations
reflect a deduction on all excess premium of 8% in years 1-7, and 5.5%
thereafter.
The guaranteed illustrations reflect a deduction from each Target Premium of 15%
in all years.
The values shown in these illustrations vary according to assumptions used for
charges, and gross rates of investment returns. For the first twenty-five policy
years the current charges consist of 0.55% mortality and expense risk charge and
0.25% thereafter. In all policy years, the guaranteed charges consist of a 0.75%
mortality and expense risk charge. For all policy years the current and
guaranteed charges consist of 0.86% for Investment Option Expenses.
The charge for Investment Option expenses reflected in the illustrations assumes
that Contract Value is allocated equally among all Investment Options and that
no Policy Loans are outstanding, and is an average of the investment advisory
fees and other expenses charged by each of the Investment Options during the
most recent audited calendar year. The Investment Option expenses for some of
the Underlying Funds reflect an expense reimbursement agreement currently in
effect, as shown in the Policy prospectus summary. Although these reimbursement
arrangements
34
are expected to continue in subsequent years, the effect of discontinuance could
be higher expenses charged to Policy Owners.
After deduction of these amounts, the illustrated gross annual investment rates
of return of 0%, 6%, and 12% correspond to approximate net annual rates of
-1.41%, 4.59% and 10.59%, respectively on a current basis for years 1-25; and to
approximate net annual rates of -1.11%; 4.89%; 10.89% thereafter. On a
guaranteed basis the annual gross investment rates of 0%, 6.0% and 12%
correspond to approximate net annual rates of -1.61%; 4.39% and 10.39% in all
years.
The actual charges under a Policy for expenses of the Investment Options will
depend on the actual allocation of Contract Value and may be higher or lower
than those illustrated.
The illustrations do not reflect any charges for federal income taxes against
Fund UL III, since the Company is not currently deducting such charges from Fund
UL III. However, such charges may be made in the future, and in that event, the
gross annual investment rates of return would have to exceed 0%, 6% and 12% by
an amount sufficient to cover the tax charges in order to produce the Death
Benefits, Contract Values and Cash Surrender Values illustrated.
Upon request, the Company will provide a comparable illustration based upon the
proposed Insured's age, sex, underwriting classification, the specified
insurance benefits, and the premium requested. The illustration will show
average fund expenses or, if requested, actual fund expenses. The hypothetical
gross annual investment return assumed in such an illustration will not exceed
12%.
35
$25,000 ANNUAL PREMIUM FOR 7 YEARS
$436,577 SPECIFIED AMOUNT CASH VALUE ACCUMULATION TEST
MALE GUARANTEED ISSUE/NON TOBACCO AGE 45
DEATH BENEFIT OPTION 1 GUARANTEED VALUES
<Table>
<Caption>
PREMIUM 0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PLUS ------------------------------ ------------------------------ ---------------------------------
POLICY INTEREST CONTRACT SURRENDER DEATH CONTRACT SURRENDER DEATH CONTRACT SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ -------- -------- --------- ------- -------- --------- ------- --------- --------- ---------
1 26,250 17,364 17,364 436,577 18,526 18,526 436,577 19,690 19,690 436,577
2 53,813 34,375 34,375 436,577 37,798 37,798 436,577 41,366 41,366 436,577
3 82,753 51,041 51,041 436,577 57,860 57,860 436,577 65,255 65,255 436,577
4 113,141 67,370 67,370 436,577 78,758 78,758 436,577 91,611 91,611 436,577
5 145,048 83,361 83,361 436,577 100,534 100,534 436,577 120,713 120,713 436,577
6 178,550 99,017 99,017 436,577 123,240 123,240 436,577 152,882 152,882 436,577
7 213,728 114,329 114,329 436,577 146,921 146,921 436,577 188,458 188,458 447,001
8 224,414 108,215 108,215 436,577 149,270 149,270 436,577 204,048 204,048 470,316
9 235,635 101,884 101,884 436,577 151,506 151,506 436,577 220,962 220,962 495,140
10 247,417 95,300 95,300 436,577 153,604 153,604 436,577 239,298 239,298 521,556
11 259,787 88,429 88,429 436,577 155,539 155,539 436,577 259,165 259,165 549,653
12 272,777 81,238 81,238 436,577 157,289 157,289 436,577 280,687 280,687 579,526
13 286,416 73,691 73,691 436,577 158,828 158,828 436,577 303,996 303,996 611,276
14 300,736 65,747 65,747 436,577 160,128 160,128 436,577 329,234 329,234 645,008
15 315,773 57,350 57,350 436,577 161,149 161,149 436,577 356,547 356,547 680,834
16 331,562 48,426 48,426 436,577 161,836 161,836 436,577 386,078 386,078 718,869
17 348,140 38,875 38,875 436,577 162,119 162,119 436,577 417,969 417,969 759,235
18 365,547 28,584 28,584 436,577 161,914 161,914 436,577 452,363 452,363 802,059
19 383,824 17,424 17,424 436,577 161,127 161,127 436,577 489,409 489,409 847,472
20 403,015 5,251 5,251 436,577 159,654 159,654 436,577 529,268 529,268 895,613
21 423,166 0 0 0 157,933 157,933 436,577 572,674 572,674 947,539
22 444,325 0 0 0 155,344 155,344 436,577 619,334 619,334 1,002,533
23 466,541 0 0 0 151,762 151,762 436,577 669,484 669,484 1,060,764
24 489,868 0 0 0 147,024 147,024 436,577 723,361 723,361 1,122,406
25 514,361 0 0 0 140,912 140,912 436,577 781,185 781,185 1,187,639
26 540,079 0 0 0 133,135 133,135 436,577 843,149 843,149 1,256,644
27 567,083 0 0 0 123,315 123,315 436,577 909,413 909,413 1,329,601
28 595,437 0 0 0 110,964 110,964 436,577 980,102 980,102 1,406,696
29 625,209 0 0 0 95,475 95,475 436,577 1,055,330 1,055,330 1,488,115
30 656,470 0 0 0 76,136 76,136 436,577 1,135,256 1,135,256 1,638,791
</Table>
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed as a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors, including the
investment allocations made by an owner and prevailing rates. The death benefit
and cash value would be different from those shown if the actual rate rates of
return averaged 0%, 6% and 12% over a period of years but also fluctuated above
or below those averages for individual policy years. No representation can be
made by the company that these hypothetical rates of returns can be achieved for
any one year or sustained over any period of time.
36
$25,000 ANNUAL PREMIUM FOR 7 YEARS
$436,577 SPECIFIED AMOUNT CASH VALUE ACCUMULATION TEST
MALE GUARANTEED ISSUE/NON TOBACCO AGE 45
DEATH BENEFIT OPTION 1 CURRENT VALUES
<Table>
<Caption>
PREMIUM 0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PLUS ------------------------------ ------------------------------ ---------------------------------
POLICY INTEREST CONTRACT SURRENDER DEATH CONTRACT SURRENDER DEATH CONTRACT SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ -------- -------- --------- ------- -------- --------- ------- --------- --------- ---------
1 26,250 20,132 22,132 436,577 21,402 23,402 436,577 22,673 24,673 436,577
2 53,813 39,838 42,838 436,577 43,642 46,642 436,577 47,600 50,600 436,577
3 82,753 59,139 61,764 436,577 66,778 69,028 436,577 75,046 77,296 436,577
4 113,141 78,086 79,586 436,577 90,902 91,402 436,577 105,335 105,835 436,577
5 145,048 96,804 98,679 436,577 116,184 116,184 436,577 138,899 138,899 436,577
6 178,550 115,198 116,698 436,577 142,588 142,588 436,577 176,006 176,006 436,577
7 213,728 133,304 134,179 436,577 170,202 170,202 436,577 216,917 216,917 514,505
8 224,414 129,386 129,386 436,577 176,026 176,026 436,577 237,726 237,726 547,940
9 235,635 125,428 125,428 436,577 182,063 182,063 436,577 260,609 260,609 583,982
10 247,417 121,399 121,399 436,577 188,300 188,300 436,577 285,744 285,744 622,787
11 259,787 117,007 117,007 436,577 194,522 194,522 436,577 313,024 313,024 663,881
12 272,777 112,432 112,432 436,577 200,888 200,888 436,577 342,862 342,862 707,899
13 286,416 107,625 107,625 436,577 207,382 207,382 436,577 375,450 375,450 754,956
14 300,736 102,567 102,567 436,577 214,014 214,014 436,577 411,037 411,037 805,270
15 315,773 97,240 97,240 436,577 220,795 220,795 436,577 449,897 449,897 859,089
16 331,562 91,412 91,412 436,577 227,602 227,602 436,577 492,061 492,061 916,208
17 348,140 85,254 85,254 436,577 234,574 234,574 436,577 538,073 538,073 977,403
18 365,547 78,725 78,725 436,577 241,716 241,716 436,577 588,264 588,264 1,043,018
19 383,824 71,776 71,776 436,577 249,038 249,038 436,577 642,993 642,993 1,113,420
20 403,015 64,349 64,349 436,577 256,544 256,544 436,577 702,639 702,639 1,188,987
21 423,166 56,281 56,281 436,577 264,486 264,486 437,615 767,307 767,307 1,269,576
22 444,325 48,015 48,015 436,577 272,812 272,812 441,607 838,291 838,291 1,356,964
23 466,541 39,004 39,004 436,577 281,290 281,290 445,690 915,483 915,483 1,450,537
24 489,868 29,138 29,138 436,577 289,916 289,916 449,850 999,374 999,374 1,550,683
25 514,361 18,290 18,290 436,577 298,685 298,685 454,093 1,090,498 1,090,498 1,657,889
26 540,079 10,860 10,860 436,577 310,135 310,135 462,230 1,199,060 1,199,060 1,787,100
27 567,083 2,742 2,742 436,577 321,964 321,964 470,725 1,318,150 1,318,150 1,927,192
28 595,437 0 0 0 334,184 334,184 479,639 1,448,761 1,448,761 2,079,341
29 625,209 0 0 0 346,802 346,802 489,023 1,591,962 1,591,962 2,244,818
30 656,470 0 0 0 359,821 359,821 519,418 1,748,898 1,748,898 2,524,612
</Table>
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed as a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors, including the
investment allocations made by an owner and prevailing rates. The death benefit
and cash value would be different from those shown if the actual rate rates of
return averaged 0%, 6% and 12% over a period of years but also fluctuated above
or below those averages for individual policy years. No representation can be
made by the company that these hypothetical rates of returns can be achieved for
any one year or sustained over any period of time.
37
$25,000 ANNUAL PREMIUM FOR 7 YEARS
$436,577 SPECIFIED AMOUNT CASH VALUE ACCUMULATION TEST
MALE PREFERRED/NON TOBACCO AGE 45
DEATH BENEFIT OPTION 1 GUARANTEED VALUES
<Table>
<Caption>
PREMIUM 0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PLUS ------------------------------ ------------------------------ ---------------------------------
POLICY INTEREST CONTRACT SURRENDER DEATH CONTRACT SURRENDER DEATH CONTRACT SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ -------- -------- --------- ------- -------- --------- ------- --------- --------- ---------
1 26,250 17,364 17,364 436,577 18,526 18,526 436,577 19,690 19,690 436,577
2 53,813 34,375 34,375 436,577 37,798 37,798 436,577 41,366 41,366 436,577
3 82,753 51,041 51,041 436,577 57,860 57,860 436,577 65,255 65,255 436,577
4 113,141 67,370 67,370 436,577 78,758 78,758 436,577 91,611 91,611 436,577
5 145,048 83,361 83,361 436,577 100,534 100,534 436,577 120,713 120,713 436,577
6 178,550 99,017 99,017 436,577 123,240 123,240 436,577 152,882 152,882 436,577
7 213,728 114,329 114,329 436,577 146,921 146,921 436,577 188,458 188,458 447,001
8 224,414 108,215 108,215 436,577 149,270 149,270 436,577 204,048 204,048 470,316
9 235,635 101,884 101,884 436,577 151,506 151,506 436,577 220,962 220,962 495,140
10 247,417 95,300 95,300 436,577 153,604 153,604 436,577 239,298 239,298 521,556
11 259,787 88,429 88,429 436,577 155,539 155,539 436,577 259,165 259,165 549,653
12 272,777 81,238 81,238 436,577 157,289 157,289 436,577 280,687 280,687 579,526
13 286,416 73,691 73,691 436,577 158,828 158,828 436,577 303,996 303,996 611,276
14 300,736 65,747 65,747 436,577 160,128 160,128 436,577 329,234 329,234 645,008
15 315,773 57,350 57,350 436,577 161,149 161,149 436,577 356,547 356,547 680,834
16 331,562 48,426 48,426 436,577 161,836 161,836 436,577 386,078 386,078 718,869
17 348,140 38,875 38,875 436,577 162,119 162,119 436,577 417,969 417,969 759,235
18 365,547 28,584 28,584 436,577 161,914 161,914 436,577 452,363 452,363 802,059
19 383,824 17,424 17,424 436,577 161,127 161,127 436,577 489,409 489,409 847,472
20 403,015 5,251 5,251 436,577 159,654 159,654 436,577 529,268 529,268 895,613
21 423,166 0 0 0 157,933 157,933 436,577 572,674 572,674 947,539
22 444,325 0 0 0 155,344 155,344 436,577 619,334 619,334 1,002,533
23 466,541 0 0 0 151,762 151,762 436,577 669,484 669,484 1,060,764
24 489,868 0 0 0 147,024 147,024 436,577 723,361 723,361 1,122,406
25 514,361 0 0 0 140,912 140,912 436,577 781,185 781,185 1,187,639
26 540,079 0 0 0 133,135 133,135 436,577 843,149 843,149 1,256,644
27 567,083 0 0 0 123,315 123,315 436,577 909,413 909,413 1,329,601
28 595,437 0 0 0 110,964 110,964 436,577 980,102 980,102 1,406,696
29 625,209 0 0 0 95,475 95,475 436,577 1,055,330 1,055,330 1,488,115
30 656,470 0 0 0 76,136 76,136 436,577 1,135,256 1,135,256 1,638,791
</Table>
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed as a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors, including the
investment allocations made by an owner and prevailing rates. The death benefit
and cash value would be different from those shown if the actual rate rates of
return averaged 0%, 6% and 12% over a period of years but also fluctuated above
or below those averages for individual policy years. No representation can be
made by the company that these hypothetical rates of returns can be achieved for
any one year or sustained over any period of time.
38
$25,000 ANNUAL PREMIUM FOR 7 YEARS
$436,577 SPECIFIED AMOUNT CASH VALUE ACCUMULATION TEST
MALE PREFERRED/NON TOBACCO AGE 45
DEATH BENEFIT OPTION 1 CURRENT VALUES
<Table>
<Caption>
PREMIUM 0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PLUS ------------------------------ ------------------------------ ---------------------------------
POLICY INTEREST CONTRACT SURRENDER DEATH CONTRACT SURRENDER DEATH CONTRACT SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ -------- -------- --------- ------- -------- --------- ------- --------- --------- ---------
1 26,250 20,221 22,221 436,577 21,493 23,493 436,577 22,767 24,767 436,577
2 53,813 40,050 43,050 436,577 43,865 46,865 436,577 47,835 50,835 436,577
3 82,753 59,505 62,130 436,577 67,171 69,421 436,577 75,467 77,717 436,577
4 113,141 78,624 80,124 436,577 91,491 91,991 436,577 105,979 106,479 436,577
5 145,048 97,501 99,376 436,577 116,966 116,966 436,577 139,772 139,772 436,577
6 178,550 116,069 117,569 436,577 143,581 143,581 436,577 177,136 177,136 436,577
7 213,728 134,354 135,229 436,577 171,417 171,417 436,577 218,358 218,358 517,922
8 224,414 130,632 130,632 436,577 177,487 177,487 436,577 239,535 239,535 552,110
9 235,635 126,893 126,893 436,577 183,794 183,794 436,577 262,856 262,856 589,018
10 247,417 123,112 123,112 436,577 190,335 190,335 436,577 288,517 288,517 628,831
11 259,787 119,071 119,071 436,577 196,953 196,953 436,577 316,503 316,503 671,258
12 272,777 114,907 114,907 436,577 203,772 203,772 436,577 347,199 347,199 716,852
13 286,416 110,582 110,582 436,577 210,785 210,785 436,577 380,831 380,831 765,777
14 300,736 106,084 106,084 436,577 218,004 218,004 436,577 417,678 417,678 818,281
15 315,773 101,399 101,399 436,577 225,444 225,444 436,577 458,046 458,046 874,648
16 331,562 96,359 96,359 436,577 233,024 233,024 436,577 502,062 502,062 934,830
17 348,140 91,090 91,090 436,577 240,850 240,850 437,501 550,260 550,260 999,541
18 365,547 85,565 85,565 436,577 248,914 248,914 441,335 603,021 603,021 1,069,183
19 383,824 79,750 79,750 436,577 257,211 257,211 445,391 660,761 660,761 1,144,188
20 403,015 73,605 73,605 436,577 265,742 265,742 449,681 723,925 723,925 1,225,007
21 423,166 67,155 67,155 436,577 274,815 274,815 454,705 792,887 792,887 1,311,899
22 444,325 60,588 60,588 436,577 284,297 284,297 460,200 868,718 868,718 1,406,216
23 466,541 53,510 53,510 436,577 294,029 294,029 465,874 951,539 951,539 1,507,666
24 489,868 45,848 45,848 436,577 304,009 304,009 471,716 1,041,953 1,041,953 1,616,752
25 514,361 37,521 37,521 436,577 314,239 314,239 477,738 1,140,619 1,140,619 1,734,089
26 540,079 31,747 31,747 436,577 326,963 326,963 487,312 1,256,673 1,256,673 1,872,967
27 567,083 25,504 25,504 436,577 340,164 340,164 497,335 1,384,330 1,384,330 2,023,951
28 595,437 18,740 18,740 436,577 353,857 353,857 507,874 1,524,732 1,524,732 2,188,378
29 625,209 11,389 11,389 436,577 368,055 368,055 518,993 1,679,111 1,679,111 2,367,705
30 656,470 3,369 3,369 436,577 382,771 382,771 552,547 1,848,805 1,848,805 2,668,831
</Table>
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed as a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors, including the
investment allocations made by an owner and prevailing rates. The death benefit
and cash value would be different from those shown if the actual rate rates of
return averaged 0%, 6% and 12% over a period of years but also fluctuated above
or below those averages for individual policy years. No representation can be
made by the company that these hypothetical rates of returns can be achieved for
any one year or sustained over any period of time.
39
APPENDIX A
PERFORMANCE INFORMATION
--------------------------------------------------------------------------------
From time to time, we may show investment performance for the investment
options, the percentage change in the value of an Accumulation Unit based on the
performance of the Investment Option over a period of time, determined by
dividing the increase (decrease) in value for that unit by the Accumulation Unit
Value at the beginning of the period.
For Investment Options of Fund UL III that invest in underlying funds that were
in existence before the Investment Option became available under the Policy,
average annual rates of return may include periods prior to the inception of the
Investment Option. Performance calculations for Investment Options with
pre-existing Investment Options will be calculated by adjusting the actual
returns of the Investment Options to reflect the charges that would have been
assessed under the Investment Options had the Investment Option been available
under Fund during the period shown.
The following performance information represents the percentage change in the
value of an Accumulation Unit of the Investment Options for the periods
indicated, and reflects all expenses of the Investment Options. The chart
reflects the guaranteed maximum .75% mortality and expense risk charge. The
rates of return do not reflect the front-end sales charge (which is deducted
from premium payments) nor do they reflect Monthly Deduction Amounts. These
charges would reduce the average annual return reflected.
The surrender charges and Monthly Deduction Amounts for a hypothetical Insured
are depicted in the Example following the Rates of Returns. See "Charges and
Deductions" for more information regarding fees assessed under the Policy. For
illustrations of how these charges affect Contract Values and Death Benefits,
see "Illustrations." The performance information described in this prospectus
may be used from time to time in advertisement for the Policy, subject to
National Association of Securities Dealers, Inc. ("NASD") and applicable state
approval and guidelines.
The table below shows the net annual rates of return for accumulation units of
investment options available through the Variable Life Policy.
A-1
CORPORATE OWNED VARIABLE UNIVERSAL LIFE
PERFORMANCE UPDATE AS OF DECEMBER 31, 2000
<Table>
<Caption>
AVERAGE ANNUAL RETURNS
INCEPTION --------------------------------------------------------------- SINCE
INVESTMENT OPTION DATE MO QTR YTD 1 YR 3 YR 5 YR 10 YR INCEPTION
----------------- --------- ------ ------- ------- ------- ------ ------ ------ ---------
AIM Capital Appreciation
Portfolio....................... 10-Oct-95 -4.05% -27.19% -17.28% -17.28% 11.07% 11.70% -- 10.31%
Alliance Growth Portfolio......... 16-Jun-94 -1.29% -15.97% -21.41% -21.41% 9.87% 16.94% -- 18.79%
Alliance Premier Growth Portfolio
- Class B....................... 26-Jun-92 -0.62% -14.06% -17.30% -17.30% 16.66% 20.71% 19.27%
Capital Appreciation Fund
(Janus)......................... 31-Dec-85 -7.20% -22.21% -26.91% -26.91% 21.59% 23.48% 20.66% 14.75%
Credit Suisse Warburg Pincus
Emerging Markets Portfolio...... 31-Dec-97 4.08% -11.61% -32.23% -32.23% 0.65% -- -- 0.65%
Delaware Investments REIT
Series.......................... 04-May-98 5.95% 5.92% 29.78% 29.78% -- -- -- 4.90%
Deutsche VIT EAFE Equity Index
Fund............................ 22-Aug-97 2.80% -4.72% -17.78% -17.78% 8.04% -- -- 6.64%
Deutsche VIT Small Cap Index
Fund............................ 25-Aug-97 3.61% -9.63% -8.86% -8.86% 1.85% -- -- -0.02%
Dreyfus Appreciation Portfolio.... 05-Apr-93 -1.51% -3.53% -2.83% -2.83% 11.65% 17.19% -- 16.16%
Dreyfus Small Cap Portfolio....... 31-Aug-90 2.38% -6.01% 8.09% 8.09% 8.24% 11.24% 33.02% 32.03%
Equity Income Portfolio
(Fidelity)...................... 30-Aug-96 3.95% 1.14% 6.30% 6.30% 7.31% -- -- 14.64%
Equity Index Portfolio............ 16-Oct-91 -2.36% -10.50% -12.37% -12.37% 10.37% 16.97% -- 16.35%
Fidelity VIP II Asset Manager
Portfolio - Initial Class....... 06-Sep-89 0.19% -5.88% -6.30% -6.30% 5.72% 10.03% 11.01% 10.29%
Fidelity VIP II Contrafund
Portfolio-Service Class 2....... 03-Jan-95 -0.02% -9.32% -10.54% -10.54% 12.56% 16.23% -- 19.71%
Fidelity VIP III Mid-Cap Portfolio
- Service Class 2............... 12-Jan-00 2.72% 2.13% -- -- -- -- 25.37%
Franklin Small Cap Fund-Class 2... 01-May-98 -0.37% -24.05% -22.77% -22.77% -- -- -- 8.11%
Janus Aspen Series Balanced
Portfolio-Service Shares........ 13-Sep-93 0.91% -3.67% -3.34% -3.34% 17.59% 17.88% -- 16.38%
Janus Aspen Series Global
Technology Port.-Svc Shares..... 15-Jan-00 -8.49% -33.23% -- -- -- -- -- -39.49%
Janus Aspen Series Worldwide
Growth Port-Svc Shares.......... 13-Sep-93 -3.36% -15.56% -19.14% -19.14% 19.28% 21.29% -- 20.96%
Large Cap Portfolio (Fidelity).... 30-Aug-96 -2.86% -14.93% -18.12% -18.12% 12.38% -- -- 16.93%
Lazard International Stock
Portfolio....................... 01-Aug-96 3.57% -1.09% -12.26% -12.26% 5.90% -- -- 7.49%
MFS Emerging Growth Portfolio..... 30-Aug-96 -0.48% -22.33% -24.70% -24.70% 21.00% -- -- 20.64%
MFS Mid Cap Growth Portfolio...... 23-Mar-98 -1.68% -14.52% 2.61% 2.61% -- -- -- 20.47%
MFS Research Portfolio............ 23-Mar-98 -3.25% -16.66% -10.95% -10.95% -- -- -- 5.23%
MFS Total Return Portfolio........ 16-Jun-94 3.63% 5.05% 15.29% 15.29% 9.21% 12.27% -- 12.72%
PIMCO Total Return Bond Fund...... 31-Dec-97 1.40% 3.88% 10.19% 10.19% 5.30% -- 5.30%
Putnam International Growth
Portfolio - Class 1B............ 06-Apr-98 4.93% -2.08% -10.32% -10.32% -- -- -- 13.20%
Putnam Small Cap Value Portfolio -
Class 1B........................ 03-May-99 10.74% 4.83% 14.36% -- -- -- -- 11.08%
Putnam Voyager II Portfolio -
Class 1B........................ 29-Sep-00 -5.52% -32.91 -- -- -- -- -- -34.32
Salomon Brothers Variable Capital
Fund............................ 17-Feb-98 3.01% -0.95% 16.24% 16.24% -- -- -- 19.22%
Salomon Brothers Variable
Investors Fund.................. 17-Feb-98 3.41% 0.52% 13.21% 13.21% -- -- -- 11.87%
Salomon Brothers Variable
Strategic Bond Fund............. 17-Feb-98 2.49% 2.77% 7.22% 7.22% -- -- -- 4.26%
Salomon Brothers Variable Total
Return Fund..................... 17-Feb-98 2.05% 2.50% 6.89% 6.89% -- -- -- 4.17%
Smith Barney Aggressive Growth
Fund............................ 31-Dec-85 4.83% -6.00% 19.21% 18.07% 18.07% 36.95% 27.16% 22.21%
Smith Barney Fundamental Value
Portfolio....................... 16-Oct-91 5.37% -1.24% 16.26% 17.12% 17.12% 13.73% 15.87% --
Smith Barney International All Cap
Growth Portfolio................ 16-Jun-94 3.71% -11.43% -26.03% -26.03% 9.33% 9.27% -- 7.95%
Smith Barney Large Cap Growth
Portfolio....................... 01-May-98 0.35% -10.88% -9.77% -9.77% -- -- -- 15.24%
Social Awareness Stock Portfolio
(Smith Barney).................. 01-May-92 -0.39% -7.13% -4.75% -4.75% 12.96% 16.80% -- 14.54%
Strong Multi Cap Value Fund II....
Travelers Convertible Bond
Portfolio....................... 01-May-98 3.24% -5.44% 10.27% 10.27% -- -- -- 10.51%
Travelers Disciplined Mid Cap
Stock Portfolio................. 01-Apr-97 3.77% -7.63% 10.92% 10.92% 13.26% -- -- 19.40%
Travelers High Yield Bond Trust... 10-Jun-83 3.35% -2.09% 0.45% 0.45% 3.28% 8.02% 10.31% 7.61%
Travelers Money Market
Portfolio....................... 31-Dec-87 0.51% 1.40% 5.46% 5.46% 4.65% 4.33% 3.69% 4.41%
Travelers Quality Bond
Portfolio....................... 30-Aug-96 1.70% 2.61% 6.22 6.22 4.72 -- -- 4.41
Travelers U.S. Government
Securities Portfolio............ 24-Jan-92 3.11% 7.29% 14.99% 14.99% 6.17% 6.16% -- 6.93%
Van Kampen Enterprise Portfolio... 16-Jun-94 -4.04% -20.99% -19.82% -19.82% 7.68% 14.27% -- 16.29%
</Table>
A-2
APPENDIX B
TARGET PREMIUM PER $1,000
OF STATED AMOUNT
ALL UNDERWRITING CLASSES
STANDARD AND PREFERRED
SMOKER AND NON-SMOKER
--------------------------------------------------------------------------------
<Table>
<Caption>
AGE MALE FEMALE UNISEX
--- ---- ------ ------
20 25.49885 21.35312 24.67777
21 26.25533 22.05852 25.42278
22 27.04281 22.79038 26.19845
23 27.86586 23.54970 27.00937
24 28.72917 24.33773 27.85695
25 29.63486 25.15422 28.74463
26 30.58643 26.00205 29.67441
27 31.58335 26.88113 30.64690
28 32.62452 27.79141 31.66258
29 33.71079 28.73438 32.72066
30 34.84316 29.71150 33.82174
31 36.02088 30.72326 34.96677
32 37.24380 31.77143 36.15529
33 38.51130 32.85823 37.38654
34 39.82501 33.98300 38.66183
35 41.18470 35.14808 39.98270
36 42.59063 36.35310 41.34755
37 44.04142 37.59596 42.75638
38 45.53736 38.87592 44.20922
39 47.07884 40.19069 45.70492
40 48.66485 41.53957 47.24193
41 50.29448 42.92135 48.82045
42 51.96862 44.33684 50.44101
43 53.68801 45.78699 52.10416
44 55.45241 47.27608 53.81251
45 57.26368 48.80417 55.56579
46 59.12431 50.37449 57.36606
47 61.03580 51.99103 59.21574
48 63.00258 53.65371 61.11856
49 65.02827 55.36365 63.07747
50 67.11449 57.12257 65.09434
</Table>
<Table>
<Caption>
AGE MALE FEMALE UNISEX
--- ---- ------ ------
51 69.26320 58.93024 67.16829
52 71.47047 60.78640 69.29887
53 73.73607 62.68726 71.48414
54 76.05516 64.63067 73.71929
55 78.42689 66.61974 76.00345
56 80.85354 68.65902 78.34017
57 83.34160 70.75893 80.73560
58 85.90006 72.93427 83.20014
59 88.53960 75.19989 85.74576
60 91.26869 77.56483 88.37912
61 94.09169 80.03119 91.10324
62 97.00755 82.59477 93.91915
63 100.01297 85.23864 96.81869
64 103.10493 87.94870 99.79450
65 106.28342 90.71791 102.84656
66 109.56101 93.55528 105.98510
67 112.96034 96.48236 109.23156
68 116.51614 99.53950 112.62104
69 120.26554 102.77254 116.19089
70 124.23658 106.21512 119.96965
71 128.44465 109.89099 123.97439
72 132.88796 113.80393 128.20151
73 137.54435 117.93734 132.63054
74 142.38323 122.27404 137.23573
75 147.39278 126.80803 142.00609
76 152.58944 131.55967 146.95678
77 158.02373 136.57999 152.13912
78 163.78802 141.95257 157.64536
79 169.99253 147.77602 163.58178
80 176.72991 154.13846 170.04077
</Table>
B-1
THIS PAGE INTENTIONALLY LEFT BLANK
APPENDIX C
CASH VALUE ACCUMULATION TEST FACTORS
--------------------------------------------------------------------------------
<Table>
<Caption>
ATTAINED
AGE MALE FEMALE UNISEX
-------- ---- ------ ------
20 633.148% 729.902% 634.212%
21 614.665% 706.514% 615.406%
22 596.465% 683.789% 596.908%
23 578.611% 661.708% 578.729%
24 560.815% 640.288% 560.856%
25 543.379% 619.481% 543.379%
26 526.258% 599.296% 526.258%
27 509.509% 579.740% 509.509%
28 493.139% 560.793% 493.139%
29 477.198% 542.436% 477.198%
30 461.701% 524.666% 461.701%
31 446.663% 507.462% 446.663%
32 432.102% 490.804% 432.102%
33 418.008% 474.701% 418.008%
34 404.389% 459.135% 404.389%
35 391.242% 444.108% 391.242%
36 378.572% 429.635% 378.572%
37 366.371% 415.712% 366.371%
38 354.629% 402.342% 354.629%
39 343.340% 389.510% 343.340%
40 332.495% 377.202% 332.495%
41 322.076% 365.390% 322.076%
42 312.066% 354.046% 312.066%
43 302.451% 343.130% 302.451%
44 293.213% 332.625% 293.213%
45 284.333% 322.505% 284.333%
46 275.796% 312.743% 275.796%
47 267.583% 303.331% 267.583%
48 259.681% 294.258% 259.681%
49 252.082% 285.511% 252.082%
50 244.777% 277.080% 244.777%
51 237.768% 268.956% 237.768%
52 231.048% 261.136% 231.048%
53 224.616% 253.611% 224.616%
54 218.462% 246.362% 218.462%
55 212.574% 239.368% 212.574%
56 206.935% 232.606% 206.935%
57 201.529% 226.050% 201.529%
58 196.343% 219.684% 196.343%
59 191.366% 213.506% 191.366%
</Table>
<Table>
<Caption>
ATTAINED
AGE MALE FEMALE UNISEX
-------- ---- ------ ------
60 186.595% 207.521% 186.595%
61 182.029% 201.744% 182.029%
62 177.668% 196.192% 177.668%
63 173.510% 190.877% 173.510%
64 169.549% 185.796% 169.549%
65 165.775% 180.933% 165.775%
66 162.175% 176.268% 162.175%
67 158.734% 171.774% 158.734%
68 155.443% 167.434% 155.443%
69 152.298% 163.242% 152.296%
70 149.296% 159.205% 149.296%
71 146.446% 155.337% 146.446%
72 143.754% 151.657% 143.754%
73 141.225% 148.174% 141.225%
74 138.855% 144.893% 138.855%
75 142.252% 142.252% 142.252%
76 140.077% 140.077% 140.077%
77 138.021% 138.021% 138.021%
78 136.067% 136.067% 136.067%
79 134.206% 134.206% 134.206%
80 132.698% 132.698% 132.698%
81 131.020% 131.020% 131.020%
82 129.445% 129.445% 129.445%
83 127.981% 127.981% 127.981%
84 126.623% 126.623% 126.623%
85 120.411% 120.411% 120.411%
86 119.280% 119.280% 119.280%
87 118.211% 118.211% 118.211%
88 117.185% 117.185% 117.185%
89 116.182% 116.182% 116.182%
90 115.177% 115.177% 115.177%
91 114.146% 114.146% 114.146%
92 113.058% 113.058% 113.058%
93 111.887% 111.887% 111.887%
94 110.625% 110.625% 110.625%
95 109.295% 109.295% 109.295%
96 107.982% 107.982% 107.982%
97 106.958% 106.958% 106.958%
98 106.034% 106.034% 106.034%
99 103.603% 103.603% 103.603%
</Table>
C-1
THIS PAGE INTENTIONALLY LEFT BLANK
TRAVELERS
CORPORATE BENEFIT LIFE
L-16160 October 2001
ANNUAL REPORT
DECEMBER 31, 2000
THE TRAVELERS FUND UL III
FOR VARIABLE LIFE INSURANCE
[TRAVELERS INSURANCE LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
THE TRAVELERS FUND UL III
FOR VARIABLE LIFE INSURANCE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2000
ASSETS:
Investments at market value:
Capital Appreciation Fund, 281,439 shares (cost $27,687,976)........................ $ 23,080,832
High Yield Bond Trust, 501,114 shares (cost $4,572,338)............................. 4,394,772
Money Market Portfolio, 28,023,571 shares (cost $28,023,571)........................ 28,023,571
American Odyssey Funds, Inc., 535,972 shares (cost $5,498,570)...................... 5,590,183
Delaware Group Premium Fund, 52,172 shares (cost $701,916).......................... 747,876
Deutsche Asset Management VIT Funds, 648,709 shares (cost $7,566,362)............... 7,212,024
Dreyfus Variable Investment Fund, 61,624 shares (cost $3,343,839)................... 2,471,126
Franklin Templeton Variable Insurance Products Trust, 40 shares (cost $1,000)....... 840
Greenwich Street Series Fund, 471,742 shares (cost $15,307,845)..................... 14,467,773
Janus Aspen Series, 4,944 shares (cost $186,377).................................... 178,232
OCC Accumulation Trust, 11,021 shares (cost $365,962)............................... 397,760
Salomon Brothers Variable Series Fund Inc., 500,602 shares (cost $6,473,666)........ 6,787,252
Strong Variable Insurance Funds, Inc., 113 shares (cost $1,005)..................... 1,106
The Montgomery Funds III, 531 shares (cost $9,598).................................. 8,259
The Travelers Series Trust, 2,476,123 shares (cost $43,392,141)..................... 40,347,408
Travelers Series Fund Inc., 1,021,402 shares (cost $22,692,088)..................... 20,647,613
Variable Insurance Products Fund II, 128,070 shares (cost $2,191,873)............... 2,137,203
Warburg Pincus Trust, 110,035 shares (cost $1,337,231).............................. 1,026,625
---------------
Total Investments (cost $169,353,358)........................................... $ 157,520,455
Receivables:
Dividends........................................................................... 94,471
Premium payments and transfers from other Travelers accounts........................ 198,903
Other assets.......................................................................... 2,361
--------------
Total Assets.................................................................... 157,816,190
--------------
LIABILITIES:
Payables:
Contract surrenders and transfers to other Travelers accounts..................... 56,585
Insurance charges................................................................. 18,471
Accrued liabilities............................................................... 2,358
--------------
Total Liabilities............................................................... 77,414
--------------
NET ASSETS: $ 157,738,776
==============
See Notes to Financial Statements
-1-
THE TRAVELERS FUND UL III
FOR VARIABLE LIFE INSURANCE
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
INVESTMENT INCOME:
Dividends.................................................................... $ 5,916,449
EXPENSES:
Insurance charges............................................................ 471,603
---------------
Net investment income...................................................... 5,444,846
---------------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold............................................. $ 55,859,667
Cost of investments sold................................................... 55,128,870
---------------
Net realized gain (loss)................................................. 730,797
Change in unrealized gain (loss) on investments:
Unrealized gain at December 31, 1999......................................... 5,173,578
Unrealized loss at December 31, 2000......................................... (11,832,903)
---------------
Net change in unrealized gain (loss) for the year.......................... (17,006,481)
---------------
Net realized gain (loss) and change in unrealized gain (loss)............ (16,275,684)
---------------
Net decrease in net assets resulting from operations........................... $ (10,830,838)
===============
See Notes to Financial Statements
-2-
THE TRAVELERS FUND UL III
FOR VARIABLE LIFE INSURANCE
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE
PERIOD SEPTEMBER 8, 1999 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1999
2000 1999
---- ----
OPERATIONS:
Net investment income................................................ $ 5,444,846 $ 383,377
Net realized gain (loss) from investment transactions................ 730,797 8,226
Net change in unrealized gain (loss) on investments.................. (17,006,481) 5,173,578
-------------- --------------
Net increase (decrease) in net assets resulting from operations..... (10,830,838) 5,565,181
-------------- --------------
UNIT TRANSACTIONS:
Participant premium payments
(applicable to 99,167,215 and 53,893,509 units, respectively)....... 110,856,012 56,405,022
Participant transfers from other Travelers accounts
(applicable to 71,212,975 and 744,740 units, respectively).......... 78,058,756 839,753
Contract surrenders
(applicable to 3,252,756 and 409,730 units, respectively)........... (3,698,303) (425,818)
Participant transfers to other Travelers accounts
(applicable to 71,610,636 and 828,645 units, respectively).......... (78,110,147) (839,753)
Other payments to participants
(applicable to 77,341 units)........................................ (81,089) -
-------------- --------------
Net increase in net assets resulting from unit transactions......... 107,025,229 55,979,204
-------------- --------------
Net increase in net assets......................................... 96,194,391 61,544,385
NET ASSETS:
Beginning of period.................................................. 61,544,385 -
-------------- --------------
End of period........................................................ $ 157,738,776 $ 61,544,385
============== ==============
See Notes to Financial Statements
-3-
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Fund UL III for Variable Life Insurance ("Fund UL III") is a
separate account of The Travelers Insurance Company ("The Travelers"), an
indirect wholly owned subsidiary of Citigroup Inc., and is available for funding
certain variable life insurance contracts issued by The Travelers. Fund UL III
is registered under the Investment Company Act of 1940, as amended, as a unit
investment trust. Fund UL III is comprised of the Travelers Corporate Owned
Variable Universal Life Insurance Policies and the Travelers Corporate Owned
Variable Life Insurance 2000 Policies products.
Participant premium payments applied to Fund UL III are invested in one or more
sub-accounts in accordance with the selection made by the owner. As of December
31, 2000, the investments comprising Fund UL III were: Capital Appreciation
Fund; High Yield Bond Trust; Money Market Portfolio; Intermediate-Term Bond Fund
(formerly American Odyssey Intermediate-Term Bond Fund) of American Odyssey
Funds, Inc; REIT Series and Small Cap Value Series of Delaware Group Premium
Fund (formerly Delaware Group Premium Fund, Inc.); EAFE(R) Equity Index Fund and
Small Cap Index Fund of Deutsche Asset Management VIT Funds (formerly BT
Insurance Funds Trust); Appreciation Portfolio (formerly Capital Appreciation
Portfolio ) and Small Cap Portfolio of Dreyfus Variable Investment Fund;
Franklin Small Cap Fund - Class 2 of Franklin Templeton Variable Insurance
Products Trust: Equity Index Portfolio and Diversified Strategic Income
Portfolio of Greenwich Street Series Fund; Balanced Portfolio - Service Shares,
Global Technology Portfolio - Service Shares and Worldwide Growth Portfolio -
Service Shares of Janus Aspen Series; Equity Portfolio of OCC Accumulation
Trust; Total Return Fund (formerly Salomon Brothers Variable Total Return Fund),
Capital Fund (formerly Salomon Brothers Variable Capital Fund), Investors Fund
(formerly Salomon Brothers Variable Investors Fund) and Strategic Bond Fund
(formerly Salomon Brothers Variable Strategic Bond Fund) of Salomon Brothers
Variable Series Fund Inc.; Strong Schafer Value Fund II of Strong Variable
Insurance Funds, Inc.; Montgomery Variable Series: Growth Fund of Montgomery
Funds III; Equity Income Portfolio, Jurika & Voyles Core Equity Portfolio, Large
Cap Portfolio, Lazard International Stock Portfolio, MFS Emerging Growth
Portfolio, MFS Mid Cap Growth Portfolio, MFS Research Portfolio, NWQ Large Cap
Portfolio, *Social Awareness Stock Portfolio, Strategic Stock Portfolio,
Convertible Bond Portfolio, Disciplined Mid Cap Stock Portfolio, Disciplined
Small Cap Stock Portfolio, U.S. Government Securities Portfolio and Utilities
Portfolio of The Travelers Series Trust; AIM Capital Appreciation Portfolio,
Alliance Growth Portfolio, MFS Total Return Portfolio, Putnam Diversified Income
Portfolio, Smith Barney International Equity Portfolio, Smith Barney Large
Capitalization Growth Portfolio and Van Kampen Enterprise Portfolio of Travelers
Series Fund Inc.; Asset Manager Portfolio - Initial Class and Contrafund(R)
Portfolio - Service Class 2 of Variable Insurance Products Fund II (formerly
Fidelity's Variable Insurance Products Fund II) and Emerging Markets Portfolio
of the Warburg Pincus Trust.
All funds are Massachusetts business trust, except for Travelers Series Trust
Fund Inc., American Odyssey Funds, Inc., and Salomon Brothers Variable Series
Fund Inc., which are incorporated under Maryland law. Strong Variable
Insurance Funds, Inc. is a Wisconsin corporation and Montgomery Funds III is a
Delaware business trust. Capital Appreciation Fund, High Yield Bond Trust,
Money Market Portfolio, The Travelers Series Trust and Travelers Series Fund
Inc. are managed by affiliates of The Travelers. Not all funds may be
available in all states or to all contract owners. Funds indicated by an
asterisk (*) did not have activity as of December 31, 2000.
The following is a summary of significant accounting policies consistently
followed by Fund UL III in the preparation of its financial statements.
SECURITY VALUATION. Investments are valued daily at the net asset values per
share of the underlying funds.
SECURITY TRANSACTIONS. Security transactions are accounted for on the trade
date. Dividend income is recorded on the ex-dividend date.
FEDERAL INCOME TAXES. The operations of Fund UL III form a part of the total
operations of The Travelers and are not taxed separately. The Travelers is taxed
as a life insurance company under the Internal Revenue Code of 1986, as amended
(the "Code"). Under existing federal income tax law, no taxes are payable on the
investment income of Fund UL III. Fund UL III is not taxed as a "regulated
investment company" under Subchapter M of the Code.
OTHER. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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
expenses during the reporting period. Actual results could differ from those
estimates.
-4-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
2. INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments were
$170,916,491 and $55,859,667, respectively, for the period ended December 31,
2000. Realized gains and losses from investment transactions are reported on an
average cost basis. The cost of investments in eligible funds was $169,353,358
at December 31, 2000. Gross unrealized appreciation for all investments at
December 31, 2000 was $1,352,306. Gross unrealized depreciation for all
investments at December 31, 2000 was $13,185,209.
3. CONTRACT CHARGES
Insurance charges are paid for the mortality and expense risks assumed by The
Travelers. Each business day, The Travelers deducts a mortality and expense risk
charge, which is reflected in the calculation of unit values. For the Travelers
Corporate Variable Life Insurance Policies this charge equals, on an annual
basis, 0.45% for policy years 1-4 (contracts in this category are identified as
Price 1 in Note 4); 0.25% for policy years 5-20 (contracts in this category are
identified as Price 2 in Note 4); and 0.05% thereafter (contracts in this
category are identified as Price 3 in Note 4), of the amounts held in each
variable funding option. For the Travelers Corporate Owned Variable Life
Insurance 2000 Policies this charge equals, on an annual basis, 0.20% for policy
years 1-25 (contracts in this category are identified as Price 4 in note 4); and
0.05% thereafter (contracts in this category are identified as Price 3 in note
4), of the amounts held in each variable funding option.
4. NET CONTRACT OWNERS' EQUITY
DECEMBER 31, 2000
-----------------------------------------------------
UNIT NET
UNITS VALUE ASSETS
----- ----- ------
Capital Appreciation Fund
Price 1................................. 21,560,037 $ 1.038 $ 22,374,871
Price 2................................. - 1.041 -
Price 3................................. - 1.037 -
Price 4................................. 1,130,736 0.635 718,249
High Yield Bond Trust
Price 1................................. 4,014,368 1.019 4,090,926
Price 2................................. - 1.022 -
Price 3................................. - 1.024 -
Price 4................................. 303,599 1.011 307,029
Money Market Portfolio
Price 1................................. 23,799,441 1.074 25,551,791
Price 2................................. - 1.076 -
Price 3................................. - 1.079 -
Price 4................................. 2,417,590 1.047 2,530,169
American Odyssey Funds, Inc.
Intermediate Term Bond Fund
Price 1................................. 5,073,470 1.068 5,419,044
Price 2................................. - 1.071 -
Price 3................................. - 1.073 -
Price 4................................. 162,499 1.049 170,462
-5-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. NET CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 2000
-----------------------------------------------
UNIT NET
UNITS VALUE ASSETS
----- ----- ------
Delaware Group Premium Fund
REIT Series
Price 1..................................... 223,818 $ 1.289 $ 288,404
Price 2..................................... - 1.291 -
Price 3..................................... - 1.293 -
Price 4..................................... - 1.301 -
Small Cap Value Series
Price 1..................................... 396,703 1.176 466,509
Price 2..................................... - 1.178 -
Price 3..................................... - 1.180 -
Price 4..................................... - 1.212 -
Deutsche Asset Management VIT Funds
EAFE(R) Equity Index Fund
Price 1..................................... 1,263,410 0.940 1,187,861
Price 2..................................... - 0.942 -
Price 3..................................... . 0.945 -
Price 4..................................... 2,364,622 0.838 1,982,284
Small Cap Index Fund
Price 1..................................... 3,116,511 1.141 3,555,113
Price 2..................................... - 1.144 -
Price 3..................................... - 1.146 -
Price 4..................................... 582,205 0.845 492,237
Dreyfus Variable Investment Fund
Appreciation Portfolio
Price 1..................................... 336,497 1.028 345,959
Price 2..................................... - 1.031 -
Price 3..................................... - 1.034 -
Price 4..................................... - 0.985 -
Small Cap Portfolio
Price 1..................................... 1,417,591 1.280 1,814,236
Price 2..................................... - 1.283 -
Price 3..................................... - 1.287 -
Price 4..................................... 320,553 0.973 311,803
Franklin Templeton Variable Insurance Products Trust
Franklin Small Cap Fund Class 2
Price 1..................................... 1,000 0.837 837
Price 2..................................... - 0.839 -
Price 3..................................... - 0.840 -
Price 4..................................... - 0.839 -
-6-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. NET CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 2000
----------------------------------------------
UNIT NET
UNITS VALUE ASSETS
----- ----- ------
Greenwich Street Series Fund
Equity Index Portfolio - Class I Shares
Price 1......................................... 13,582,169 $ 0.990 $ 13,452,084
Price 2......................................... - 0.993 -
Price 3......................................... - 0.996 -
Price 4......................................... 800,111 0.873 698,359
Diversified Strategic Income Portfolio
Price 1......................................... 346,484 1.028 356,334
Price 2......................................... - 1.030 -
Price 3......................................... - 1.032 -
Price 4......................................... - 1.023 -
Janus Aspen Series
Balanced Portfolio - Service Shares
Price 1......................................... 1,000 0.978 979
Price 2......................................... - 0.979 -
Price 3......................................... - 0.981 -
Price 4......................................... - 0.980 -
Global Technology Portfolio - Service Shares
Price 1......................................... 1,000 0.676 675
Price 2......................................... - 0.677 -
Price 3......................................... - 0.678 -
Price 4......................................... - 0.677 -
Worldwide Growth Portfolio - Service Shares
Price 1......................................... - 0.803 -
Price 2......................................... - 0.804 -
Price 3......................................... - 0.805 -
Price 4......................................... 219,484 0.804 176,564
OCC Accumulation Trust
Equity Portfolio
Price 1......................................... 368,687 1.085 400,181
Price 2......................................... - 1.088 -
Price 3......................................... - 1.090 -
Price 4......................................... - 1.153 -
Salomon Brothers Variable Series Fund Inc.
Total Return Fund
Price 1......................................... 1,000 1.084 1,084
Price 2......................................... - 1.086 -
Price 3......................................... - 1.088 -
Price 4......................................... - 1.069 -
Capital Fund
Price 1......................................... 698,481 1.302 909,482
Price 2......................................... - 1.305 -
Price 3......................................... - 1.308 -
Price 4......................................... - 1.088 -
-7-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. NET CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 2000
-----------------
UNIT NET
UNITS VALUE ASSETS
----- ----- ------
Salomon Brothers Variable Series Fund Inc. (continued)
Investors Fund
Price 1................................ 4,550,746 $ 1.232 $ 5,608,342
Price 2................................ - 1.236 -
Price 3................................ - 1.232 -
Price 4................................ - 1.115 -
Strategic Bond Fund
Price 1................................ 93,235 1.090 101,639
Price 2................................ - 1.093 -
Price 3................................ - 1.096 -
Price 4................................ 160,406 1.050 168,375
Strong Variable Insurance Funds, Inc.
Strong Schafer Value Fund II
Price 1................................ 1,000 1.102 1,103
Price 2................................ - 1.104 -
Price 3................................ - 1.106 -
Price 4................................ - 1.066 -
The Montgomery Funds III
Montgomery Variable Series: Growth Fund
Price 1................................ 8,847 0.955 8,448
Price 2................................ - 0.957 -
Price 3................................ - 0.958 -
Price 4................................ - 0.893 -
The Travelers Series Trust
Equity Income Portfolio
Price 1................................ 3,637,656 1.151 4,187,691
Price 2................................ - 1.154 -
Price 3................................ - 1.157 -
Price 4................................ 2,003 1.065 2,132
Jurika & Voyles Core Equity Portfolio
Price 1................................ 1,000 1.126 1,127
Price 2................................ - 1.128 -
Price 3................................ - 1.130 -
Price 4................................ - 1.093 -
Large Cap Portfolio
Price 1................................ 7,526,314 1.021 7,685,069
Price 2................................ - 1.024 -
Price 3................................ - 1.026 -
Price 4................................ 452,765 0.786 356,053
-8-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. NET CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 2000
---------------------------------------------------
UNIT NET
UNITS VALUE ASSETS
----- ------ -------
The Travelers Series Trust (continued)
Lazard International Stock Portfolio
Price 1..................................... 6,707,013 $ 0.954 $ 6,399,833
Price 2..................................... - 0.957 -
Price 3..................................... - 0.959 -
Price 4..................................... 188,638 0.924 174,264
MFS Emerging Growth Portfolio
Price 1..................................... 10,188,903 1.213 12,358,875
Price 2..................................... - 1.216 -
Price 3..................................... - 1.219 -
Price 4..................................... 404,476 0.674 272,632
MFS Mid Cap Growth Portfolio
Price 1..................................... 939,941 1.427 1,340,870
Price 2..................................... - 1.430 -
Price 3..................................... - 1.433 -
Price 4..................................... - 0.918 -
MFS Research Portfolio
Price 1..................................... 215,884 1.069 230,716
Price 2..................................... - 1.071 -
Price 3..................................... - 1.074 -
Price 4..................................... 129,848 0.840 109,077
NWQ Large Cap Portfolio
Price 1..................................... 1,000 1.160 1,162
Price 2..................................... - 1.163 -
Price 3..................................... - 1.165 -
Price 4..................................... - 1.094 -
Strategic Stock Portfolio
Price 1..................................... 1,000 1.151 1,151
Price 2..................................... - 1.153 -
Price 3..................................... - 1.155 -
Price 4..................................... - 1.229 -
Convertible Bond Portfolio
Price 1..................................... 662,069 1.186 785,413
Price 2..................................... - 1.189 -
Price 3..................................... - 1.192 -
Price 4..................................... - 1.032 -
-9-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. NET CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 2000
--------------------------------------
UNIT NET
UNITS VALUE ASSETS
----- ----- ------
The Travelers Series Trust (continued)
Disciplined Mid Cap Stock Portfolio
Price 1........................................... 375,434 $ 1.296 $ 486,629
Price 2........................................... - 1.299 -
Price 3........................................... - 1.302 -
Price 4........................................... - 1.031 -
Disciplined Small Cap Stock Portfolio
Price 1........................................... 1,000 1.034 1,035
Price 2........................................... - 1.036 -
Price 3........................................... - 1.038 -
Price 4........................................... - 0.928 -
U.S. Government Securities Portfolio
Price 1........................................... 4,827,970 1.119 5,400,993
Price 2........................................... - 1.121 -
Price 3........................................... - 1.124 -
Price 4........................................... 301,586 1.112 335,392
Utilities Portfolio
Price 1........................................... 216,324 1.186 256,501
Price 2........................................... - 1.188 -
Price 3........................................... - 1.191 -
Price 4........................................... - 1.173 -
Travelers Series Fund Inc.
AIM Capital Appreciation Portfolio
Price 1........................................... 3,180,297 1.211 3,851,381
Price 2........................................... - 1.214 -
Price 3........................................... - 1.217 -
Price 4........................................... 35,358 0.738 26,107
Alliance Growth Portfolio
Price 1........................................... 8,973,641 1.030 9,238,780
Price 2........................................... - 1.032 -
Price 3........................................... - 1.035 -
Price 4........................................... 694,976 0.770 535,364
MFS Total Return Portfolio
Price 1........................................... 2,997,859 1.194 3,580,696
Price 2........................................... - 1.197 -
Price 3........................................... - 1.200 -
Price 4........................................... 3,596 1.174 4,221
Putnam Diversified Income Portfolio
Price 1........................................... 412,401 1.001 412,656
Price 2........................................... - 1.003 -
Price 3........................................... - 1.005 -
Price 4........................................... - 0.983 -
-10-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. NET CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 2000
-------------------------------------------
UNIT NET
UNITS VALUE ASSETS
----- ----- ------
Travelers Series Fund Inc. (continued)
Smith Barney International Equity Portfolio
Price 1.................................... 1,465,705 $ 0.993 $ 1,456,109
Price 2.................................... - 0.996 -
Price 3.................................... - 0.998 -
Price 4.................................... 368,195 0.754 277,617
Smith Barney Large Capitalization Growth Portfolio
Price 1.................................... 707,548 1.026 725,781
Price 2.................................... - 1.028 -
Price 3.................................... - 1.031 -
Price 4.................................... - 0.840 -
Van Kampen Enterprise Portfolio
Price 1.................................... 538,839 0.999 538,364
Price 2.................................... - 1.001 -
Price 3.................................... - 1.004 -
Price 4.................................... - 0.727 -
Variable Insurance Products Fund II
Asset Manager Portfolio - Initial Class
Price 1.................................... 1,756,809 1.015 1,783,086
Price 2.................................... - 1.017 -
Price 3.................................... - 1.020 -
Price 4.................................... 96,905 0.931 90,215
Contrafund(R) Portfolio - Service Class 2
Price 1.................................... - 0.928 -
Price 2.................................... - 0.930 -
Price 3.................................... - 0.931 -
Price 4.................................... 293,040 0.930 272,483
Warburg Pincus Trust
Emerging Markets Portfolio
Price 1.................................... 1,216,038 0.878 1,067,868
Price 2.................................... - 0.880 -
Price 3.................................... - 0.882 -
Price 4.................................... - 0.639 -
---------------
Net Contract Owners' Equity .................................................. $ 157,738,776
===============
-11-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. STATEMENT OF INVESTMENTS
INVESTMENTS NO. OF MARKET
SHARES VALUE
------------ -------------
CAPITAL APPRECIATION FUND (14.7%)
Total (Cost $27,687,976) 281,439 $ 23,080,832
------------ -------------
HIGH YIELD BOND TRUST (2.8%)
Total (Cost $4,572,338) 501,114 4,394,772
------------ -------------
MONEY MARKET PORTFOLIO (17.8%)
Total (Cost $28,023,571) 28,023,571 28,023,571
------------ -------------
AMERICAN ODYSSEY FUNDS, INC. (3.5%)
Intermediate Term Bond Fund
Total (Cost $5,498,570) 535,972 5,590,183
------------ -------------
DELAWARE GROUP PREMIUM FUND (0.5%)
REIT Series (Cost $272,172) 26,087 287,482
Small Cap Value Series (Cost $429,744) 26,085 460,394
------------ -------------
Total (Cost $701,916) 52,172 747,876
------------ -------------
DEUTSHE ASSET MANAGEMENT VIT FUNDS (4.6%)
EAFE(R) Equity Index Fund (Cost $3,361,373) 284,042 3,164,223
Small Cap Index Fund (Cost $4,204,989) 364,667 4,047,801
------------ -------------
Total (Cost $7,566,362) 648,709 7,212,024
------------ -------------
DREYFUS VARIABLE INVESTMENT FUND (1.6%)
Appreciation Portfolio (Cost $357,156) 8,882 345,618
Small Cap Portfolio (Cost $2,986,683) 52,742 2,125,508
------------ -------------
Total (Cost $3,343,839) 61,624 2,471,126
------------ -------------
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (0.0%)
Franklin Small Cap Fund - Class 2
Total (Cost $1,000) 40 840
------------ -------------
GREENWICH STREET SERIES FUND (9.2%)
Equity Index Portfolio - Class I Shares (Cost $14,955,739) 435,765 14,118,800
Diversified Strategic Income Portfolio (Cost $352,106) 35,977 348,973
------------ -------------
Total (Cost $15,307,845) 471,742 14,467,773
------------ -------------
JANUS ASPEN SERIES (0.1%)
Balanced Portfolio - Service Shares (Cost $1,094) 39 981
Global Technology Portfolio - Service Shares (Cost $1,004) 103 678
Worldwide Growth Portfolio - Service Shares (Cost $184,279) 4,802 176,573
------------ -------------
Total (Cost $186,377) 4,944 178,232
------------ -------------
-12-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. STATEMENT OF INVESTMENTS (CONTINUED)
NO. OF MARKET
SHARES VALUE
------------- -------------
OCC ACCUMULATION TRUST (0.2%)
Equity Portfolio
Total (Cost $365,962) 11,021 $ 397,760
------------- -------------
SALOMON BROTHERS VARIABLE SERIES FUND INC. (4.3%)
Total Return Fund (Cost $1,096) 102 1,090
Capital Fund (Cost $894,462) 60,073 907,106
Investors Fund (Cost $5,298,488) 412,731 5,609,020
Strategic Bond Fund (Cost $279,620) 27,696 270,036
------------- -------------
Total (Cost $6,473,666) 500,602 6,787,252
------------- -------------
STRONG VARIABLE INSURANCE FUNDS, INC. (0.0%)
Strong Schafer Value Fund II
Total (Cost $1,005) 113 1,106
------------- -------------
THE MONTGOMERY FUNDS III (0.0%)
Montgomery Variable Series: Growth Fund
Total (Cost $9,598) 531 8,259
------------- -------------
THE TRAVELERS SERIES TRUST (25.6%)
Equity Income Portfolio (Cost $3,953,025) 257,708 4,190,332
Jurika & Voyles Core Equity Portfolio (Cost $1,041) 93 1,131
Large Cap Portfolio (Cost $9,397,097) 478,399 8,041,892
Lazard International Stock Portfolio (Cost $6,958,807) 499,991 6,574,879
MFS Emerging Growth Portfolio (Cost $14,354,313) 558,950 12,632,268
MFS Mid Cap Growth Portfolio (Cost $1,473,635) 79,911 1,339,313
MFS Research Portfolio (Cost $385,329) 27,969 339,828
NWQ Large Cap Portfolio (Cost $1,018) 107 1,165
Social Awareness Stock Portfolio (Cost $12) 1 11
Strategic Stock Portfolio (Cost $1,041) 116 1,152
Convertible Bond Portfolio (Cost $787,995) 65,086 784,935
Disciplined Mid Cap Stock Portfolio (Cost $477,148) 28,197 486,688
Disciplined Small Cap Stock Portfolio (Cost $970) 101 1,038
U.S. Government Securities Portfolio (Cost $5,370,007) 466,157 5,696,435
Utilities Portfolio (Cost $230,703) 13,337 256,341
------------- -------------
Total (Cost $43,392,141) 2,476,123 40,347,408
------------- -------------
TRAVELERS SERIES FUND INC. (13.1%)
AIM Capital Appreciation Portfolio (Cost $4,261,720) 214,134 3,877,960
Alliance Growth Portfolio (Cost $11,237,692) 393,349 9,774,717
MFS Total Return Portfolio (Cost $3,325,355) 201,878 3,585,354
Putnam Diversified Income Portfolio (Cost $419,340) 39,531 412,706
Smith Barney International Equity Portfolio (Cost $2,013,840) 99,697 1,733,724
Smith Barney Large Capitalization Growth Portfolio (Cost $769,148) 48,821 725,487
Van Kampen Enterprise Portfolio (Cost $664,993) 23,992 537,665
------------- -------------
Total (Cost $22,692,088) 1,021,402 20,647,613
------------- -------------
-13-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. STATEMENT OF INVESTMENTS (CONTINUED)
NO. OF MARKET
SHARES VALUE
----------- --------------
VARIABLE INSURANCE PRODUCTS FUND II (1.4%)
Asset Manager Portfolio - Initial Class (Cost $1,919,695) 116,543 $ 1,864,695
Contrafund(R) Portfolio - Service Class 2 (Cost $272,178) 11,527 272,508
----------- --------------
Total (Cost $2,191,873) 128,070 2,137,203
----------- --------------
WARBURG PINCUS TRUST (0.6%)
Emerging Markets Portfolio
Total (Cost $1,337,231) 110,035 1,026,625
----------- --------------
TOTAL INVESTMENTS (100%)
(COST $169,353,358) $ 157,520,455
==============
-14-
This page intentionally left blank
-15-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF FUND UL III OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1999
CAPITAL APPRECIATION FUND HIGH YIELD BOND TRUST
------------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
INVESTMENT INCOME:
Dividends................................................ $ 716,325 $ - $ 205,849 $ -
------------ ------------ ----------- -----------
EXPENSES:
Insurance charges........................................ 83,603 6,182 12,587 919
------------ ------------ ----------- -----------
Net investment income (loss)......................... 632,722 (6,182) 193,262 (919)
------------ ------------ ----------- -----------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold......................... 4,736,324 24,089 682,602 3,259
Cost of investments sold............................... 4,539,760 21,019 691,328 3,236
------------ ------------ ----------- -----------
Net realized gain (loss)............................. 196,564 3,070 (8,726) 23
------------ ------------ ----------- -----------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of period............. 1,652,031 - 13,145 -
Unrealized gain (loss) end of period................... (4,607,144) 1,652,031 (177,566) 13,145
------------ ------------ ----------- -----------
Net change in unrealized gain (loss) for the period.. (6,259,175) 1,652,031 (190,711) 13,145
------------ ------------ ----------- -----------
Net increase (decrease) in net assets
resulting from operations............................ (5,429,889) 1,648,919 (6,175) 12,249
------------ ------------ ----------- -----------
UNIT TRANSACTIONS:
Participant premium payments............................. 18,974,365 8,458,556 2,975,593 1,378,638
Participant transfers from other Travelers accounts...... 7,868,402 169,647 1,114,989 13,728,311
Contract surrenders...................................... (665,175) (65,123) (100,333) (9,473
Participant transfers to other Travelers accounts........ (7,856,250) - (965,126) -
Other payments to participants........................... (10,332) - (2,407) -
------------ ------------ ----------- -----------
Net increase (decrease) in net assets
resulting from unit transactions..................... 18,311,010 8,563,080 3,022,716 1,369,165
------------ ------------ ----------- -----------
Net increase (decrease) in net assets................ 12,881,121 10,211,999 3,016,541 1,381,414
NET ASSETS:
Beginning of period.................................... 10,211,999 - 1,381,414 -
------------ ------------ ----------- -----------
End of period.......................................... $ 23,093,120 $ 10,211,999 $ 4,397,955 $ 1,381,414
============ ============ =========== ===========
MONEY MARKET PORTFOLIO
-----------------------
2000 1999
---- ----
INVESTMENT INCOME:
Dividends................................................ $ 1,153,773 $ 131,476
------------ ------------
EXPENSES:
Insurance charges........................................ 84,168 10,821
------------ ------------
Net investment income (loss)......................... 1,069,605 120,655
------------ ------------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold......................... 18,609,152 958,747
Cost of investments sold............................... 18,609,152 958,747
------------ ------------
Net realized gain (loss)............................. - -
------------ ------------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of period............. - -
Unrealized gain (loss) end of period................... - -
------------ ------------
Net change in unrealized gain (loss) for the period.. - -
------------ ------------
Net increase (decrease) in net assets
resulting from operations............................ 1,069,605 120,655
------------ ------------
UNIT TRANSACTIONS:
Participant premium payments............................. 21,705,836 17,920,543
Participant transfers from other Travelers accounts......
Contract surrenders...................................... (571,580) (140,370)
Participant transfers to other Travelers accounts........ (24,907,814) (839,753)
Other payments to participants........................... (3,473) -
------------ ------------
Net increase (decrease) in net assets
resulting from unit transactions..................... 9,951,280 16,940,420
------------ ------------
Net increase (decrease) in net assets................ 11,020,885 17,061,075
NET ASSETS:
Beginning of period.................................... 17,061,075 -
------------ ------------
End of period.......................................... $ 28,081,960 $ 17,061,075
============ ============
-16-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
INTERMEDIATE-TERM BOND FUND REIT SERIES SMALL CAP VALUE SERIES EAFE(R) EQUITY INDEX FUND
--------------------------- ---------------------- ----------------------- -------------------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
$ 186,713 $ - $ 2,059 $ - $ 2,486 $ - $ 50,964 $ 8,490
------------- ------------ ------------ ------------ ----------- ------------ ------------ -----------
15,362 1,589 164 - 844 - 5,627 93
------------- ------------ ------------ ------------ ----------- ------------ ------------ -----------
171,351 (1,589) 1,895 - 1,642 - 45,337 8,397
------------- ------------ ------------ ------------ ----------- ------------ ------------ -----------
2,002,406 5,564 70,973 - 706,363 - 1,569,625 743
2,019,544 5,545 69,574 - 693,963 - 1,607,405 719
------------- ------------ ------------ ------------ ----------- ------------ ------------ -----------
(17,138) 19 1,399 - 12,400 - (37,780) 24
------------- ------------ ------------ ------------ ----------- ------------ ------------ -----------
6,837 - - - - - 9,008 -
91,613 6,837 15,310 - 30,650 - (197,150) 9,008
------------- ------------ ------------ ------------ ----------- ------------ ------------ -----------
84,776 6,837 15,310 - 30,650 - (206,158) 9,008
------------- ------------ ------------ ------------ ----------- ------------ ------------ -----------
238,989 5,267 18,604 - 44,692 - (198,601) 17,429
------------- ------------ ------------ ------------ ----------- ------------ ------------ -----------
3,896,097 2,316,200 44,969 - 845,409 - 1,609,391 179,571
1,751,909 8,482 306,900 - 572,654 - 4,266,803
(118,124) (15,950) (789) - (9,129) - (47,861) (1,427)
(2,493,364) (81,280) - (986,191) - (2,650,543) -
- - - - (926) - (4,617) -
------------- ------------ ------------ ------------ ----------- ------------ ------------ -----------
3,036,518 2,308,732 269,800 - 421,817 - 3,173,173 178,144
------------- ------------ ------------ ------------ ----------- ------------ ------------ -----------
3,275,507 2,313,999 288,404 - 466,509 - 2,974,572 195,573
2,313,999 - - - - - 195,573 -
------------- ------------ ------------ ------------ ----------- ------------ ------------ -----------
$ 5,589,506 $ 2,313,999 $ 288,404 $ - $ 466,509 $ - $ 3,170,145 $ 195,573
============= ============ ============ ============ =========== ============ ============ ===========
-17-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF FUND UL III OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1999 (CONTINUED)
SMALL CAP INDEX FUND APPRECIATION PORTFOLIO SMALL CAP PORTFOLIO
----------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
Dividends................................................. $ 21,008 $ 41,366 $ 6,077 $ 1,347 $ 941,479 $ -
------------ ----------- --------- -------- ----------- ---------
EXPENSES:
Insurance charges......................................... 9,608 727 1,438 111 4,727 152
------------ ----------- --------- -------- ----------- ---------
Net investment income (loss).......................... 11,400 40,639 4,639 1,236 936,752 (152)
------------ ----------- --------- -------- ----------- ---------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold.......................... 825,673 2,601 687,100 1,137 497,760 1,171
Cost of investments sold................................ 802,574 2,469 675,499 1,133 448,579 1,143
------------ ----------- --------- -------- ----------- ---------
Net realized gain (loss).............................. 23,099 132 11,601 4 49,181 28
------------ ----------- --------- -------- ----------- ---------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of period.............. 96,961 - 4,597 - 34,840 -
Unrealized gain (loss) end of period.................... (157,188) 96,961 (11,538) 4,597 (861,175) 34,840
------------ ----------- --------- -------- ----------- ---------
Net change in unrealized gain (loss) for the period... (254,149) 96,961 (16,135) 4,597 (896,015) 34,840
------------ ----------- --------- -------- ----------- ---------
Net increase (decrease) in net assets
resulting from operations............................... (219,650) 137,732 105 5,837 89,918 34,716
------------ ----------- --------- -------- ----------- ---------
UNIT TRANSACTIONS:
Participant premium payments.............................. 2,060,949 1,066,449 623,829 180,492 1,244,437 210,214
Participant transfers from other Travelers accounts....... 1,997,180 - 251,651 - 1,430,243 152,682
Contract surrenders....................................... (71,499) (7,470) (14,082) (2,770) (41,263) (2,569
Participant transfers to other Travelers accounts......... (916,341) - (699,103) - (992,339) -
Other payments to participants............................ - - - - - -
------------ ----------- --------- -------- ----------- ---------
Net increase (decrease) in net assets
resulting from unit transactions...................... 3,070,289 1,058,979 162,295 177,722 1,641,078 360,327
------------ ----------- --------- -------- ----------- ---------
Net increase (decrease) in net assets................. 2,850,639 1,196,711 162,400 183,559 1,730,996 395,043
NET ASSETS:
Beginning of period..................................... 1,196,711 - 183,559 - 395,043 -
------------ ----------- --------- -------- ----------- ---------
End of period........................................... $ 4,047,350 $ 1,196,711 $ 345,959 $183,559 $ 2,126,039 $ 395,043
============ =========== ========= ======== =========== =========
-18-
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FRANKLIN SMALL CAP FUND - EQUITY INDEX PORTFOLIO - CLASS I DIVERSIFIED STRATEGIC INCOME
CLASS 2 SHARES PORTFOLIO
------------------------- -------------------------------- ----------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
$ -- $ -- $ 63,603 $ -- $ 22,198 $ --
------------ ---------- ----------- ------------ ----------- ----------
3 -- 44,686 1,832 753 --
------------ ---------- ----------- ------------ ----------- ----------
(3) -- 18,917 (1,832) 21,445 --
------------ ---------- ----------- ------------ ----------- ----------
-- -- 2,387,229 7,469 332,049 --
-- -- 2,302,048 7,090 341,440 --
------------ ---------- ----------- ------------ ----------- ----------
-- -- 85,181 379 (9,391) --
------------ ---------- ----------- ------------ ----------- ----------
-- -- 217,271 -- -- --
(160) -- (836,939) 217,271 (3,133) --
------------ ---------- ----------- ------------ ----------- ----------
(160) -- (1,054,210) 217,271 (3,133) --
------------ ---------- ----------- ------------ ----------- ----------
(163) -- (950,112) 215,818 8,921 --
------------ ---------- ----------- ------------ ----------- ----------
1,000 -- 7,675,956 2,675,972 311,645 --
-- -- 8,714,995 161,165 537,952 --
-- -- (363,067) (22,024) (7,563) --
-- -- (3,938,900) -- (493,747) --
-- -- (19,360) -- (874) --
------------ ---------- ----------- ------------ ----------- ----------
1,000 -- 12,069,624 2,815,113 347,413 --
------------ ---------- ----------- ------------ ----------- ----------
837 -- 11,119,512 3,030,931 356,334 --
-- -- 3,030,931 -- -- --
------------ ---------- ----------- ------------ ----------- ----------
$ 837 $ -- $14,150,443 $ 3,030,931 $ 356,334 $ --
============ ========== =========== ============ =========== ==========
BALANCED PORTFOLIO - SERVICE
SHARES
----------------------------
2000 1999
---- ----
$ 94 $ --
--------- ---------
2 --
--------- ---------
92 --
--------- ---------
-- --
-- --
--------- ---------
-- --
--------- ---------
-- --
(113) --
--------- ---------
(113) --
--------- ---------
(21) --
--------- ---------
1,000 --
-- --
-- --
-- --
-- --
--------- ---------
1,000 --
--------- ---------
979 --
-- --
--------- ---------
$ 979 $ --
========= =========
-19-
NOTES TO FINANCIAL STATEMENTS CONTINUED
6. SCHEDULE OF FUND UL III OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED TO DECEMBER 31, 1999 (CONTINUED)
GLOBAL TECHNOLOGY WORLDWIDE GROWTH
PORTFOLIO - PORTFOLIO -
SERVICE SHARES SERVICE SHARES EQUITY PORTFOLIO
--------------------- ------------------------ --------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
Dividends ........................................... $ 4 $ - $ 423 $ - $ 32,183 $ -
------ ----------- -------- ----------- ----------- -----
EXPENSES:
Insurance charges ................................... 3 - 55 - 1,479 -
------ ----------- -------- ----------- ----------- -----
Net investment income (loss) .................... 1 - 368 - 30,704 -
------ ----------- -------- ----------- ----------- -----
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold .................... - - 4,469 - 840,625 -
Cost of investments sold .......................... - - 4,772 - 863,336 -
------ ----------- -------- ----------- ----------- -----
Net realized gain (loss) ........................ - - (303) - (22,711) -
------ ----------- -------- ----------- ----------- -----
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of period ........ - - - - - -
Unrealized gain (loss) end of period .............. (326) - (7,706) - 31,798 -
------ ----------- -------- ----------- ----------- -----
Net change in unrealized gain (loss) for the
period ........................................ (326) - (7,706) - 31,798 -
------ ----------- -------- ----------- ----------- -----
Net increase (decrease) in net assets
resulting from operations ....................... (325) - (7,641) - 39,791 -
------ ----------- -------- ----------- ----------- -----
UNIT TRANSACTIONS:
Participant premium payments ........................ 1,000 - 185,257 - 402,067 -
Participant transfers from other Travelers accounts . - - - - 1,458,122 -
Contract surrenders ................................. - - (1,052) - (13,852) -
Participant transfers to other Travelers accounts ... - - - - (1,484,079) -
Other payments to participants ...................... - - - - (1,868) -
------ ----------- -------- ----------- ----------- -----
Net increase (decrease) in net assets
resulting from unit transactions ................ 1,000 - 184,205 - 360,390 -
------ ----------- -------- ----------- ----------- -----
Net increase (decrease) in net assets ........... 675 - 176,564 - 400,181 -
NET ASSETS:
Beginning of period ............................... - - - - - -
------ ----------- -------- ----------- ----------- -----
End of period ..................................... $ 675 $ - $176,564 $ - $ 400,181 $ -
====== =========== ======== =========== =========== =====
-20-
NOTES TO FINANCIAL STATEMENTS CONTINUED
TOTAL RETURN FUND CAPITAL FUND INVESTORS FUND STRATEGIC BOND FUND
----------------------- ------------------------- --------------------------- ---------------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
$ 33 $ - $ 52,905 $ 1,455 $ 199,860 $ 8,228 $ 16,025 $ 298
---------- ----------- -------------- -------- ------------ ----------- --------- -------
61 - 2,202 23 13,736 1,147 216 6
---------- ----------- -------------- -------- ------------ ----------- --------- -------
(28) - 50,703 1,432 186,124 7,081 15,809 292
---------- ----------- -------------- -------- ------------ ----------- --------- -------
158,157 - 90,048 177 1,030,588 3,975 37,910 75
154,415 - 82,440 170 968,983 3,832 37,477 75
---------- ----------- -------------- -------- ------------ ----------- --------- -------
3,742 - 7,608 7 61,605 143 433 -
---------- ----------- -------------- -------- ------------ ----------- --------- -------
- - 1,748 - 61,891 - (217) -
(6) - 12,644 1,748 310,532 61,891 (9,584) (217)
---------- ----------- -------------- -------- ------------ ----------- --------- -------
(6) - 10,896 1,748 248,641 61,891 (9,367) (217)
---------- ----------- -------------- -------- ------------ ----------- --------- -------
3,708 - 69,207 3,187 496,370 69,115 6,875 75
---------- ----------- -------------- -------- ------------ ----------- --------- -------
92,899 - 349,929 44,911 2,203,340 1,618,377 272,131 6,116
73,185 - 589,450 - 2,448,664 - 51,662 -
(610) - (15,522) (360) (99,258) (11,287) (7,810) (229)
(168,098) - (131,320) - (1,116,979) - (58,806) -
- - - - - - - -
---------- ----------- -------------- -------- ------------ ----------- --------- -------
(2,624) - 792,537 44,551 3,435,767 1,607,090 257,177 5,887
---------- ----------- -------------- -------- ------------ ----------- --------- -------
$ 1,084 $ - $ 909,482 $47,738 $ 3,932,137 $1,676,205 $264,052 $5,962
========== =========== ============== ======== ============ =========== ========= =======
-21-
NOTES TO FINANCIAL STATEMENTS CONTINUED
6. SCHEDULE OF FUND UL III OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED TO DECEMBER 31, 1999 (CONTINUED)
MONTGOMERY VARIABLE
STRONG SCHAFER SERIES:
VALUE FUND II GROWTH FUND EQUITY INCOME PORTFOLIO
-------------------- --------------------- -------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
Dividends .......................................... $ 5 $ - $ 588 $ - $ 40,858 $ 86,489
------- ---------- --------- ---------- ------------ -----------
EXPENSES:
Insurance charges .................................. 3 - 65 - 10,129 954
------- ---------- --------- ---------- ------------ -----------
Net investment income (loss) ................... 2 - 523 - 30,729 85,535
------- ---------- --------- ---------- ------------ -----------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold .................. - - 82,170 - 887,885 3,455
Cost of investments sold ........................ - - 75,505 - 905,922 3,425
------- ---------- --------- ---------- ------------ -----------
Net realized gain (loss) ....................... - - 6,665 - (18,037) 30
------- ---------- --------- ---------- ------------ -----------
CHANGE IN UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Unrealized gain (loss) beginning of period ....... - - - - (24,910) -
Unrealized gain (loss) end of period ............. 101 - (1,339) - 237,307 (24,910)
------- ---------- --------- ---------- ------------ -----------
Net change in unrealized gain (loss) for the period 101 - (1,339) - 262,217 (24,910)
------- ---------- --------- ---------- ------------ -----------
Net increase (decrease) in net assets
resulting from operations ....................... 103 - 5,849 - 274,909 60,655
------- ---------- --------- ---------- ------------ -----------
UNIT TRANSACTIONS:
Participant premium payments ....................... 1,000 - 15,023 - 2,163,724 1,451,441
Participant transfers from other Travelers accounts - - 81,397 - 1,415,418 25,448
Contract surrenders ................................ - - (424) - (79,300) (10,032)
Participant transfers to other Travelers accounts .. - - (93,397) - (1,112,440) -
Other payments to participants ..................... - - - - - -
------- ---------- --------- ---------- ------------ -----------
Net increase (decrease) in net assets
resulting from unit transactions ............... 1,000 - 2,599 - 2,387,402 1,466,857
------- ---------- --------- ---------- ------------ -----------
Net increase (decrease) in net assets .......... 1,103 - 8,448 - 2,662,311 1,527,512
NET ASSETS:
Beginning of period ............................. - - - - 1,527,512 -
------- ---------- --------- ---------- ------------ -----------
End of period ................................... $1,103 $ - $ 8,448 $ - $ 4,189,823 $1,527,512
======= ========== ========= ========== ============ ===========
-22-
NOTES TO FINANCIAL STATEMENTS CONTINUED
JURIKA & VOYLES CORE EQUITY LAZARD INTERNATIONAL STOCK
PORTFOLIO LARGE CAP PORTFOLIO PORTFOLIO MFS EMERGING GROWTH PORTFOLIO
--------------------------- ------------------------- -------------------------- ------------------------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
$ 41 $ - $ 496,326 $ 132,932 $ 207,019 $ - $ 545,232 $ -
------ --------- ------------ ----------- ------------ ------------ ------------ --------------
4 - 23,878 1,987 20,022 2,310 43,794 3,268
------ --------- ------------ ----------- ------------ ------------ ------------ --------------
37 - 472,448 130,945 186,997 (2,310) 501,438 (3,268)
------ --------- ------------ ----------- ------------ ------------ ------------ --------------
- - 476,259 7,174 1,671,657 8,137 3,694,789 12,877
- - 460,052 6,667 1,712,766 7,898 3,613,686 11,032
------ --------- ------------ ----------- ------------ ------------ ------------ --------------
- - 16,207 507 (41,109) 239 81,103 1,845
------ --------- ------------ ----------- ------------ ------------ ------------ --------------
- - 199,401 - 253,882 - 1,558,597 -
90 - (1,355,205) 199,401 (383,928) 253,882 (1,722,045) 1,558,597
------ --------- ------------ ----------- ------------ ------------ ------------ --------------
90 - (1,554,606) 199,401 (637,810) 253,882 (3,280,642) 1,558,597
------ --------- ------------ ----------- ------------ ------------ ------------ --------------
127 - (1,065,951) 330,853 (491,922) 251,811 (2,698,101) 1,557,174
------ --------- ------------ ----------- ------------ ------------ ------------ --------------
1,000 - 5,693,341 2,830,134 4,925,746 3,346,754 11,180,153 4,450,651
- - 1,175,843 - 428,706 - 2,983,786 -
- - (185,602) (20,116) (158,755) (23,359) (344,818) (33,576)
- - (717,380) - (1,704,884) - (4,463,762) -
- - - - - - - -
------ --------- ------------ ----------- ------------ ------------ ------------ --------------
1,000 - 5,966,202 2,810,018 3,490,813 3,323,395 9,355,359 4,417,075
------ --------- ------------ ----------- ------------ ------------ ------------ --------------
1,127 - 4,900,251 3,140,871 2,998,891 3,575,206 6,657,258 5,974,249
- - 3,140,871 - 3,575,206 - 5,974,249 -
------ --------- ------------ ----------- ------------ ------------ ------------ --------------
$1,127 $ - $ 8,041,122 $3,140,871 $ 6,574,097 $3,575,206 $12,631,507 $5,974,249
====== ========= ============ =========== ============ ============ ============ ==============
-23-
NOTES TO FINANCIAL STATEMENTS CONTINUED
6. SCHEDULE OF FUND UL III OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED TO DECEMBER 31, 1999 (CONTINUED)
MFS MID CAP MFS RESEARCH NWQ LARGE
GROWTH PORTFOLIO PORTFOLIO CAP PORTFOLIO
---------------------- -------------------- ------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
Dividends ............................................ $ 22,720 $ - $ 1,025 $ - $ 18 $ -
----------- --------- ---------- -------- ------- ---------
EXPENSES:
Insurance charges .................................... 2,336 50 570 23 3 -
----------- --------- ---------- -------- ------- ---------
Net investment income (loss) ..................... 20,384 (50) 455 (23) 15 -
----------- --------- ---------- -------- ------- ---------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold ..................... 251,682 387 159,761 175 - -
Cost of investments sold ........................... 215,329 354 151,419 169 - -
----------- --------- ---------- -------- ------- ---------
Net realized gain (loss) ......................... 36,353 33 8,342 6 - -
----------- --------- ---------- -------- ------- ---------
CHANGE IN UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Unrealized gain (loss) beginning of period ......... 18,618 - 4,553 - - -
Unrealized gain (loss) end of period ............... (134,322) 18,618 (45,501) 4,553 147 -
----------- --------- ---------- -------- ------- ---------
Net change in unrealized gain (loss) for the
period ......................................... (152,940) 18,618 (50,054) 4,553 147 -
----------- --------- ---------- -------- ------- ---------
Net increase (decrease) in net assets
resulting from operations ........................ (96,203) 18,601 (41,257) 4,536 162 -
----------- --------- ---------- -------- ------- ---------
UNIT TRANSACTIONS:
Participant premium payments ......................... 794,617 89,835 296,103 44,914 1,000 -
Participant transfers from other Travelers accounts .. 1,000,439 - 342,361 - - -
Contract surrenders .................................. (21,658) (734) (7,195) (358) - -
Participant transfers to other Travelers accounts .... (444,027) - (299,311) - - -
Other payments to participants ....................... - - - - - -
----------- --------- ---------- -------- ------- ---------
Net increase (decrease) in net assets
resulting from unit transactions ................. 1,329,371 89,101 331,958 44,556 1,000 -
----------- --------- ---------- -------- ------- ---------
Net increase (decrease) in net assets ............ 1,233,168 107,702 290,701 49,092 1,162 -
NET ASSETS:
Beginning of period ................................ 107,702 - 49,092 - - -
----------- --------- ---------- -------- ------- ---------
End of period ...................................... $1,340,870 $107,702 $ 339,793 $49,092 $1,162 $ -
=========== ========= ========== ======== ======= =========
-24-
NOTES TO FINANCIAL STATEMENTS CONTINUED
SOCIAL AWARENESS STRATEGIC CONVERTIBLE DISCIPLINED MID CAP
STOCK PORTFOLIO STOCK PORTFOLIO BOND PORTFOLIO STOCK PORTFOLIO
------------------------ ----------------------- -------------------- ---------------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
$ 18 $ - $ 15,517 $ - $ 18,250 $ - $ 3,826 $ -
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
296 - 265 - 1,021 23 626 23
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
(278) - 15,252 - 17,229 (23) 3,200 (23)
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
309,119 - 211,456 - 97,446 172 236,133 177
307,942 - 217,264 - 93,537 169 228,225 170
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
1,177 - (5,808) - 3,909 3 7,908 7
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
- - - - 2,532 - 3,607 -
(1) - 111 - (3,060) 2,532 9,540 3,607
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
(1) - 111 - (5,592) 2,532 5,933 3,607
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
898 - 9,555 - 15,546 2,512 17,041 3,591
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
20,312 - 20,546 - 195,281 44,895 246,504 44,902
300,894 - 320,593 - 665,540 - 561,713 -
(2,179) - (1,867) - (7,652) (354) (4,280) (359)
(319,925) - (347,676) - (130,355) - (382,483) -
- - - - - - - -
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
(898) - (8,404) - 722,814 44,541 421,454 44,543
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
- - 1,151 - 738,360 47,053 438,495 48,134
- - - - 47,053 - 48,134 -
---------- ---------- ---------- ----------- ---------- -------- ---------- --------
$ - $ - $ 1,151 $ - $ 785,413 $47,053 $ 486,629 $48,134
========== ========== ========== =========== ========== ======== ========== ========
-25-
NOTES TO FINANCIAL STATEMENTS CONTINUED
6. SCHEDULE OF FUND UL III OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED TO DECEMBER 31, 1999 (CONTINUED)
DISCIPLINED SMALL U.S. GOVERNMENT
CAP STOCK PORTFOLIO SECURITIES PORTFOLIO UTILITIES PORTFOLIO
------------------- ---------------------- ---------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
Dividends ............................................ $ 62 $ - $ 64,814 $ - $ 6,000 $ -
--------- -------- ----------- -------- ---------- --------
EXPENSES:
Insurance charges .................................... 7 - 16,205 40 702 22
--------- -------- ----------- -------- ---------- --------
Net investment income (loss) ..................... 55 - 48,609 (40) 5,298 (22)
--------- -------- ----------- -------- ---------- --------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold ..................... 42,061 - 4,435,390 176 120,677 164
Cost of investments sold ........................... 41,251 - 4,366,014 178 117,366 170
--------- -------- ----------- -------- ---------- --------
Net realized gain (loss) ............................. 810 - 69,376 (2) 3,311 (6)
--------- -------- ----------- -------- ---------- --------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of period ......... - - (1,085) - (1,019) -
Unrealized gain (loss) end of period ............... 68 - 326,428 (1,085) 25,638 (1,019)
--------- -------- ----------- -------- ---------- --------
Net change in unrealized gain (loss) for the
period ......................................... 68 - 327,513 (1,085) 26,657 (1,019)
--------- -------- ----------- -------- ---------- --------
Net increase (decrease) in net assets
resulting from operations ....................... 933 - 445,498 (1,127) 35,266 (1,047)
--------- -------- ----------- -------- ---------- --------
UNIT TRANSACTIONS:
Participant premium payments ......................... 42,327 - 1,163,990 62,773 203,807 44,866
Participant transfers from other Travelers accounts .. 60 - 12,090,310 - 123,805 -
Contract surrenders .................................. (163) - (164,924) (304) (5,100) (345)
Participant transfers to other Travelers accounts .... (42,122) - (7,828,175) - (144,753) -
Other payments to participants ....................... - - (31,656) - 2 -
--------- -------- ----------- -------- ---------- --------
Net increase (decrease) in net assets
resulting from unit transactions ................. 102 - 5,229,545 62,469 177,761 44,521
--------- -------- ----------- -------- ---------- --------
Net increase (decrease) in net assets ............ 1,035 - 5,675,043 61,342 213,027 43,474
NET ASSETS:
Beginning of period ................................ - - 61,342 - 43,474 -
--------- -------- ----------- -------- ---------- --------
End of period ...................................... $ 1,035 $ - $ 5,736,385 $61,342 $ 256,501 $43,474
========= ======== =========== ======== ========== ========
-26-
NOTES TO FINANCIAL STATEMENTS CONTINUED
AIM CAPITAL ALLIANCE MFS TOTAL PUTNAM DIVERSIFIED
APPRECIATION PORTFOLIO GROWTH PORTFOLIO RETURN PORTFOLIO INCOME PORTFOLIO
------------------------ ------------------------- ------------------------- ---------------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
$ 55,256 $ - $ 506,468 $ - $ 104,301 $ - $ 10,368 $ -
---------- ---------- ----------- ---------- ----------- ---------- -------- -------
10,997 751 30,804 3,288 9,410 909 641 40
---------- ---------- ----------- ---------- ----------- ---------- -------- -------
44,259 (751) 475,664 (3,288) 94,891 (909) 9,727 (40)
---------- ---------- ----------- ---------- ----------- ---------- -------- -------
315,699 2,593 1,937,507 11,858 1,748,106 3,100 15,946 178
275,019 2,288 1,837,814 10,675 1,717,538 3,060 16,587 178
---------- ---------- ----------- ---------- ----------- ---------- -------- -------
40,680 305 99,693 1,183 30,568 40 (641) -
---------- ---------- ----------- ---------- ----------- ---------- -------- -------
219,664 - 710,415 - 17,622 - 606 -
(383,760) 219,664 (1,462,975) 710,415 259,999 17,622 (6,634) 606
---------- ---------- ----------- ---------- ----------- ---------- -------- -------
(603,424) 219,664 (2,173,390) 710,415 242,377 17,622 (7,240) 606
---------- ---------- ----------- ---------- ----------- ---------- -------- -------
(518,485) 219,218 (1,598,033) 708,310 367,836 16,753 1,846 566
---------- ---------- ----------- ---------- ----------- ---------- -------- -------
2,166,863 1,077,003 7,833,038 4,458,264 2,015,177 1,333,763 87,300 62,772
1,299,802 - 690,533 169,647 1,642,603 42,412 304,983 -
(82,862) (7,669) (246,230) (32,178) (69,515) (9,207) (4,804) (306)
(276,382) - (2,209,207) - (1,754,905) - (39,701) -
- - - - - - - -
---------- ---------- ----------- ---------- ----------- ---------- -------- -------
3,107,421 1,069,334 6,068,134 4,595,733 1,833,360 1,366,968 347,778 62,466
---------- ---------- ----------- ---------- ----------- ---------- -------- -------
2,588,936 1,288,552 4,470,101 5,304,043 2,201,196 1,383,721 349,624 63,032
1,288,552 - 5,304,043 - 1,383,721 - 63,032 -
---------- ---------- ----------- ---------- ----------- ---------- -------- -------
$3,877,488 $1,288,552 $ 9,774,144 $5,304,043 $ 3,584,917 $1,383,721 $412,656 $63,032
========== ========== =========== ========== =========== ========== ======== =======
-27-
NOTES TO FINANCIAL STATEMENTS CONTINUED
6. SCHEDULE OF FUND UL III OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED TO DECEMBER 31, 1999 (CONTINUED)
SMITH BARNEY SMITH BARNEY LARGE
INTERNATIONAL CAPITALIZATION GROWTH VAN KAMPEN
EQUITY PORTFOLIO PORTFOLIO ENTERPRISE PORTFOLIO
------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
Dividends ............................................. $ 5,058 $ - $ 1,054 $ 681 $ 54,230 $ -
---------- -------- ----------- -------- --------- --------
EXPENSES:
Insurance charges ..................................... 4,204 67 2,381 164 1,889 48
---------- -------- ----------- -------- --------- --------
Net investment income (loss) ...................... 854 (67) (1,327) 517 52,341 (48)
---------- -------- ----------- -------- --------- --------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold ...................... 76,584 204 965,379 1,359 493,296 372
Cost of investments sold ............................ 77,627 185 928,671 1,293 494,149 354
---------- -------- ----------- -------- --------- --------
Net realized gain (loss) .............................. (1,043) 19 36,708 66 (853) 18
---------- -------- ----------- -------- --------- --------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of period .......... 32,301 - 21,194 - 10,888 -
Unrealized gain (loss) end of period ................ (280,116) 32,301 (43,661) 21,194 (127,328) 10,888
---------- -------- ----------- -------- --------- --------
Net change in unrealized gain (loss) for the
period .......................................... (312,417) 32,301 (64,855) 21,194 (138,216) 10,888
---------- -------- ----------- -------- --------- --------
Net increase (decrease) in net assets
resulting from operations ......................... (312,606) 32,253 (29,474) 21,777 (86,728) 10,858
---------- -------- ----------- -------- --------- --------
UNIT TRANSACTIONS:
Participant premium payments .......................... 1,143,296 62,772 1,376,793 314,438 498,921 89,862
Participant transfers from other Travelers accounts ... 843,783 110,270 468,161 - 623,069 -
Contract surrenders ................................... (36,786) (318) (18,978) (2,520) (15,930) (719)
Participant transfers to other Travelers accounts ..... (108,938) - (1,404,416) - (580,969) -
Other payments to participants ........................ - - - - - -
---------- -------- ----------- -------- --------- --------
Net increase (decrease) in net assets
resulting from unit transactions .................. 1,841,355 172,724 421,560 311,918 525,091 89,143
---------- -------- ----------- -------- --------- --------
Net increase (decrease) in net assets ............. 1,528,749 204,977 392,086 333,695 438,363 100,001
NET ASSETS:
Beginning of period ................................. 204,977 - 333,695 - 100,001 -
---------- -------- ----------- -------- --------- --------
End of period ....................................... $1,733,726 $204,977 $ 725,781 $333,695 $ 538,364 $100,001
========== ======== =========== ======== ========= ========
-28-
NOTES TO FINANCIAL STATEMENTS CONTINUED
ASSET MANAGER PORTFOLIO - INITIAL CONTRAFUND(R) PORTFOLIO - SERVICE
CLASS CLASS 2 EMERGING MARKETS PORTFOLIO COMBINED
--------------------------------- ---------------------------------- ---------------------------- ---------------------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
$ 41,961 $ - $ - $ - $ 41,373 $ 8,468 $ 5,916,449 $ 421,230
----------- -------- -------- --------- ----------- -------- ------------ -----------
6,408 159 68 - 3,551 125 471,603 37,853
----------- -------- -------- --------- ----------- -------- ------------ -----------
35,553 (159) (68) - 37,822 8,343 5,444,846 383,377
----------- -------- -------- --------- ----------- -------- ------------ -----------
1,684,720 1,315 1,641 - 675,251 981 55,859,667 1,063,861
1,687,018 1,292 1,695 - 674,185 900 55,128,870 1,055,635
----------- -------- -------- --------- ----------- -------- ------------ -----------
(2,298) 23 (54) - 1,066 81 730,797 8,226
----------- -------- -------- --------- ------------ -------- ------------ -----------
14,015 - - - 34,585 - 5,173,578 -
(55,000) 14,015 330 - (310,606) 34,585 (11,832,903) 5,173,578
----------- -------- -------- --------- ------------ -------- ------------ -----------
(69,015) 14,015 330 - (345,191) 34,585 (17,006,481) 5,173,578
----------- -------- -------- --------- ------------ -------- ------------ -----------
(35,760) 13,879 208 - (306,303) 43,009 (10,830,838) 5,565,181
----------- -------- -------- --------- ------------ -------- ------------ -----------
1,496,386 314,252 273,741 - 1,522,924 224,692 110,856,012 56,405,022
2,878,652 - - - 653,233 - 78,058,756 839,753
(58,818) (2,480) (1,466) - (30,428) (1,832) (3,698,303) (425,818)
(2,727,232) - - - (1,037,427) - (78,110,147) (839,753)
(5,578) - - - - - (81,089) -
----------- -------- -------- --------- ------------ -------- ------------ -----------
1,583,410 311,772 272,275 - 1,108,302 222,860 107,025,229 55,979,204
----------- -------- -------- --------- ------------ -------- ------------ -----------
1,547,650 325,651 272,483 - 801,999 265,869 96,194,391 61,544,385
325,651 - - - 265,869 - 61,544,385 -
----------- -------- -------- --------- ------------ -------- ------------ -----------
$ 1,873,301 $325,651 $272,483 $ - $ 1,067,868 $265,869 $157,738,776 $61,544,385
============ ======== ======== ========= ============ ======== ============ ===========
-29-
NOTES TO FINANCIAL STATEMENTS CONTINUED
7. SCHEDULE OF UNITS FOR FUND UL III
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED TO DECEMBER 31, 1999
CAPITAL
APPRECIATION FUND HIGH YIELD BOND TRUST MONEY MARKET PORTFOLIO
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. 7,652,695 - 1,362,519 - 16,799,562 -
Units purchased and transferred from
other Travelers accounts ................ 21,548,374 7,711,777 4,006,038 1,371,980 34,218,071 17,767,544
Units redeemed and transferred to
other Travelers accounts ................ (6,510,296) (59,082) (1,050,590) (9,461) (24,800,602) (967,982)
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 22,690,773 7,652,695 4,317,967 1,362,519 26,217,031 16,799,562
=========== ========== =========== ========== ============ ===========
INTERMEDIATE-TERM
BOND FUND REIT SERIES SMALL CAP VALUE SERIES
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. 2,298,702 - - - - -
Units purchased and transferred from
other Travelers accounts ................ 5,481,142 2,314,606 300,821 - 1,352,265 -
Units redeemed and transferred to
other Travelers accounts ................ (2,543,875) (15,904) (77,003) - (955,562) -
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 5,235,969 2,298,702 223,818 - 396,703 -
=========== ========== =========== ========== ============ ===========
EAFE(R) EQUITY
INDEX FUND SMALL CAP INDEX FUND APPRECIATION PORTFOLIO
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. 172,586 - 1,003,936 - 176,578 -
Units purchased and transferred from
other Travelers accounts ................ 6,077,388 173,986 3,528,570 1,011,120 839,901 179,350
Units redeemed and transferred to
other Travelers accounts ................ (2,621,942) (1,400) (833,790) (7,184) (679,982) (2,772)
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 3,628,032 172,586 3,698,716 1,003,936 336,497 176,578
=========== ========== =========== ========== ============ ===========
FRANKLIN SMALL CAP EQUITY INDEX PORTFOLIO -
SMALL CAP PORTFOLIO FUND - CLASS 2 CLASS I SHARES
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. 348,184 - - - 2,769,408 -
Units purchased and transferred from
other Travelers accounts ................ 2,214,812 350,747 1,000 - 15,612,576 2,791,294
Units redeemed and transferred to
other Travelers accounts ................ (824,852) (2,563) - - (3,999,704) (21,886)
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 1,738,144 348,184 1,000 - 14,382,280 2,769,408
=========== ========== =========== ========== ============ ===========
-30-
NOTES TO FINANCIAL STATEMENTS CONTINUED
7. SCHEDULE OF UNITS FOR FUND UL III
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1999 (CONTINUED)
GLOBAL TECHNOLOGY
DIVERSIFIED STRATEGIC BALANCED PORTFOLIO - PORTFOLIO -
INCOME PORTFOLIO SERVICE SHARES SERVICE SHARES
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. - - - - - -
Units purchased and transferred from
other Travelers accounts ................ 840,886 - 1,000 - 1,000 -
Units redeemed and transferred to
other Travelers accounts ................ (494,402) - - - - -
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 346,484 - 1,000 - 1,000 -
=========== ========== =========== ========== ============ ===========
WORLDWIDE GROWTH
PORTFOLIO -
SERVICE SHARES EQUITY PORTFOLIO TOTAL RETURN FUND
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. - - - - - -
Units purchased and transferred from
other Travelers accounts ................ 220,758 - 1,929,811 - 161,447 -
Units redeemed and transferred to
other Travelers accounts ................ (1,274) - (1,561,124) - (160,447) -
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 219,484 - 368,687 - 1,000 -
=========== ========== =========== ========== ============ ===========
CAPITAL FUND INVESTORS FUND STRATEGIC BOND FUND
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. 43,155 - 1,560,318 - 5,843 -
Units purchased and transferred from
other Travelers accounts ................ 771,435 43,504 4,083,478 1,571,346 309,621 6,071
Units redeemed and transferred to
other Travelers accounts ................ (116,109) (349) (1,093,050) (11,028) (61,823) (228)
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 698,481 43,155 4,550,746 1,560,318 253,641 5,843
=========== ========== =========== ========== ============ ===========
STRONG SCHAFER MONTGOMERY VARIABLE
VALUE FUND II SERIES: GROWTH FUND EQUITY INCOME PORTFOLIO
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. - - - - 1,441,520 -
Units purchased and transferred from
other Travelers accounts ................ 1,000 - 95,037 - 3,342,324 1,451,445
Units redeemed and transferred to
other Travelers accounts ................ - - (86,190) - (1,144,185) (9,925)
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 1,000 - 8,847 - 3,639,659 1,441,520
=========== ========== =========== ========== ============ ===========
-31-
NOTES TO FINANCIAL STATEMENTS CONTINUED
7. SCHEDULE OF UNITS FOR FUND UL III
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1999 (CONTINUED)
JURIKA & VOYLES CORE LAZARD INTERNATIONAL
EQUITY PORTFOLIO LARGE CAP PORTFOLIO STOCK PORTFOLIO
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. - - 2,618,902 - 3,303,214 -
Units purchased and transferred from
other Travelers accounts ................ 1,000 - 6,113,884 2,637,905 5,475,698 3,326,495
Units redeemed and transferred to
other Travelers accounts ................ - - (753,707) (19,003) (1,883,261) (23,281)
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 1,000 - 7,979,079 2,618,902 6,895,651 3,303,214
=========== ========== =========== ========== ============ ===========
MFS EMERGING MFS MID CAP
GROWTH PORTFOLIO GROWTH PORTFOLIO MFS RESEARCH PORTFOLIO
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. 3,916,098 - 82,194 - 42,994 -
Units purchased and transferred from
other Travelers accounts ................ 10,093,464 3,946,576 1,169,143 82,887 562,250 43,344
Units redeemed and transferred to
other Travelers accounts ................ (3,416,183) (30,478) (311,396) (693) (259,512) (350)
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 10,593,379 3,916,098 939,941 82,194 345,732 42,994
=========== ========== =========== ========== ============ ===========
NWQ LARGE SOCIAL AWARENESS
CAP PORTFOLIO STOCK PORTFOLIO STRATEGIC STOCK PORTFOLIO
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. - - - - - -
Units purchased and transferred from
other Travelers accounts ................ 1,000 - 300,604 - 349,718 -
Units redeemed and transferred to
other Travelers accounts ................ - - (300,604) - (348,718) -
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 1,000 - - - 1,000 -
=========== ========== =========== ========== ============ ===========
CONVERTIBLE DISCIPLINED MID CAP DISCIPLINED SMALL CAP
BOND PORTFOLIO STOCK PORTFOLIO STOCK PORTFOLIO
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. 43,662 - 43,107 - - -
Units purchased and transferred from
other Travelers accounts ................ 739,748 44,013 652,638 43,456 43,594 -
Units redeemed and transferred to
other Travelers accounts ................ (121,341) (351) (320,311) (349) (42,594) -
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 662,069 43,662 375,434 43,107 1,000 -
=========== ========== =========== ========== ============ ===========
-32-
NOTES TO FINANCIAL STATEMENTS CONTINUED
7. SCHEDULE OF UNITS FOR FUND UL III
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1999 (CONTINUED)
U.S. GOVERNMENT AIM CAPITAL
SECURITIES PORTFOLIO UTILITIES PORTFOLIO APPRECIATION PORTFOLIO
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. 62,467 - 45,475 - 949,091 -
Units purchased and transferred from
other Travelers accounts ................ 13,064,454 62,772 315,168 45,828 2,512,867 956,055
Units redeemed and transferred to
other Travelers accounts ................ (7,997,365) (305) (144,319) (353) (246,303) (6,964)
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 5,129,556 62,467 216,324 45,475 3,215,655 949,091
=========== ========== =========== ========== ============ ===========
ALLIANCE MFS TOTAL RETURN PUTNAM DIVERSIFIED
GROWTH PORTFOLIO PORTFOLIO INCOME PORTFOLIO
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. 4,193,981 - 1,345,156 - 62,467 -
Units purchased and transferred from
other Travelers accounts ................ 7,476,181 4,223,472 3,376,933 1,354,209 393,938 62,772
Units redeemed and transferred to
other Travelers accounts ................ (2,001,545) (29,491) (1,720,634) (9,053) (44,004) (305)
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 9,668,617 4,193,981 3,001,455 1,345,156 412,401 62,467
=========== ========== =========== ========== ============ ===========
SMITH BARNEY SMITH BARNEY LARGE
INTERNATIONAL CAPITALIZATION GROWTH VAN KAMPEN
EQUITY PORTFOLIO PORTFOLIO ENTERPRISE PORTFOLIO
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. 156,528 - 301,335 - 85,037 -
Units purchased and transferred from
other Travelers accounts ................ 1,800,350 156,833 1,646,864 303,778 943,200 85,735
Units redeemed and transferred to
other Travelers accounts ................ (122,978) (305) (1,240,651) (2,443) (489,398) (698)
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 1,833,900 156,528 707,548 301,335 538,839 85,037
=========== ========== =========== ========== ============ ===========
ASSET MANAGER CONTRAFUND(R)
PORTFOLIO - PORTFOLIO -
INITIAL CLASS SERVICE CLASS 2 EMERGING MARKETS PORTFOLIO
------------------------ ------------------------ --------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Units beginning of period .................. 306,860 - - - 206,300 -
Units purchased and transferred from
other Travelers accounts ................ 4,205,617 309,313 294,630 - 1,908,492 208,036
Units redeemed and transferred to
other Travelers accounts ................ (2,658,763) (2,453) (1,590) - (898,754) (1,736)
----------- ---------- ----------- ---------- ------------ -----------
Units end of period ........................ 1,853,714 306,860 293,040 - 1,216,038 206,300
=========== ========== =========== ========== ============ ===========
-33-
NOTES TO FINANCIAL STATEMENTS CONTINUED
7. SCHEDULE OF UNITS FOR FUND UL III
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD SEPTEMBER 8, 1999
(DATE OPERATIONS COMMENCED) (CONTINUED) TO DECEMBER 31, 1999
COMBINED
-----------------------------------
2000 1999
---- ----
Units beginning of period .................. 53,399,874 -
Units purchased and transferred from
other Travelers accounts ................ 170,380,190 54,638,249
Units redeemed and transferred to
other Travelers accounts ................ (74,940,733) (1,238,375)
---------------- -----------------
Units end of period ........................ 148,839,331 53,399,874
================ =================
-34-
INDEPENDENT AUDITORS' REPORT
The Board of Directors of The Travelers Insurance Company and
Owners of Variable Life Insurance Contracts of The Travelers Fund UL III for
Variable Life Insurance:
We have audited the accompanying statement of assets and liabilities of The
Travelers Fund UL III for Variable Life Insurance (comprised of the sub-accounts
listed in note 1) (collectively, "the Account") as of December 31, 2000, and the
related statements of operations and changes in net assets for the year ended
December 31, 2000 and the period September 8, 1999 (date operations commenced)
to December 31, 1999. These financial statements are the responsibility of the
Account's management. Our responsibility is to express an opinion on these
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. Our procedures included confirmation of shares owned as of December
31, 2000, by correspondence with the underlying funds. 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 financial statements referred to above present fairly, in
all material respects, the financial position of the Account as of December 31,
2000, the results of its operations and changes in its net assets for the year
ended December 31, 2000 and the period September 8, 1999 (date operations
commenced) to December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
[KPMG LLP LOGO]
Hartford, Connecticut
February 15, 2001
-35-
Independent Auditors
KPMG LLP
Hartford, Connecticut
This report is prepared for the general information of contract owners and is
not an offer of units of The Travelers Fund UL III for Variable Life Insurance
or shares of Fund UL III's underlying funds. It should not be used in connection
with any offer except in conjunction with the Prospectus for The Travelers Fund
UL III product(s) for Variable Life Insurance offered by The Travelers Insurance
Company and the Prospectuses for the underlying funds, which collectively
contain all pertinent information, including the applicable sales commissions.
Fund UL III (Annual) (12-00) Printed in U.S.A.
SEMI-ANNUAL REPORT
JUNE 30, 2001
THE TRAVELERS FUND UL III
FOR VARIABLE LIFE INSURANCE
[TRAVELERS ICON]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
THE TRAVELERS FUND UL III
FOR VARIABLE LIFE INSURANCE
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 2001
ASSETS:
Investments at market value:
Capital Appreciation Fund, 388,124 shares (cost $33,874,761)............. $ 26,869,825
High Yield Bond Trust, 840,773 shares (cost $7,778,497).................. 7,878,047
Money Market Portfolio, 51,481,880 shares (cost $51,481,880)............. 51,481,880
CitiStreet Funds, Inc., 198,206 shares (cost $2,179,419)................. 2,184,232
Credit Suisse Warburg Pincus Trust, 127,996 shares (cost $1,480,053)..... 1,185,243
Delaware Group Premium Fund, 225,856 shares (cost $2,818,642)............ 3,034,933
Deutsche Asset Management VIT Funds, 993,328 shares (cost $10,830,326)... 10,343,765
Dreyfus Variable Investment Fund, 328,023 shares (cost $13,262,799)...... 12,418,050
Franklin Templeton Variable Insurance Products Trust, 15,916 shares
(cost $307,565).......................................................... 97,471
Greenwich Street Series Fund, 701,870 shares (cost $21,630,342).......... 20,497,779
Janus Aspen Series, 291,621 shares (cost $6,804,858)..................... 6,416,611
OCC Accumulation Trust, 27,001 shares (cost $947,755).................... 972,862
PIMCO Variable Insurance Trust, 162,182 shares (cost $1,586,407)......... 1,581,277
Salomon Brothers Variable Series Funds Inc., 937,930 shares
(cost $12,153,969)....................................................... 12,130,642
Strong Variable Insurance Funds, Inc., 113 shares (cost $1,005).......... 1,164
The Montgomery Funds III, 61 shares (cost $1,000)........................ 828
The Travelers Series Trust, 4,978,595 shares (cost $77,181,590).......... 70,601,111
Travelers Series Fund Inc., 1,818,731 shares (cost $35,334,785).......... 28,512,533
Variable Insurance Products Fund II, 166,091 shares (cost $2,744,633).... 2,517,929
------------------
Total Investments (cost $282,400,286).................................. $ 258,926,182
Receivables:
Dividends................................................................ 57,993
Premium payments and transfers from other Travelers accounts............. 171,791
Other assets............................................................... 12
-------------------
Total Assets........................................................... 259,155,978
-------------------
LIABILITIES:
Payables:
Insurance charges........................................................ 20,937
-------------------
Total Liabilities...................................................... 20,937
-------------------
NET ASSETS: $ 259,135,041
===================
See Notes to Financial Statements
-1-
THE TRAVELERS FUND UL III
FOR VARIABLE LIFE INSURANCE
STATEMENT OF OPERATIONS
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2001 2000
---- ----
(UNAUDITED) (UNAUDITED)
----------- -----------
INVESTMENT INCOME:
Dividends .............................................................. $ 6,051,049 $ 3,330,911
-------------- --------------
EXPENSES:
Insurance charges ...................................................... 421,292 186,790
-------------- --------------
Net investment income .............................................. 5,629,757 3,144,121
-------------- --------------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold ....................................... 108,464,925 31,849,688
Cost of investments sold ............................................. 115,595,996 30,888,283
-------------- --------------
Net realized gain (loss) ........................................... (7,131,071) 961,405
-------------- --------------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) loss at beginning of period ................... (11,832,903) 5,173,578
Unrealized gain (loss) loss at end of period ......................... (23,474,104) 1,634,631
-------------- --------------
Net change in unrealized gain (loss) for the period ................ (11,641,201) (3,538,947)
-------------- --------------
Net realized gain (loss) and change in unrealized gain (loss) .... (18,772,272) (2,577,542)
-------------- --------------
Net increase (decrease) in net assets resulting from operations ........ $ (13,142,515) $ 566,579
============== ==============
-2-
See Notes to Financial Statements
-3-
THE TRAVELERS FUND UL III
FOR VARIABLE LIFE INSURANCE
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2001 2000
---- ----
(UNAUDITED) (UNAUDITED)
OPERATIONS:
Net investment income .......................................... $ 5,629,757 $ 3,144,121
Net realized gain (loss) from investment transactions .......... (7,131,071) 961,405
Net change in unrealized gain (loss) on investments ............ (11,641,201) (3,538,947)
--------------- --------------
Net increase (decrease) in net assets resulting from
operations ................................................... (13,142,515) 566,579
--------------- --------------
UNIT TRANSACTIONS:
Participant premium payments
(applicable to 133,103,380 and 35,302,876 units,
respectively) ............................................... 129,267,900 41,429,580
Participant transfers from other Travelers accounts
(applicable to 130,921,890 and 48,661,424 units,
respectively) ............................................... 129,653,011 53,121,494
Contract surrenders
(applicable to 14,197,313 and 1,035,962 units,
respectively) ............................................... (14,725,869) (1,202,897)
Participant transfers to other Travelers accounts
(applicable to 130,420,287 and 49,145,031 units,
respectively) ............................................... (129,656,262) (53,119,700)
--------------- --------------
Net increase in net assets resulting from unit
transactions ................................................. 114,538,780 40,228,477
--------------- --------------
Net increase in net assets ................................. 101,396,265 40,795,056
NET ASSETS:
Beginning of period ............................................ 157,738,776 61,544,385
--------------- --------------
End of period .................................................. $ 259,135,041 $ 102,339,441
=============== ==============
-4-
See Notes to Financial Statements
-5-
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Fund UL III for Variable Life Insurance ("Fund UL III") is a
separate account of The Travelers Insurance Company ("The Travelers"), an
indirect wholly owned subsidiary of Citigroup Inc., and is available for
funding certain variable life insurance contracts issued by The Travelers.
Fund UL III is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. Fund UL III is comprised of the
Travelers Corporate Owned Variable Universal Life Insurance Policies and
the Travelers Corporate Owned Variable Life Insurance 2000 Policies
products.
Participant premium payments applied to Fund UL III are invested in one or
more sub-accounts in accordance with the selection made by the owner. As of
June 30, 2001, the investments comprising Fund UL III were: Capital
Appreciation Fund; High Yield Bond Trust; Money Market Portfolio; *American
Century VP Ultra Fund of American Century Variable Portfolios, Inc.;
Intermediate-Term Bond Fund (formerly American Odyssey Intermediate-Term
Bond Fund) of American Odyssey Funds, Inc; REIT Series and Small Cap Value
Series of Delaware Group Premium Fund (formerly Delaware Group Premium
Fund, Inc.); EAFE(R) Equity Index Fund and Small Cap Index Fund of Deutsche
Asset Management VIT Funds (formerly BT Insurance Funds Trust);
Appreciation Portfolio (formerly Capital Appreciation Portfolio ) and Small
Cap Portfolio of Dreyfus Variable Investment Fund; Franklin Small Cap Fund
- Class 2 of Franklin Templeton Variable Insurance Products Trust: Equity
Index Portfolio and Diversified Strategic Income Portfolio of Greenwich
Street Series Fund; Balanced Portfolio - Service Shares, Global Technology
Portfolio - Service Shares and Worldwide Growth Portfolio - Service Shares
of Janus Aspen Series; Equity Portfolio of OCC Accumulation Trust; PIMCO
Total Return Bond Portfolio of PIMCO Variable Insurance Trust; Total Return
Fund (formerly Salomon Brothers Variable Total Return Fund), Capital Fund
(formerly Salomon Brothers Variable Capital Fund), Investors Fund (formerly
Salomon Brothers Variable Investors Fund) and Strategic Bond Fund (formerly
Salomon Brothers Variable Strategic Bond Fund) of Salomon Brothers Variable
Series Fund Inc.; Strong Multi Cap Value Fund II (formerly Strong Schafer
Value Fund II) of Strong Variable Insurance Funds, Inc.; Montgomery
Variable Series: Growth Fund of Montgomery Funds III; Equity Income
Portfolio, Jurika & Voyles Core Equity Portfolio, Large Cap Portfolio,
Lazard International Stock Portfolio, MFS Emerging Growth Portfolio, MFS
Mid Cap Growth Portfolio, MFS Research Portfolio, MFS Value Portfolio
(formerly NWQ Large Cap Portfolio), *Social Awareness Stock Portfolio,
Strategic Stock Portfolio, Convertible Bond Portfolio, Disciplined Mid Cap
Stock Portfolio, Disciplined Small Cap Stock Portfolio, Travelers Quality
Bond Portfolio, U.S. Government Securities Portfolio and Utilities
Portfolio of The Travelers Series Trust; AIM Capital Appreciation
Portfolio, Alliance Growth Portfolio, MFS Total Return Portfolio, Putnam
Diversified Income Portfolio, Smith Barney International All Cap Growth
Portfolio (formerly Smith Barney International Equity Portfolio), Smith
Barney Large Capitalization Growth Portfolio and Van Kampen Enterprise
Portfolio of Travelers Series Fund Inc.; Asset Manager Portfolio - Initial
Class and Contrafund(R) Portfolio - Service Class 2 of Variable Insurance
Products Fund II (formerly Fidelity's Variable Insurance Products Fund II)
and Emerging Markets Portfolio of Credit Suisse Warburg Pincus Trust.
All funds are Massachusetts business trust, except for Travelers Series
Trust Fund Inc., American Century Variable Portfolios, Inc., American
Odyssey Funds, Inc., and Salomon Brothers Variable Series Fund Inc., which
are incorporated under Maryland law. Strong Variable Insurance Funds, Inc.
is a Wisconsin corporation and Montgomery Funds III is a Delaware business
trust. Capital Appreciation Fund, High Yield Bond Trust, Money Market
Portfolio, The Travelers Series Trust and Travelers Series Fund Inc. are
managed by affiliates of The Travelers. Not all funds may be available in
all states or to all contract owners. Funds indicated by an asterisk (*)
did not have activity as of December 31, 2000.
A reorganization was approved by the shareholders that combined the assets
Intermediate-Term Bond Fund of American Odyssey into CitiStreet Diversified
Bond Fund, effective April 27, 2001. At the effective date, Fund UL III
held 1,230,766 shares of American Odyssey Intermediate-Term Bond having a
market value of $12,245,114, which were exchanged for 1,140,552 shares of
CitiStreet Diversified Bond Fund equal in value.
The following is a summary of significant accounting policies consistently
followed by Fund UL III in the preparation of its financial statements.
SECURITY VALUATION. Investments are valued daily at the net asset values
per share of the underlying funds.
SECURITY TRANSACTIONS. Security transactions are accounted for on the trade
date. Dividend income is recorded on the ex-dividend date.
-6-
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
FEDERAL INCOME TAXES. The operations of Fund UL III form a part of the
total operations of The Travelers and are not taxed separately. The
Travelers is taxed as a life insurance company under the Internal Revenue
Code of 1986, as amended (the "Code"). Under existing federal income tax
law, no taxes are payable on the investment income of Fund UL III. Fund UL
III is not taxed as a "regulated investment company" under Subchapter M of
the Code.
OTHER. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 expenses during the reporting period.
Actual results could differ from those estimates.
2. INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments
were $228,642,924 and $108,464,925, respectively, for the period ended June
30, 2001. Realized gains and losses from investment transactions are
reported on an average cost basis. The cost of investments in eligible
funds was $282,400,286 at June 30, 2001. Gross unrealized appreciation for
all investments at June 30, 2001 was $1,463,851. Gross unrealized
depreciation for all investments at June 30, 2001 was $24,937,955.
3. CONTRACT CHARGES
Insurance charges are paid for the mortality and expense risks assumed by
The Travelers. Each business day, The Travelers deducts a mortality and
expense risk charge, which is reflected in the calculation of unit values.
For the Travelers Corporate Variable Life Insurance Policies this charge
equals, on an annual basis, 0.45% for policy years 1-4 (contracts in this
category are identified as Price 1 in Note 4); 0.25% for policy years 5-20
(contracts in this category are identified as Price 2 in Note 4); and 0.05%
thereafter (contracts in this category are identified as Price 3 in Note
4), of the amounts held in each variable funding option. For the Travelers
Corporate Owned Variable Life Insurance 2000 Policies this charge equals,
on an annual basis, 0.20% for policy years 1-25 (contracts in this category
are identified as Price 4 in note 4); and 0.05% thereafter (contracts in
this category are identified as Price 3 in note 4), of the amounts held in
each variable funding option.
4. BASIS OF PRESENTATION OF UNAUDITED INTERIM FINANCIAL STATEMENTS
Management believes that all adjustments, consisting of only normal
recurring accruals, considered necessary for a fair presentation of the
unaudited financial statements have been included. The results of
operations for any interim period are not necessarily indicative of
results for the full year. The unaudited interim financial statements
should be read in conjunction with the audited financial statements and
notes thereto for the years ended December 31, 2000 and 1999.
-7-
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-8-
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-9-
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-10-
This report is prepared for the general information of contract owners and is
not an offer of units of The Travelers Fund UL III for Variable Life Insurance
or shares of Fund UL III's underlying funds. It should not be used in connection
with any offer except in conjunction with the Prospectus for The Travelers Fund
UL III product(s) for Variable Life Insurance offered by The Travelers Insurance
Company and the Prospectuses for the underlying funds, which collectively
contain all pertinent information, including the applicable sales commissions.
Fund UL III (Semi-Annual) (6-01) Printed in U.S.A.
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, 2000 and 1999, and the
related consolidated statements of income, changes in retained earnings and
accumulated other changes in equity from non-owner sources and cash flows for
each of the years in the three-year period ended December 31, 2000. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Hartford, Connecticut
January 16, 2001
F-1
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in millions)
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
---- ---- ----
REVENUES
Premiums $1,966 $1,728 $1,727
Net investment income 2,730 2,506 2,185
Realized investment gains (losses) (77) 113 149
Fee income 505 432 370
Other revenues 130 89 70
------------------------------------------------------------------------------------
Total Revenues 5,254 4,868 4,501
------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,752 1,505 1,462
Interest credited to contractholders 1,038 937 876
Amortization of deferred acquisition costs 347 315 275
General and administrative expenses 463 519 505
------------------------------------------------------------------------------------
Total Benefits and Expenses 3,600 3,276 3,118
------------------------------------------------------------------------------------
Income before federal income taxes 1,654 1,592 1,383
------------------------------------------------------------------------------------
Federal income taxes
Current 462 409 442
Deferred 89 136 39
------------------------------------------------------------------------------------
Total Federal Income Taxes 551 545 481
------------------------------------------------------------------------------------
Net income $1,103 $1,047 $902
====================================================================================
See Notes to Consolidated Financial Statements.
F-2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions)
DECEMBER 31, 2000 1999
-------------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value
(including $1,494 at December 31, 2000 subject
to securities lending agreements) $26,812 $23,866
Equity securities, at fair value 592 784
Mortgage loans 2,187 2,285
Real estate held for sale 31 236
Policy loans 1,249 1,258
Short-term securities 2,136 1,283
Trading securities, at fair value 1,870 1,678
Other invested assets 2,356 2,098
-------------------------------------------------------------------------------------
Total Investments 37,233 33,488
-------------------------------------------------------------------------------------
Cash 150 85
Investment income accrued 442 395
Premium balances receivable 97 109
Reinsurance recoverables 3,977 3,234
Deferred acquisition costs 2,989 2,688
Separate and variable accounts 24,006 22,199
Other assets 1,399 1,333
-------------------------------------------------------------------------------------
Total Assets $70,293 $63,531
-------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $19,394 $17,567
Future policy benefits and claims 13,300 12,563
Separate and variable accounts 23,994 22,194
Deferred federal income taxes 284 23
Trading securities sold not yet purchased, at fair value 1,109 1,098
Other liabilities 3,818 2,466
-------------------------------------------------------------------------------------
Total Liabilities 61,899 55,911
-------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized,
issued and outstanding 100 100
Additional paid-in capital 3,848 3,819
Retained earnings 4,342 4,099
Accumulated other changes in equity from non-owner sources 104 (398)
-------------------------------------------------------------------------------------
Total Shareholder's Equity 8,394 7,620
-------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $70,293 $63,531
=====================================================================================
See Notes to Consolidated Financial Statements.
F-3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS AND ACCUMULATED
OTHER CHANGES IN EQUITY FROM NON-OWNER SOURCES
($ in millions)
STATEMENTS OF CHANGES IN RETAINED EARNINGS 2000 1999 1998
------------------------------------------------------------------------------------
Balance, beginning of year $ 4,099 $ 3,602 $2,810
Net income 1,103 1,047 902
Dividends to parent 860 550 110
------------------------------------------------------------------------------------
Balance, end of year $ 4,342 $ 4,099 $3,602
====================================================================================
STATEMENTS OF ACCUMULATED OTHER CHANGES
IN EQUITY FROM NON-OWNER SOURCES
------------------------------------------------------------------------------------
Balance, beginning of year $ (398) $ 598 $ 535
Unrealized gains (losses), net of tax 502 (996) 62
Foreign currency translation, net of tax 0 0 1
------------------------------------------------------------------------------------
Balance, end of year $ 104 $ (398) $ 598
====================================================================================
SUMMARY OF CHANGES IN EQUITY
FROM NON-OWNER SOURCES
------------------------------------------------------------------------------------
Net Income $ 1,103 $ 1,047 $ 902
Other changes in equity from non-owner sources 502 (996) 63
------------------------------------------------------------------------------------
Total changes in equity from non-owner sources $ 1,605 $ 51 $ 965
====================================================================================
See Notes to Consolidated Financial Statements.
F-4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ in millions)
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 1,986 $ 1,715 $ 1,763
Net investment income received 2,489 2,365 2,021
Other revenues received 865 537 419
Benefits and claims paid (1,193) (1,094) (1,127)
Interest credited to contractholders (1,046) (958) (918)
Operating expenses paid (970) (1,013) (751)
Income taxes paid (490) (393) (506)
Trading account investments purchases, net (143) (80) (38)
Other (258) (104) 12
-------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,240 975 875
-------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 4,257 4,103 2,608
Mortgage loans 380 662 722
Proceeds from sales of investments
Fixed maturities 10,840 12,562 13,390
Equity securities 397 100 212
Real estate held for sale 244 219 53
Purchases of investments
Fixed maturities (17,836) (18,129) (18,072)
Equity securities (7) (309) (194)
Mortgage loans (264) (470) (457)
Policy loans, net 9 599 15
Short-term securities (purchases) sales, net (810) 316 (495)
Other investments purchases, net (461) (413) (550)
Securities transactions in course of settlement, net 944 (463) 192
-------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,307) (1,223) (2,576)
-------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 6,022 5,764 4,383
Contractholder fund withdrawals (4,030) (4,946) (2,565)
Dividends to parent company (860) (550) (110)
-------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,132 268 1,708
-------------------------------------------------------------------------------------------------
Net increase in cash 65 20 7
Cash at December 31, previous year 85 65 58
-------------------------------------------------------------------------------------------------
Cash at December 31, current year $ 150 $ 85 $ 65
=================================================================================================
See Notes to Consolidated Financial Statements.
F-5
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 The Travelers Insurance Group Inc.
(TIGI), an indirect wholly owned subsidiary of Citigroup Inc. (Citigroup), a
diversified holding company whose businesses provide a broad range of
financial services to consumer and corporate customers around the world. 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 financial statements and accompanying footnotes of the Company are
prepared in conformity with generally accepted accounting principles 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 2000
presentation.
ACCOUNTING CHANGES
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement No. 125" (FAS 140). Provisions
of FAS 140 primarily relating to transfers of financial assets and
securitizations that differ from provisions of FAS 125 are effective for
transfers taking place after March 31, 2001. Special purpose entities (SPEs)
used in securitizations that are currently qualifying SPEs under FAS 125 will
continue to be treated as qualifying SPEs so long as they issue no new
beneficial interests and accept no new asset transfers after March 31, 2001,
other than transfers committed to prior to that date. Under FAS 140
qualifying SPEs are not consolidated by the transferor. It is not expected
that there will be a significant effect on the Company's results of
operations, financial condition or liquidity relating to a change in
consolidation status for existing qualifying SPEs under FAS 140. FAS 140 also
amends the accounting for collateral and requires new disclosures for
collateral, securitizations, and retained interests in securitizations. These
provisions are effective for financial statements for fiscal years ending
after December 15, 2000. The accounting for collateral, as amended, requires
(a) certain assets pledged as collateral to be separately reported in the
consolidated balance sheet from assets not so encumbered and (b) disclosure
of assets pledged as collateral that have not been reclassified and
separately reported. The change in accounting for collateral did not have a
significant effect on the Company's results of operations, financial
condition or liquidity. See Note 4.
F-6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE
During the third quarter of 1998, the Company adopted the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants' (AcSEC) Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP
98-1 provides guidance on accounting for the costs of computer software
developed or obtained for internal use and for determining when specific
costs should be capitalized or expensed. The adoption of SOP 98-1 did not
have a material impact on the Company's financial condition, results of
operations or liquidity.
ACCOUNTING POLICIES
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks. Fixed
maturities are classified as "available for sale" and are reported at fair
value, with unrealized investment gains and losses, net of income taxes,
charged or credited directly to shareholder's equity. Fair values of
investments in fixed maturities are based on quoted market prices or dealer
quotes or, if these are not available, discounted expected cash flows using
market rates commensurate with the credit quality and maturity of the
investment. Also included in fixed maturities are loan-backed and structured
securities, which are amortized using the retrospective method. The effective
yield used to determine amortization is calculated based upon actual
historical and projected future cash flows, which are obtained from a widely
accepted securities data provider.
Equity securities, which include common and non-redeemable preferred stocks,
are classified as "available for sale" and carried at fair value based
primarily on quoted market prices. Changes in fair values of equity
securities are charged or credited directly to shareholder's equity, net of
income taxes.
Mortgage loans are carried at amortized cost. A mortgage loan is considered
impaired when it is probable that the Company will be unable to collect
principal and interest amounts due. For mortgage loans that are determined to
be impaired, a reserve is established for the difference between the
amortized cost and fair market value of the underlying collateral. In
estimating fair value, the Company uses interest rates reflecting the higher
returns required in the current real estate financing market. Impaired loans
were insignificant at December 31, 2000 and 1999.
Real estate held for sale is carried at the lower of cost or fair value less
estimated cost to sell. Fair value of foreclosed properties is established at
the time of foreclosure by internal analysis or external appraisers, using
discounted cash flow analyses and other accepted techniques. Thereafter, an
allowance for losses on real estate held for sale is established if the
carrying value of the property exceeds its current fair value less estimated
costs to sell. There was no such allowance at December 31, 2000 and 1999.
Policy loans are carried at the amount of the unpaid balances that are not in
excess of the net cash surrender values of the related insurance policies.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
Short-term securities, consisting primarily of money market instruments and
other debt issues purchased with a maturity of less than one year, are
carried at amortized cost, which approximates market.
F-7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Trading securities and related liabilities are normally held for periods less
than six months. These investments are marked to market with the change
recognized in net investment income during the current period.
Other invested assets include partnership investments and real estate joint
ventures accounted for on the equity method of accounting. Undistributed
income is reported in net investment income. Also included in other invested
assets is an investment in Citigroup Preferred Stock. See Note 14.
Accrual of income is suspended on fixed maturities or mortgage loans that are
in default, or on which it is likely that future payments will not be made as
scheduled. Interest income on investments in default is recognized only as
payment is received.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, options, forward contracts, interest rate swaps, currency
swaps and equity swaps, as a means of hedging exposure to interest rate,
equity price and foreign currency risk. Hedge accounting is generally used to
account for derivatives. To qualify for hedge accounting the changes in value
of the derivative must be expected to substantially offset the changes in
value of the hedged item. Hedges are monitored to ensure that there is a high
correlation between the derivative instruments and the hedged investment.
Derivatives that do not qualify for hedge accounting are marked to market
with changes in market value reflected in the consolidated statement of
income.
Gains and losses arising from financial futures contracts are used to adjust
the basis of hedged investments and are recognized in net investment income
over the life of the investment.
Payments to be received or made under interest rate swaps are accrued and
recognized in net investment income. Swaps hedging investments are carried at
fair value with unrealized gains and losses, net of taxes, charged or
credited directly to shareholder's equity. Interest rate, currency options
and currency swaps hedging liabilities are off-balance sheet.
Gains and losses arising from equity index options are marked to market with
changes in market value reflected in realized investment gains (losses).
Forward contracts, interest rate options and equity swaps were not
significant at December 31, 2000 and 1999. Information concerning derivative
financial instruments is included in Note 12.
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. Also included are gains and losses arising from the remeasurement
of the local currency value of foreign investments to U.S. dollars, the
functional currency of the Company. The foreign exchange effects of Canadian
operations are included in unrealized gains and losses.
F-8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DEFERRED ACQUISITION COSTS
Costs of acquiring individual life insurance and annuities, principally
commissions and certain expenses related to policy issuance, underwriting and
marketing, all of which vary with and are primarily related to the production
of new business, are deferred. Acquisition costs relating to traditional life
insurance, including term insurance, are amortized in relation to anticipated
premiums; universal life in relation to estimated gross profits; and annuity
contracts employing a level yield method. For life insurance, a 15 to 20-year
amortization period is used; for long-term care insurance, a 10 to 20-year
period is used, and a seven to 20-year period is employed for annuities.
Deferred acquisition costs are reviewed periodically for recoverability to
determine if any adjustment is required. Adjustments, if any, are charged to
income.
VALUE OF INSURANCE IN FORCE
The value of insurance in force is an asset that was recorded at the time of
acquisition of the Company by Citigroup's predecessor. It represents the
actuarially determined present value of anticipated profits to be realized
from life insurance, annuities and health contracts at the date of
acquisition using the same assumptions that were used for computing related
liabilities where appropriate. The value of insurance in force was the
actuarially determined present value of the projected future profits
discounted at interest rates ranging from 14% to 18%. Traditional life
insurance and guaranteed renewable health policies are amortized in relation
to anticipated premiums; universal life is amortized in relation to estimated
gross profits; and annuity contracts are amortized employing a level yield
method. The value of insurance in force, which is included in other assets,
is reviewed periodically for recoverability to determine if any adjustment is
required. Adjustments, if any, are charged to income. The carrying value at
December 31, 2000 and 1999 was $170 million and $215 million, respectively.
SEPARATE AND VARIABLE ACCOUNTS
Separate and variable accounts primarily represent funds for which investment
income and investment gains and losses accrue directly to, and investment
risk is borne by, the contractholders. Each account has specific investment
objectives. The assets of each account are legally segregated and are not
subject to claims that arise out of any other business of the Company. The
assets of these accounts are carried at market value. Certain other separate
accounts provide guaranteed levels of return or benefits and the assets of
these accounts are primarily carried at market value. Amounts assessed to the
contractholders for management services are included in revenues. Deposits,
net investment income and realized investment gains and losses for these
accounts are excluded from revenues, and related liability increases are
excluded from benefits and expenses.
GOODWILL
Goodwill, which is included in other assets, represents the cost of acquired
businesses in excess of net assets and is being amortized on a straight-line
basis principally over a 40-year period. The carrying amount of $294 million
and $404 million at December 31, 2000 and 1999, respectively, is regularly
reviewed for indication of impairment in value that in the view of management
would be other than temporary. If it is determined that goodwill is unlikely
to be recovered, impairment is recognized on a discounted cash flow basis.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal life,
corporate owned life insurance, pension investment and certain deferred
annuity contracts. Contractholder fund balances are increased by
F-9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
such receipts and credited interest and reduced by withdrawals, mortality
charges and administrative expenses charged to the contractholders. Interest
rates credited to contractholder funds range from 3.5% to 10.0%.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits. Benefit reserves for life insurance and annuities have been
computed based upon mortality, morbidity, persistency and interest
assumptions applicable to these coverages, which range from 2.5% to 8.1%,
including adverse deviation. These assumptions consider Company experience
and industry standards. The assumptions vary by plan, age at issue, year of
issue and duration. Appropriate recognition has been given to experience
rating and reinsurance.
OTHER LIABILITIES
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, 2000
and 1999, the Company had a liability of $22.5 million and $21.9 million,
respectively, for guaranty fund assessments and a related premium tax offset
recoverable of $3.4 million and $4.7 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 include
certain publications of the National Association of Insurance Commissioners
(NAIC) as well as state laws, regulations, and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices
not so prescribed. The impact of presently permitted accounting practices on
statutory surplus of the Company is not material.
The NAIC recently completed a process intended to codify statutory accounting
practices for certain insurance enterprises. As a result of this process, the
NAIC will issue a revised statutory Accounting Practices and Procedures
Manual - version effective January 1, 2001 (the revised Manual) that will be
effective for years beginning January 1, 2001. The State of Connecticut will
require that, effective January 1, 2001, insurance companies domiciled in
Connecticut prepare their statutory basis financial statements in accordance
with the revised Manual subject to any deviations prescribed or permitted by
the Connecticut insurance commissioner. Massachusetts and other states have
addressed compliance with the revised Manual in a similar manner. The Company
has estimated that the impact of this change on statutory capital and surplus
will not be significant.
PREMIUMS
Premiums are recognized as revenues when due. Reserves are established for
the portion of premiums that will be earned in future periods and for
deferred profits on limited-payment policies that are being recognized in
income over the policy term.
F-10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER REVENUES
Other revenues include management fees for variable annuity separate
accounts; surrender, mortality and administrative charges and fees earned on
investment, universal life and other insurance contracts; and revenues of
non-insurance subsidiaries.
CURRENT AND FUTURE INSURANCE BENEFITS
Current and future insurance benefits represent charges for mortality and
morbidity related to fixed annuities, universal life, term life and health
insurance benefits.
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, corporate owned life insurance, pension investment and certain deferred
annuity contracts in accordance with contract provisions.
FEDERAL INCOME TAXES
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income taxes
arise from changes during the year in cumulative temporary differences
between the tax basis and book basis of assets and liabilities.
STOCK-BASED COMPENSATION
The Company accounts for the stock-based compensation plans using the
accounting method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and has included in the
notes to consolidated financial statements the pro forma disclosures required
by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). See note 14. The Company accounts for
its stock-based non-employee compensation plans at fair value.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). In June 1999, the FASB issued Statement of Financial Standards No. 137,
"Deferral of the Effective Date of FASB Statement No. 133" (FAS 137), which
allows entities that have not yet adopted FAS 133 to defer its effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133," which amends the
accounting and reporting standards of FAS 133. FAS 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to
as derivatives), and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the consolidated
balance sheet and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a recognized asset or liability or of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for
F-11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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. Upon
initial application of FAS 133, hedging relationships must be designated anew
and documented pursuant to the provisions of this statement. The Company
adopted the deferral provisions of FAS 137, effective January 1, 2000. The
Company will adopt FAS 133, as amended, as of January 1, 2001.
The Company has determined that the cumulative effect of FAS 133, as amended,
will not be significant. The Company does, however, anticipate a significant
and continuing increase in the complexity of the accounting and the
recordkeeping requirements for hedging activities and for insurance-related
contracts and may make changes to its risk management strategies. The Company
does not expect that FAS 133, as amended, will have a significant impact on
its results of operations, financial condition or liquidity in future
periods.
2. BUSINESS DISPOSITION
Effective July 1, 2000, the Company sold 90% of its individual long-term care
insurance business to General Electric Capital Assurance Company and its
subsidiary in the form of indemnity reinsurance arrangements. The proceeds
were $410 million, resulting in a deferred gain of approximately $150 million
after-tax. The deferred gain will be amortized in relation to anticipated
premiums. Earned premiums were $138 million, $230 million and $200 million in
2000, 1999 and 1998, respectively.
3. OPERATING SEGMENTS
The Company has two reportable business segments that are separately managed
due to differences in products, services, marketing strategy and resource
management. The business of each segment is maintained and reported through
separate legal entities within the Company. The management groups of each
segment report separately to the common ultimate parent, Citigroup Inc.
The TRAVELERS LIFE & ANNUITY business segment consolidates primarily the
business of TIC and TLAC. Travelers Life & Annuity core offerings include
individual annuity, group annuity, individual life and corporate owned life
insurance (COLI) insurance products distributed by TIC and TLAC under the
Travelers name. Among the range of individual products offered are fixed and
variable deferred annuities, payout annuities and term, universal and
variable life insurance. The COLI product is a variable universal life
product distributed through independent specialty brokers. The group products
include institutional pensions, including guaranteed investment contracts,
payout annuities, group annuities to employer-sponsored retirement and
savings plans and structured finance transactions.
The PRIMERICA LIFE INSURANCE business segment consolidates primarily the
business of Primerica Life, Primerica Life Insurance Company of Canada,
CitiLife and NBL. The Primerica Life Insurance business segment offers
individual life products, primarily term insurance, to customers through a
nationwide sales force of approximately 87,000 full and part-time licensed
Personal Financial Analysts.
F-12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1), except that
management also includes receipts on long-duration contracts (universal
life-type and investment contracts) as deposits along with premiums in
measuring business volume. The amount of investments in equity method
investees and total expenditures for additions to long-lived assets other
than financial instruments, long-term customer relationships of a financial
institution, mortgage and other servicing rights, and deferred tax assets,
were not material.
BUSINESS SEGMENT INFORMATION:
----------------------------------------------------------------------------------------------------------
TRAVELERS LIFE PRIMERICA LIFE
2000 ($ in millions) & ANNUITY INSURANCE TOTAL
----------------------------------------------------------------------------------------------------------
Business Volume:
Premiums $ 860 $1,106 $ 1,966
Deposits 11,536 -- 11,536
------- ------ -------
Total business volume $12,396 $1,106 $13,502
Net investment income 2,450 280 2,730
Interest credited to contractholders 1,038 -- 1,038
Amortization of deferred acquisition costs 166 181 347
Total expenditures for deferred acquisition costs 376 272 648
Federal income taxes on Operating Income 381 197 578
Operating Income (excludes realized gains or
losses and the related FIT) $ 777 $ 376 $ 1,153
Segment Assets $62,771 $7,522 $70,293
----------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
TRAVELERS LIFE PRIMERICA LIFE
1999 ($ in millions) & ANNUITY INSURANCE TOTAL
---------------------------------------------------------------------------------------------------------
Business Volume:
Premiums $ 656 $1,072 $ 1,728
Deposits 10,639 -- 10,639
------- ------ -------
Total business volume $11,295 $1,072 $12,367
Net investment income 2,249 257 2,506
Interest credited to contractholders 937 -- 937
Amortization of deferred acquisition costs 127 188 315
Total expenditures for deferred acquisition costs 430 256 686
Federal income taxes on Operating Income 319 186 505
Operating Income (excludes realized gains or
losses and the related FIT) $ 619 $ 355 $ 974
Segment Assets $56,615 $6,916 $63,531
---------------------------------------------------------------------------------------------------------
F-13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
-----------------------------------------------------------------------------------------------------
TRAVELERS LIFE PRIMERICA LIFE
1998 ($ in millions) & ANNUITY INSURANCE TOTAL
-----------------------------------------------------------------------------------------------------
Business Volume:
Premiums $ 670 $1,057 $ 1,727
Deposits 7,437 -- 7,437
------- ------ -------
Total business volume $ 8,107 $1,057 $ 9,164
Net investment income 1,965 220 2,185
Interest credited to contractholders 876 -- 876
Amortization of deferred acquisition costs 88 187 275
Total expenditures for deferred acquisition costs 319 247 566
Federal income taxes on Operating Income 260 170 430
Operating Income (excludes realized gains or
losses and the related FIT) $ 493 $ 312 $ 805
Segment Assets $49,646 $6,902 $56,548
-----------------------------------------------------------------------------------------------------
F-14
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
-------------------------------------------------------------------------------------------
BUSINESS SEGMENT RECONCILIATION:
($ in millions)
-------------------------------------------------------------------------------------------
REVENUES 2000 1999 1998
-------------------------------------------------------------------------------------------
Total business volume $ 13,502 $ 12,367 $ 9,164
Net investment income 2,730 2,506 2,185
Realized investment gains (losses) (77) 113 149
Other revenues, including fee income 635 521 440
Elimination of deposits (11,536) (10,639) (7,437)
-------------------------------------------------------------------------------------------
Total revenues $ 5,254 $ 4,868 $ 4,501
===========================================================================================
OPERATING INCOME 2000 1999 1998
-------------------------------------------------------------------------------------------
Total operating income of business segments $ 1,153 $ 974 $ 805
Realized investment gains (losses), net of tax (50) 73 97
-------------------------------------------------------------------------------------------
Income from continuing operations $ 1,103 $ 1,047 $ 902
===========================================================================================
ASSETS 2000 1999 1998
-------------------------------------------------------------------------------------------
Total assets of business segments $ 70,293 $ 63,531 $ 56,548
===========================================================================================
BUSINESS VOLUME AND REVENUES 2000 1999 1998
-------------------------------------------------------------------------------------------
Individual Annuities $ 7,101 $ 5,816 $ 4,326
Group Annuities 6,563 6,572 4,942
Individual Life and Health Insurance 2,445 2,424 2,257
Other (a) 681 695 413
Elimination of deposits (11,536) (10,639) (7,437)
-------------------------------------------------------------------------------------------
Total Revenue $ 5,254 $ 4,868 $ 4,501
===========================================================================================
(a) Other represents revenue attributable to unallocated capital and
run-off businesses.
The Company's revenue was derived almost entirely from U.S. domestic
business. Revenue attributable to foreign countries was insignificant.
The Company had no transactions with a single customer representing 10% or
more of its revenue.
F-15
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities were as
follows:
-----------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2000 AMORTIZED UNREALIZED UNREALIZED FAIR
($ in millions) COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities -
CMOs and pass-through securities $ 5,492 $169 $ 34 $ 5,627
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,141 71 5 1,207
Obligations of states, municipalities
and political subdivisions 168 14 1 181
Debt securities issued by foreign
governments 761 18 14 765
All other corporate bonds 14,575 269 253 14,591
Other debt securities 4,217 87 59 4,245
Redeemable preferred stock 201 14 19 196
-----------------------------------------------------------------------------------------------------------
Total Available For Sale $26,555 $642 $385 $26,812
-----------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 1999 AMORTIZED UNREALIZED UNREALIZED FAIR
($ in millions) COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities -
CMOs and pass-through securities $ 5,081 $ 22 $224 $ 4,879
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,032 14 53 993
Obligations of states, municipalities and
political subdivisions 214 -- 31 183
Debt securities issued by foreign
governments 811 35 10 836
All other corporate bonds 13,938 69 384 13,623
Other debt securities 3,319 30 99 3,250
Redeemable preferred stock 105 4 7 102
-----------------------------------------------------------------------------------------------------------
Total Available For Sale $24,500 $174 $808 $23,866
-----------------------------------------------------------------------------------------------------------
F-16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Proceeds from sales of fixed maturities classified as available for sale were
$10.8 billion, $12.6 billion and $13.4 billion in 2000, 1999 and 1998,
respectively. Gross gains of $213 million, $200 million and $314 million and
gross losses of $432 million, $223 million and $203 million in 2000, 1999 and
1998, respectively, were realized on those sales.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted expected
cash flows using market rates commensurate with the credit quality and
maturity of the investment. The fair value of investments for which a quoted
market price or dealer quote are not available amounted to $4.8 billion at
December 31, 2000 and 1999.
The amortized cost and fair value of fixed maturities at December 31, 2000,
by contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
--------------------------------------------------------------------------
AMORTIZED
($ in millions) COST FAIR VALUE
--------------------------------------------------------------------------
MATURITY:
Due in one year or less $ 1,556 $ 1,545
Due after 1 year through 5 years 7,789 7,839
Due after 5 years through 10 years 5,606 5,640
Due after 10 years 6,112 6,161
------------------------
21,063 21,185
------------------------
Mortgage-backed securities 5,492 5,627
--------------------------------------------------------------------------
Total Maturity $26,555 $26,812
--------------------------------------------------------------------------
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 (PAC) 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, 2000 and 1999, the Company held CMOs classified as available
for sale with a fair value of $4.4 billion and $3.8 billion, respectively.
Approximately 49% and 52%, respectively, of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 2000
and 1999. In addition, the Company held $1.1 billion of GNMA, FNMA or FHLMC
mortgage-backed pass-through securities at December 31, 2000 and 1999.
Virtually all of these securities are rated AAA.
F-17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. The
Company generally receives cash collateral from the borrower, equal to at
least the market value of the loaned securities plus accrued interest, and
reinvests it in a short-term investment pool. See Note 14. The loaned
securities remain a recorded asset of the Company, however, the Company
records a liability for the amount of the collateral held, representing its
obligation to return the collateral related to these loaned securities, and
reports that liability as part of other liabilities in the consolidated
balance sheet. At December 31, 2000 and 1999, the Company held collateral of
$1.5 billion and $561.1 million, respectively.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as follows:
------------------------------------------------------------------------------------------
GROSS GROSS
EQUITY SECURITIES: UNREALIZED UNREALIZED FAIR
($ in millions) COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------------
DECEMBER 31, 2000
Common stocks $139 $ 11 $25 $125
Non-redeemable preferred stocks 492 7 32 467
------------------------------------------------------------------------------------------
Total Equity Securities $631 $ 18 $57 $592
------------------------------------------------------------------------------------------
DECEMBER 31, 1999
Common stocks $195 $123 $ 4 $314
Non-redeemable preferred stocks 496 15 41 470
------------------------------------------------------------------------------------------
Total Equity Securities $691 $138 $45 $784
------------------------------------------------------------------------------------------
Proceeds from sales of equity securities were $397 million, $100 million and
$212 million in 2000, 1999 and 1998, respectively. Gross gains of $107
million, $15 million and $30 million and gross losses of $16 million, $8
million and $24 million in 2000, 1999 and 1998, respectively, were realized
on those sales.
MORTGAGE LOANS AND REAL ESTATE HELD FOR SALE
At December 31, 2000 and 1999, the Company's mortgage loan and real estate
held for sale portfolios consisted of the following:
--------------------------------------------------------------------------------------
($ in millions) 2000 1999
--------------------------------------------------------------------------------------
Current Mortgage Loans $2,144 $2,228
Underperforming Mortgage Loans 43 57
----------------------
Total Mortgage Loans 2,187 2,285
----------------------
Real Estate Held For Sale - Foreclosed 18 223
Real Estate Held For Sale - Investment 13 13
--------------------------------------------------------------------------------------
Total Real Estate 31 236
--------------------------------------------------------------------------------------
Total Mortgage Loans and Real Estate Held for Sale $2,218 $2,521
======================================================================================
Underperforming mortgage loans include delinquent mortgage loans over 90 days
past due, loans in the process of foreclosure and loans modified at interest
rates below market.
F-18
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 2000 are as
follows:
---------------------------------------------
YEAR ENDING DECEMBER 31,
($ in millions)
---------------------------------------------
Past Maturity $ 32
2001 259
2002 152
2003 172
2004 167
2005 124
Thereafter 1,281
---------------------------------------------
Total $2,187
---------------------------------------------
TRADING SECURITIES
Trading securities of the Company are held in Tribeca Investments LLC. See
Note 12.
-------------------------------------------------------------------------
($ in millions) 2000 1999
-------------------------------------------------------------------------
TRADING SECURITIES OWNED
Convertible bond arbitrage $1,474 $1,045
Merger arbitrage 309 421
Other 87 212
-------------------------------------------------------------------------
Total $1,870 $1,678
-------------------------------------------------------------------------
TRADING SECURITIES SOLD NOT YET PURCHASED
Convertible bond arbitrage $ 845 $ 799
Merger arbitrage 205 299
Other 59 --
-------------------------------------------------------------------------
Total $1,109 $1,098
-------------------------------------------------------------------------
The Company's trading portfolio investments and related liabilities are
normally held for periods less than six months. Therefore, expected future
cash flows for these assets and liabilities are expected to be realized in
less than one year.
OTHER INVESTED ASSETS
Other invested assets are composed of the following:
------------------------------------------------------------------------
($ in millions) 2000 1999
------------------------------------------------------------------------
Investment in Citigroup preferred stock $ 987 $ 987
Partnership investments 807 592
Real estate joint ventures 535 502
Other 27 17
------------------------------------------------------------------------
Total $2,356 $2,098
------------------------------------------------------------------------
F-19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONCENTRATIONS
At December 31, 2000 and 1999, the Company had an investment in Citigroup
Preferred Stock of $987 million. See Note 14.
The Company maintains a short-term investment pool for its insurance
affiliates in which the Company also participates. See Note 14.
The Company had concentrations of investments, primarily fixed maturities at
fair value, in the following industries:
--------------------------------------------------
($ in millions) 2000 1999
--------------------------------------------------
Electric Utilities $2,244 $1,653
Banking 2,078 1,906
Finance 1,836 1,571
--------------------------------------------------
The Company held investments in foreign banks in the amount of $1,082 million
and $1,012 million at December 31, 2000 and 1999, respectively, which are
included in the table above. Below investment grade assets included in the
preceding table were not significant.
Included in fixed maturities are below investment grade assets totaling $2.0
billion and $2.2 billion at December 31, 2000 and 1999, respectively. The
Company defines its below investment grade assets as those securities rated
"Ba1" 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.
Mortgage loan investments are relatively evenly dispersed throughout the
United States, with no significant holdings in any one state. Also, there is
no significant mortgage loan investment in a particular property type.
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, limits and other
monitoring procedures. Collateral for fixed maturities often includes pledges
of assets, including stock and other assets, guarantees and letters of
credit. The Company's underwriting standards with respect to new mortgage
loans generally require loan to value ratios of 75% or less at the time of
mortgage origination.
NON-INCOME PRODUCING INVESTMENTS
Investments included in the consolidated balance sheets that were non-income
producing for the preceding 12 months were insignificant.
RESTRUCTURED INVESTMENTS
The Company had mortgage loans and debt securities that were restructured at
below market terms at December 31, 2000 and 1999. The balances of the
restructured investments were insignificant. The new terms typically defer a
portion of contract interest payments to varying future periods. The accrual
of interest is suspended on all restructured assets, and interest income is
reported only as payment is received. Gross interest income on restructured
assets that would have been recorded in accordance with the original terms of
such loans was insignificant in 2000 and in 1999. Interest on these assets,
included in net investment income, was also insignificant in 2000 and 1999.
F-20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NET INVESTMENT INCOME
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
($ in millions)
---------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $2,061 $1,806 $1,598
Mortgage loans 223 235 295
Trading 208 141 43
Joint ventures and partnerships 150 141 74
Other, including policy loans 237 287 240
---------------------------------------------------------------------
Total Gross Investment Income 2,879 2,610 2,250
---------------------------------------------------------------------
Investment expenses 149 104 65
---------------------------------------------------------------------
Net Investment Income $2,730 $2,506 $2,185
---------------------------------------------------------------------
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the periods were as follows:
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
($ in millions)
---------------------------------------------------------------------
REALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $(219) $(23) $111
Equity securities 91 7 6
Mortgage loans 27 29 21
Real estate held for sale 25 108 16
Other (1) (8) (5)
---------------------------------------------------------------------
Total Realized Investment
Gains (Losses) $ (77) $113 $149
---------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are reported as
accumulated other changes in equity from non-owner sources or unrealized
gains on Citigroup stock in shareholder's equity were as follows:
---------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
($ in millions)
---------------------------------------------------------------------------------------------------
UNREALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $ 891 $(1,554) $ 91
Equity securities (132) 49 13
Other 14 (30) (169)
---------------------------------------------------------------------------------------------------
Total Unrealized Investment Gains (Losses) 773 (1,535) (65)
---------------------------------------------------------------------------------------------------
Related taxes 271 (539) (20)
---------------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) 502 (996) (45)
Transferred to paid in capital, net of tax -- -- (585)
Balance beginning of year (398) 598 1,228
---------------------------------------------------------------------------------------------------
Balance End of Year $ 104 $ (398) $ 598
---------------------------------------------------------------------------------------------------
F-21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In 1998 Citigroup common stock owned by the Company was converted to
Citigroup preferred stock. The balance of unrealized appreciation on the
common stock was transferred to additional paid in capital.
Included in Other in 1998 is the unrealized loss on Citigroup common stock of
$167 million prior to the conversion to preferred stock.
5. REINSURANCE
The Company participates in reinsurance in order to limit losses, minimize
exposure to large risks, provide additional capacity for future growth and to
effect business-sharing arrangements. Reinsurance is accomplished through
various plans of reinsurance, primarily yearly renewable term coinsurance and
modified coinsurance. The Company remains primarily liable as the direct
insurer on all risks reinsured.
Since 1997 universal life business has been reinsured under an 80%/20% quota
share reinsurance program and term life business has been reinsured under a
90%/10% quota share reinsurance program. Maximum retention of $2.5 million is
generally reached on policies in excess of $12.5 million. For other plans of
insurance, it is the policy of the Company to obtain reinsurance for amounts
above certain retention limits on individual life policies, which limits vary
with age and underwriting classification. Generally, the maximum retention on
an ordinary life risk is $2.5 million. Total in-force business ceded under
reinsurance contracts is $252.5 billion and $222.5 billion at December 31,
2000 and 1999.
The Company writes workers' compensation business through its Accident
Department. This business is ceded 100% to an affiliate, The Travelers
Indemnity Company.
A summary of reinsurance financial data reflected within the consolidated
statements of income and balance sheets is presented below ($ in millions):
WRITTEN PREMIUMS 2000 1999 1998
----------------------------------------------------------------------
Direct $2,634 $2,274 $2,310
Assumed from:
Non-affiliated companies -- -- --
Ceded to:
Affiliated companies (195) (206) (242)
Non-affiliated companies (465) (322) (317)
----------------------------------------------------------------------
Total Net Written Premiums $1,974 $1,746 $1,751
======================================================================
EARNED PREMIUMS 2000 1999 1998
----------------------------------------------------------------------
Direct $2,644 $2,248 $2,286
Assumed from:
Non-affiliated companies -- -- --
Ceded to:
Affiliated companies (216) (193) (251)
Non-affiliated companies (462) (327) (308)
----------------------------------------------------------------------
Total Net Earned Premiums $1,966 $1,728 $1,727
======================================================================
F-22
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reinsurance recoverables at December 31, 2000 and 1999 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
REINSURANCE RECOVERABLES 2000 1999
-----------------------------------------------------------
Life and Accident and Health Business:
Non-affiliated companies $2,024 $1,221
Property-Casualty Business:
Affiliated companies 1,953 2,013
-----------------------------------------------------------
Total Reinsurance Recoverables $3,977 $3,234
===========================================================
Reinsurance recoverables include $820 million from General Electric Capital
Assurance Company at December 31, 2000, related to the July 1, 2000 indemnity
reinsurance transaction. Reinsurance recoverables also include $539 million
and $569 million, from The Metropolitan Life Insurance Company as of December
31, 2000 and 1999, respectively.
6. DEPOSIT FUNDS AND RESERVES
At December 31, 2000 and 1999, the Company had $29.7 billion and $27.0
billion of life and annuity deposit funds and reserves, respectively. Of that
total, $16.4 billion and $13.8 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $13.3 billion and $13.2
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 $2.9 billion and $2.1 billion of liabilities that
are surrenderable with market value adjustments. Also included are an
additional $4.9 billion and $4.9 billion of life insurance and individual
annuity liabilities which are subject to discretionary withdrawals, and have
an average surrender charge of 4.5% and 4.6%. In the payout phase, these
funds are credited at significantly reduced interest rates. The remaining
$5.5 billion and $6.2 billion of liabilities are surrenderable without
charge. More than 10.5% and 12.7% of these relate to individual life products
for 2000 and 1999, respectively. These risks would have to be underwritten
again if transferred to another carrier, which is considered a significant
deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding
policy loans and related accrued interest prior to payout.
7. COMMERCIAL PAPER AND LINES OF CREDIT
TIC has issued commercial paper directly to investors in prior years. No
commercial paper was outstanding at December 31, 2000 or December 31, 1999.
TIC must maintain bank lines of credit at least equal to the amount of the
outstanding commercial paper. Citigroup and TIC have an agreement with a
syndicate of banks to provide $1.0 billion of revolving credit, to be
allocated to Citigroup or TIC. TIC's participation in this agreement is
limited to $250 million. The agreement consists of a five-year revolving
credit facility that expires in June 2001. At December 31, 2000 and 1999, no
credit under this agreement was allocated to TIC. Under this facility TIC is
required to maintain certain minimum equity and risk-based capital levels. At
December 31, 2000, the Company was in compliance with these provisions. If
TIC had borrowings outstanding on this facility, the interest rate would be
based upon LIBOR plus a contractually negotiated margin.
F-23
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. FEDERAL INCOME TAXES
EFFECTIVE TAX RATE
($ in millions)
----------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
----------------------------------------------------------------------------------
Income Before Federal Income Taxes $ 1,654 $ 1,592 $ 1,383
Statutory Tax Rate 35% 35% 35%
----------------------------------------------------------------------------------
Expected Federal Income Taxes 579 557 484
Tax Effect of:
Non-taxable investment income (19) (19) (5)
Other, net (9) 7 2
----------------------------------------------------------------------------------
Federal Income Taxes $ 551 $ 545 $ 481
==================================================================================
Effective Tax Rate 33% 34% 35%
----------------------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 429 $ 377 $ 418
Foreign 33 32 24
----------------------------------------------------------------------------------
Total 462 409 442
----------------------------------------------------------------------------------
Deferred:
United States 96 143 40
Foreign (7) (7) (1)
----------------------------------------------------------------------------------
Total 89 136 39
----------------------------------------------------------------------------------
Federal Income Taxes $ 551 $ 545 $ 481
==================================================================================
Additional tax benefits attributable to employee stock plans allocated
directly to shareholder's equity for the years ended December 31, 2000, 1999
and 1998 were $24 million, $17 million and $17 million, respectively.
F-24
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 2000 and 1999 were comprised
of the tax effects of temporary differences related to the following assets
and liabilities:
------------------------------------------------------------------------------------------
($ in millions) 2000 1999
------------------------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 667 $ 645
Operating lease reserves 66 70
Investments, net -- 11
Other employee benefits 102 106
Other 139 142
------------------------------------------------------------------------------------------
Total 974 974
------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of insurance in force (843) (773)
Investments, net (308) --
Other (107) (124)
------------------------------------------------------------------------------------------
Total (1,258) (897)
------------------------------------------------------------------------------------------
Net Deferred Tax (Liability) Asset Before Valuation Allowance (284) 77
Valuation Allowance for Deferred Tax Assets 0 (100)
------------------------------------------------------------------------------------------
Net Deferred Tax Liability After Valuation Allowance $ (284) $ (23)
------------------------------------------------------------------------------------------
The Company and its life insurance subsidiaries file a consolidated federal
income tax return. Federal income taxes are allocated to each member of the
consolidated group on a separate return basis adjusted for credits and other
amounts required by the consolidation process. Any resulting liability will
be paid currently to the Company. Any credits for losses will be paid by the
Company to the extent that such credits are for tax benefits that have been
utilized in the consolidated federal income tax return.
The elimination of the valuation allowance for deferred tax assets in 2000
resulted from an analysis of the availability of capital gains to offset
capital losses. In management's opinion, there will be adequate capital gains
to make realization of existing capital losses more likely than not. The
reduction in the valuation allowance was recognized by reducing goodwill.
At December 31, 2000, 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.
F-25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. SHAREHOLDER'S EQUITY
Shareholder's Equity and Dividend Availability
The Company's statutory net income, which includes the statutory net income
of all insurance subsidiaries, was $981 million, $890 million and $702
million for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company's statutory capital and surplus was $5.16 billion and $5.03
billion at December 31, 2000 and 1999, respectively.
Effective January 1, 2001, the Company will prepare its statutory basis
financial statements in accordance with the revised Manual subject to any
deviations prescribed or permitted by its domicilary insurance commissioners
(see Note 1, Summary of Significant Accounting Policies, Permitted Statutory
Accounting Practices). The Company has estimated that the impact of this
change on statutory capital and surplus will not be significant.
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 $984
million is available by the end of the year 2001 for such dividends without
prior approval of the Connecticut Insurance Department. In addition, under a
revolving credit facility, the Company is required to maintain certain
minimum equity and risk-based capital levels. The Company was in compliance
with these covenants at December 31, 2000 and 1999. The Company paid
dividends of $860 million, $550 million and $110 million in 2000, 1999 and
1998, respectively.
F-26
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. SHAREHOLDER'S EQUITY (CONTINUED)
Accumulated Other Changes in Equity from Non-Owner Sources, Net of Tax
--------------------------------------------------------------------------------
Changes in each component of Accumulated Other Changes in Equity from Non-Owner
Sources were as follows:
--------------------------------------------------------------------------------
NET UNREALIZED FOREIGN ACCUMULATED OTHER
GAIN (LOSS) ON CURRENCY CHANGES IN EQUITY
INVESTMENT TRANSLATION FROM NON-OWNER
($ in millions) SECURITIES ADJUSTMENTS SOURCES
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1998 $545 $(10) $535
Unrealized gains on investment securities,
Net of tax of $85 159 - 159
Less: reclassification adjustment for gains
Included in net income, net of tax of $52 97 - 97
Foreign currency translation adjustment,
Net of tax of $2 - 1 1
------------------------------------------------------------------------------------------------------------------------------------
CURRENT PERIOD CHANGE 62 1 63
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 607 (9) 598
Unrealized losses on investment securities,
Net of tax of $497 (923) - (923)
Less: reclassification adjustment for gains
Included in net income, net of tax of $40 73 - 73
------------------------------------------------------------------------------------------------------------------------------------
CURRENT PERIOD CHANGE (996) - (996)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 (389) (9) (398)
------------------------------------------------------------------------------------------------------------------------------------
Unrealized gain on investment securities,
Net of tax of $297 551 - 551
Less: reclassification adjustment for losses
Included in net income, net of tax of $(27) (50) - (50)
Foreign currency translation adjustment,
Net of tax of $1 - 1 1
------------------------------------------------------------------------------------------------------------------------------------
CURRENT PERIOD CHANGE 501 1 502
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 112 (8) 104
------------------------------------------------------------------------------------------------------------------------------------
F-27
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. BENEFIT PLANS
Pension and Other Postretirement Benefits
-----------------------------------------
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by Citigroup. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by TIGI. The Company's share of net expense for the qualified
pension and other postretirement benefit plans was not significant for
2000, 1999 and 1998.
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 2000, 1999
and 1998.
11. LEASES
Most leasing functions for TIGI and its subsidiaries are administered by
Travelers Property Casualty Corp. (TPC). Rent expense related to all leases
is shared by the companies on a cost allocation method based generally on
estimated usage by department. Net rent expense was $26 million, $30
million, and $24 million in 2000, 1999 and 1998, respectively.
--------------------------------------------------------------------------------
YEAR ENDING DECEMBER 31, MINIMUM OPERATING
($ in millions) RENTAL PAYMENTS
--------------------------------------------------------------------------------
2001 $49
2002 48
2003 47
2004 43
2005 41
Thereafter 283
--------------------------------------------------------------------------------
Total Rental Payments $511
--------------------------------------------------------------------------------
Future sublease rental income of approximately $90 million will partially
offset these commitments. Also, the Company will be reimbursed for 50% of
the rental expense for a particular lease totaling $182 million, by an
affiliate. Minimum future capital lease payments are not significant.
The Company is reimbursed for use of furniture and equipment through cost
sharing agreements by its affiliates.
F-28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
--------------------------------
The Company uses derivative financial instruments, including financial
futures, interest rate swaps, currency swaps, equity swaps, options and
forward contracts as a means of hedging exposure to interest rate, equity
price, and foreign currency risk on anticipated transactions or existing
assets and liabilities. The Company, through Tribeca Investments LLC, a
subsidiary that is a broker/dealer, holds and issues derivative instruments
for trading purposes. All of these derivative financial instruments have
off-balance sheet risk. Financial instruments with off-balance sheet risk
involve, to varying degrees, elements of credit and market risk in excess
of the amount recognized in the balance sheet. The contract or notional
amounts of these instruments reflect the extent of involvement the Company
has in a particular class of financial instrument. However, the maximum
loss of cash flow associated with these instruments can be less than these
amounts. For interest rate swaps, currency swaps, equity swaps, options and
forward contracts, credit risk is limited to the amount that it would cost
the Company to replace the contracts. Financial futures contracts and
purchased listed option contracts have little credit risk since organized
exchanges are the counterparties. The Company as a writer of option
contracts has no credit risk since the counterparty has no performance
obligation after it has paid a cash premium.
The Company monitors 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, limits and other monitoring procedures.
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.
Margin payments are required to enter a futures contract and contract gains
or losses are settled daily in cash. The contract amount of futures
contracts represents the extent of the Company's involvement, but not
future cash requirements, as open positions are typically closed out prior
to the delivery date of the contract.
At December 31, 2000 and 1999, the Company held financial futures contracts
with notional amounts of $493 million and $255 million, respectively. These
financial futures had no deferred gain or deferred loss in 2000, and a
deferred gain of $1.8 million and a deferred loss of $.5 million in 1999.
Total gains of $6.9 million from financial futures were deferred at
December 31, 1999, relating to anticipated investment purchases and
investment product sales, and are reported as other liabilities. There were
no deferred amounts at December 31, 2000. At December 31, 2000 and 1999,
the Company's futures contracts had no fair value because these contracts
were marked to market and settled in cash daily.
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 notional principal amount. The Company also enters
F-29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
Swap agreements are not exchange-traded so they are subject to the risk of
default by the counterparty.
At December 31, 2000 and 1999, the Company held interest rate swap
contracts with notional amounts of $1,904 million and $1,498 million,
respectively. The fair value of these financial instruments was $8.4
million (gain position) and $21.2 million (loss position) at December 31,
2000 and was $25.1 million (gain position) and $26.3 million (loss
position) at December 31, 1999. The fair values were determined using the
discounted cash flow method.
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 corresponding funding agreements issued in
foreign currencies. Under currency swaps, the Company agrees with other
parties to exchange, at specified intervals, foreign currency for U.S.
Dollars based upon interest amounts calculated by reference to an agreed
notional principal amount. Generally, there is an exchange of foreign
currency for U.S. Dollars at the outset of the contract based upon the
prevailing foreign exchange rate. Swap agreements are not exchange-traded
so they are subject to the risk of default by the counterparty.
At December 31, 2000 and 1999, the Company held currency swap contracts
with notional amounts of $974.0 million and $732.7 million, respectively.
The fair value of these financial instruments was $1.0 million (gain
position) and $144.3 million (loss position) at December 31, 2000,
respectively, and $59.0 million (loss position) at December 31, 1999. The
fair values were determined using the discounted cash flow method.
At December 31, 2000 and 1999, the Company held interest rate, currency and
equity swap contracts with affiliate counterparties with a notional amount
of $168.7 million and $207.5 million, respectively, and a fair value of
$8.3 million (gain position) and $22.6 million (loss position),
respectively.
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.
At December 31, 2000 and 1999, the Company held equity options with
notional amounts of $462.3 million and $275.4 million, respectively. The
fair value of these financial instruments was $14.4 million (gain position)
and $32.6 million (gain position) at December 31, 2000 and 1999,
respectively. The fair value of these contracts represents the estimated
replacement cost as quoted by independent third party brokers.
The off-balance sheet risks of interest rate options, equity swaps and
forward contracts were not significant at December 31, 2000 and 1999.
The off-balance sheet risk of derivative instruments held for trading
purposes was not significant at December 31, 2000 and 1999.
F-30
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. The
off-balance sheet risk of these financial instruments was not significant
at December 31, 2000 and 1999. The Company had unfunded commitments to
partnerships with a value of $491.2 million and $459.8 million at December
31, 2000 and 1999, respectively.
Fair Value of Certain Financial Instruments
-------------------------------------------
The Company uses various financial instruments in the normal course of its
business. Certain insurance contracts are excluded by Statement of
Financial Accounting Standards No. 107, "Disclosure about Fair Value of
Financial Instruments", and therefore are not included in the amounts
discussed.
At December 31, 2000 and 1999, investments in fixed maturities had a
carrying value and a fair value of $26.8 billion and $23.9 billion,
respectively. See Notes 1 and 4.
At December 31, 2000, mortgage loans had a carrying value of $2.2 billion
and a fair value of $2.2 billion and in 1999 had a carrying value of $2.3
billion and a fair value of $2.3 billion. In estimating fair value, the
Company used interest rates reflecting the current real estate financing
market.
Citigroup Preferred Stock, included in other invested assets, had a
carrying value and fair value of $987 million at December 31, 2000 and
1999.
At December 31, 2000, contractholder funds with defined maturities had a
carrying value of $6.8 billion and a fair value of $6.7 billion, compared
with a carrying value and a fair value of $5.0 billion and $4.7 billion at
December 31, 1999. The fair value of these contracts is determined by
discounting expected cash flows at an interest rate commensurate with the
Company's credit risk and the expected timing of cash flows. Contractholder
funds without defined maturities had a carrying value of $10.1 billion and
a fair value of $9.9 billion at December 31, 2000, compared with a carrying
value of $10.1 billion and a fair value of $9.9 billion at December 31,
1999. These contracts generally are valued at surrender value.
The carrying values of $588 million and $228 million of financial
instruments classified as other assets approximated their fair values at
December 31, 2000 and 1999, respectively. The carrying values of $2.4
billion and $1.4 billion of financial instruments classified as other
liabilities also approximated their fair values at December 31, 2000 and
1999, respectively. Fair value is determined using various methods,
including discounted cash flows, as appropriate for the various financial
instruments.
The assets of separate accounts providing a guaranteed return had a
carrying value and a fair value of $376 million at December 31, 2000,
compared with a carrying value and a fair value of $251 million at December
31, 1999. The liabilities of separate accounts providing a guaranteed
return had a carrying value and a fair value of $376 million at December
31, 2000, compared with a carrying value and a fair value of $251 million
at December 31, 1999.
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.
F-31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
-------------------------------------------------
See Note 12 for a discussion of financial instruments with off-balance
sheet risk.
Litigation
----------
In March 1997, a purported class action entitled Patterman v. The
Travelers, Inc., et al. was commenced in the Superior Court of Richmond
County, Georgia, alleging, among other things, violations of the Georgia
RICO statute and other state laws by an affiliate of the Company, Primerica
Financial Services, Inc. and certain of its affiliates. Plaintiffs seek
unspecified compensatory and punitive damages and other relief. From
February 1998 through April 2000, various motions for transfer of the
lawsuit were heard and appealed. In April 2000, the matter was remanded to
the Superior Court of Richmond County by the Georgia Supreme Court. Also,
in April 2000 defendants moved for summary judgement on all counts of the
complaint. Discovery commenced in May 2000. Defendants intend to vigorously
contest the litigation.
The Company is also a defendant or co-defendant in various other litigation
matters in the normal course of business. Although there can be no
assurances, as of December 31, 2000, the Company believes, based on
information currently available, that 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.
14. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and
expenses, for certain subsidiaries and affiliates of TIGI are handled by
two companies. The Company handles banking functions for the life and
annuity operations of Travelers Life & Annuity and some of its
non-insurance affiliates. The Travelers Indemnity Company handles banking
functions for the property-casualty operations, including most of its
property-casualty insurance and non-insurance affiliates. Settlements
between companies are made at least monthly. The Company provides various
employee benefits coverages to employees of certain subsidiaries of TIGI.
The premiums for these coverages were charged in accordance with cost
allocation procedures based upon salaries or census. In addition,
investment advisory and management services, data processing services and
claims processing services are shared with affiliated companies. Charges
for these services are shared by the companies on cost allocation methods
based generally on estimated usage by department.
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, 2000 and 1999, the
pool totaled approximately $4.4 billion and $2.6 billion, respectively. The
Company's share of the pool amounted to $1.8 billion and $1.0 billion at
December 31, 2000 and 1999, respectively, and is included in short-term
securities in the consolidated balance sheet.
The Company markets deferred annuity products and life and health insurance
through its affiliate, Salomon Smith Barney (SSB). Premiums and deposits
related to these products were $1.9 billion, $1.4 billion, and $1.3 billion
in 2000, 1999 and 1998, respectively.
F-32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company also markets individual annuity and life and health insurance
through CitiStreet Retirement Services, LLC (formerly The Copeland
Companies) a division of CitiStreet a joint venture between Citigroup and
State Street Bank. Deposits received from CitiStreet Retirement Services,
LLC were $1.8 billion, $1.6 billion and $1.3 billion in 2000, 1999 and
1998, respectively.
During 1998, the Company began distributing individual annuity products
through an affiliate Citibank, NA, (Citibank). Deposits received from
Citibank were $392 million in 2000 and were insignificant in 1999 and 1998.
At December 31, 2000 and 1999 the Company had outstanding loaned securities
to SSB for $234.1 million and $123.0 million, respectively.
Included in other invested assets is a $987 million investment in Citigroup
preferred stock at December 31, 2000 and 1999, carried at cost. Dividends
received on this investment were $32 million in 2000 and $32 million in
1999.
The Company sells structured settlement annuities to the insurance
subsidiaries of TPC in connection with the settlement of certain
policyholder obligations. Such premiums and deposits were $191 million,
$156 million, and $104 million for 2000, 1999 and 1998, respectively.
Reserves and contractholder funds related to these annuities amounted to
$811 million and $798 million in 2000 and 1999, respectively.
In the ordinary course of business, the Company purchases and sells
securities through affiliated broker-dealers. These transactions are
conducted on an arm's length basis.
Primerica Life has entered into a General Agency Agreement with Primerica
Financial Services, Inc. (Primerica), that provides that Primerica will be
Primerica Life's general agent for marketing all insurance of Primerica
Life. In consideration of such services, Primerica Life agreed to pay
Primerica marketing fees of no less than $10 million based upon U.S. gross
direct premiums received by Primerica Life. In each of 2000, 1999, and 1998
the fees paid by Primerica Life were $12.5 million.
In 1998 Primerica became a distributor of products for Travelers Life &
Annuity. Primerica sold $1.03 billion, $903 million and $256 million of
individual annuities in 2000, 1999 and 1998, respectively.
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 key employees. To further encourage employee stock ownership,
during 1997 Citigroup introduced the WealthBuilder stock option program.
Under this program, all employees meeting certain requirements have been
granted Citigroup stock options. During 2000, Citigroup introduced the
Citigroup 2000 Stock Purchase Plan, which allowed eligible employees of
Citigroup including the Company's employees to enter into fixed
subscription agreements to purchase shares at the market value on the date
of the agreements. Enrolled employees are permitted to make one purchase
prior to the expiration date.
The Company also participates in the Citigroup Capital Accumulation Plan.
Participating officers and other key 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
restriction period by the participant, who is required to render service to
the Company during the restricted period.
F-33
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 with other assets in the
Consolidated Balance Sheet and is recognized as a charge to income ratably
over the vesting period. The Company's charge to income was insignificant
during 2000, 1999 and 1998.
The Company applies Accounting Principles Board Opinion No. 25 (APB 25) and
related interpretations in accounting for stock options. Since stock
options under the Citigroup plans are issued at fair market value on the
date of award, no compensation cost has been recognized for these awards.
FAS 123 provides an alternative to APB 25 whereby fair values may be
ascribed to options using a valuation model and amortized to compensation
cost over the vesting period of the options.
Had the Company applied FAS 123 in accounting for Citigroup stock options,
net income would have been the pro forma amounts indicated below:
------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000 1999 1998
($ in millions)
------------------------------------------------------------------------------------------------------------------------------------
Net income, as reported $1,103 $1,047 $902
FAS 123 pro forma adjustments, after tax (19) (16) (13)
------------------------------------------------------------------------------------------------------------------------------------
Net income, pro forma $1,084 $1,031 $889
------------------------------------------------------------------------------------------------------------------------------------
The assumptions used in applying FAS 123 to account for Citigroup stock
options were as follows:
------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
Expected volatility of Citigroup Stock 41.5% 44.1% 37.1%
Risk-free interest rate 6.23% 5.29% 5.83%
------------------------------------------------------------------------------------------------------------------------------------
Expected annual dividend per Citigroup share $0.78 $0.47 $0.32
------------------------------------------------------------------------------------------------------------------------------------
Expected annual forfeiture rate 5% 5% 5%
------------------------------------------------------------------------------------------------------------------------------------
F-34
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
($ in millions)
------------------------------------------------------------------------------------------------------------------------------------
Net Income From Continuing Operations $1,103 $1,047 $902
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized (gains) losses 77 (113) (149)
Deferred federal income taxes 89 136 39
Amortization of deferred policy acquisition costs 347 315 275
Additions to deferred policy acquisition costs (648) (686) (566)
Investment income (384) (221) (202)
Premium balances 20 (13) 36
Insurance reserves and accrued expenses 559 411 335
Other 77 99 205
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations $1,240 $975 $875
------------------------------------------------------------------------------------------------------------------------------------
16. NON-CASH INVESTING AND FINANCING ACTIVITIES
Significant non-cash investing and financing activities include the
acquisition of real estate through foreclosures of mortgage loans amounting
to $205 million in 1999 and the conversion of Citigroup common stock into
Citigroup preferred stock valued at $987 million in 1998.
F-35
Independent Auditors' Report
The Board of Directors and Shareholder
The Travelers Insurance Company:
Under date of January 16, 2001, we reported on the consolidated balance sheets
of The Travelers Insurance Company and subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of income, changes in retained
earnings and accumulated other changes in equity from non-owner sources and cash
flows for each of the years in the three-year period ended December 31, 2000,
which are included in this Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedules listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
Hartford, Connecticut
January 16, 2001
F-36
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2000
($ in millions)
------------------------------------------------------------------------------------------------------------------------------------
TYPE OF INVESTMENT AMOUNT SHOWN IN
COST VALUE BALANCE SHEET(1)
------------------------------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and
Authorities $4,317 $4,479 $4,479
States, municipalities and political subdivisions 169 181 181
Foreign governments 760 765 765
Public utilities 2,147 2,155 2,155
Convertible bonds and bonds with warrants attached 348 345 345
All other corporate bonds 18,612 18,691 18,691
------------------------------------------------------------------------------------------------------------------------------------
Total Bonds 26,353 26,616 26,616
Redeemable preferred stocks 201 196 196
------------------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 26,554 26,812 26,812
------------------------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Banks, trust and insurance companies 19 20 20
Industrial, miscellaneous and all other(2) 75 59 59
------------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks 94 79 79
Nonredeemable preferred stocks 492 467 467
------------------------------------------------------------------------------------------------------------------------------------
Total Equity Securities 586 546 546
------------------------------------------------------------------------------------------------------------------------------------
Mortgage Loans 2,187 2,187
Real Estate Held For Sale 31 31
Policy Loans 1,249 1,249
Short-Term Securities 2,136 2,136
Other Investments(3)(4)(5) 2,963 2,931
------------------------------------------------------------------------------------------------------------------------------------
Total Investments $35,706 $35,892
------------------------------------------------------------------------------------------------------------------------------------
(1) Determined in accordance with methods described in Notes 1 and 4 of the
Notes to Consolidated Financial Statements.
(2) Excludes $46 million related party investment.
(3) Excludes $987 million fair value of Citigroup Inc. preferred stock. See
Note 14 of Notes to Consolidated Financial Statements.
(4) Also excludes $308 million fair value of investment in affiliated
partnership interests.
(5) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
F-37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
($ in millions)
------------------------------------------------------------------------------------------------------------------------------------
FUTURE
POLICY
BENEFITS, AMORTIZATION
DEFERRED LOSSES, OTHER POLICY BENEFITS, OF DEFERRED
POLICY CLAIMS AND CLAIMS AND NET CLAIMS POLICY OTHER
ACQUISITION LOSS BENEFITS PREMIUM INVESTMENT AND ACQUISITION OPERATING PREMIUMS
COSTS EXPENSES(1) PAYABLE REVENUE INCOME LOSSES(2) COSTS EXPENSES WRITTEN
-----------------------------------------------------------------------------------------------------------------------------------
2000
Travelers Life & Annuity $1,291 $29,377 $321 $ 860 $2,450 $2,294 $166 $233 $ 859
Primerica Life 1,698 2,856 140 1,106 280 496 181 230 1,115
------------------------------------------------------------------------------------------------------------------------------------
Total $2,989 $32,233 $461 $1,966 $2,730 $2,790 $347 $463 $1,974
====================================================================================================================================
1999
Travelers Life & Annuity $1,081 $26,958 $280 $ 656 $2,249 $1,954 $127 $322 $ 666
Primerica Life 1,607 2,734 158 1,072 257 488 188 197 1,080
------------------------------------------------------------------------------------------------------------------------------------
Total $2,688 $29,692 $438 $1,728 $2,506 $2,442 $315 $519 $1,746
====================================================================================================================================
1998
Travelers Life & Annuity $ 779 $26,068 $232 $ 670 $1,965 $1,854 $ 88 $306 $ 683
Primerica Life 1,538 2,619 146 1,057 220 484 187 199 1,068
------------------------------------------------------------------------------------------------------------------------------------
Total $2,317 $28,687 $378 $1,727 $2,185 $2,338 $275 $505 $1,751
====================================================================================================================================
(1) Includes contractholder funds.
(2) Includes interest credited to contractholders.
F-38
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
($ in millions)
----------------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------------------------------------------------------------------------------------------------------------
2000
----
Life Insurance In Force $480,958 $252,498 $3,692 $232,152 1.6%
Premiums:
Life insurance $2,106 $ 330 $ -- $1,776 --
Accident and health insurance 322 132 -- 190 --
Property casualty 216 216 -- -- --
-------- -------- ------ -------- -----
Total Premiums $2,644 $ 678 $ -- $1,966 --
======== ======== ====== ======== =====
1999
----
Life Insurance In Force $457,541 $222,522 $3,723 $238,742 1.6%
Premiums:
Life insurance $ 1,768 $ 313 $-- $ 1,455 --
Accident and health insurance 287 14 -- 273 --
Property casualty 193 193 -- -- --
-------- -------- ------ -------- -----
Total Premiums $ 2,248 $ 520 $ -- $ 1,728 --
======== ======== ====== ======== =====
1998
----
Life Insurance In Force $439,784 $201,294 $ 105 $238,595 --
Premiums:
Life insurance $ 1,784 $ 304 $ -- $ 1,480 --
Accident and health insurance 264 17 -- 247 --
Property casualty 238 238 -- -- --
-------- -------- ------ -------- -----
Total Premiums $ 2,286 $ 559 $ -- $ 1,727 --
======== ======== ====== ======== =====
F-39
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, 2001
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 33-33691
THE TRAVELERS INSURANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-0566090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(Address of principal executive offices) (Zip Code)
(860) 277-0111
(Registrant's telephone number, including area code)
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 40,000,000 shares of common stock,
par value $2.50 per share, of the registrant, all of which were owned by The
Travelers Insurance Group Inc., an indirect wholly owned subsidiary of Citigroup
Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
Condensed Consolidated Statement of Income for the
Three and Six Months Ended June 30, 2001 and 2000 (unaudited)..........................................................3
Condensed Consolidated Balance Sheet as of June 30, 2001 (unaudited) and
December 31, 2000......................................................................................................4
Condensed Consolidated Statements of Changes in Retained Earnings and
Accumulated Other Changes in Equity from Nonowner Sources
for the Three and Six Months Ended June 30, 2001 and 2000 (unaudited)..................................................5
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 (unaudited)....................................................................6
Notes to Condensed Consolidated Financial Statements (unaudited).......................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................................................16
---------------------------------------------
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................................20
-----------------------------------------
SIGNATURES............................................................................................................21
2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENT OF INCOME
(UNAUDITED)
($ in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
REVENUES
Premiums $435 $496 $1,056 $1,047
Net investment income 737 703 1,461 1,358
Realized investment gains (losses) 8 22 101 (133)
Fee income 124 120 250 256
Other revenues 48 24 81 46
------------------------------------------------------------------------------------------------------------------------------
Total Revenues 1,352 1,365 2,949 2,574
------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 368 453 933 929
Interest credited to contractholders 300 248 586 493
Amortization of deferred acquisition costs 94 88 186 173
General and administrative expenses 97 103 205 245
------------------------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 859 892 1,910 1,840
------------------------------------------------------------------------------------------------------------------------------
Income from operations before federal income taxes and cumulative effects of
changes in accounting principles 493 473 1,039 734
Federal income taxes 163 158 347 243
------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effects of changes in
accounting principles 330 315 692 491
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) - (3) -
------------------------------------------------------------------------------------------------------------------------------
Net income $327 $315 $683 $491
==============================================================================================================================
See Notes to Condensed Consolidated Financial Statements
3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
JUNE 30 2001 DECEMBER 31, 2000
(UNAUDITED)
----------------------------------------------------------------------------------------------------------------------
ASSETS
Investments (including $1,545 and $1,494 subject to securities
lending agreements) $40,175 $37,233
Separate and variable accounts 24,271 24,006
Reinsurance recoverable 4,075 3,977
Deferred acquisition costs 3,229 2,989
Other assets 2,032 2,088
--------------------------------------------------------------------------------------------------------------------
Total Assets $73,782 $70,293
--------------------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $21,196 $19,394
Future policy benefits and claims 13,799 13,300
Separate and variable accounts 24,270 23,994
Other liabilities 5,744 5,211
--------------------------------------------------------------------------------------------------------------------
Total Liabilities 65,009 61,899
--------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized,
issued and outstanding 100 100
Additional paid-in capital 3,858 3,848
Retained earnings 4,710 4,342
Accumulated other changes in equity from nonowner sources 105 104
--------------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 8,773 8,394
--------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $73,782 $70,293
====================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
AND ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES
(UNAUDITED)
($ in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN RETAINED EARNINGS 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------
Balance, beginning of period $4,541 $4,105 $4,342 $4,099
Net income 327 315 683 491
Dividends to parent (158) (170) (315) (340)
----------------------------------------------------------------------------------------------------------------
Balance, end of period $4,710 $4,250 $4,710 $4,250
================================================================================================================
----------------------------------------------------------------------------------------------------------------
STATEMENT OF ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
----------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 245 $ (184) $ 104 $ (398)
Cumulative effect of accounting for derivative
instruments and hedging activities, net of tax - - (29) -
Unrealized gains (losses), net of tax (155) (111) 32 103
Derivative instrument hedging activity gains (losses),
net of tax 15 - (2) -
----------------------------------------------------------------------------------------------------------------
Balance, end of period $ 105 $ (295) $ 105 $ (295)
================================================================================================================
----------------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
----------------------------------------------------------------------------------------------------------------
Net income $ 327 $ 315 $ 683 $ 491
Other changes in equity from nonowner sources (140) (111) 1 103
----------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 187 $ 204 $ 684 $ 594
================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
($ in millions)
SIX MONTHS ENDED
JUNE 30,
2001 2000
---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 392 $ 815
---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,557 1,782
Mortgage loans 161 201
Proceeds from sales of investments
Fixed maturities 6,626 6,606
Equity securities 64 242
Real estate held for sale 2 205
Purchases of investments
Fixed maturities (11,058) (9,822)
Equity securities (15) (208)
Mortgage loans (45) (170)
Policy loans, net 18 9
Short-term securities (purchases) sales, net 456 (212)
Other investment (purchases) sales, net 21 (156)
Securities transactions in course of settlement, net 368 886
---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,845) (637)
---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 4,429 3,007
Contractholder fund withdrawals (2,650) (2,777)
Dividends to parent company (315) (340)
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,464 (110)
---------------------------------------------------------------------------------------------------------
Net increase in cash 11 68
Cash at beginning of period 150 85
---------------------------------------------------------------------------------------------------------
Cash at end of period $ 161 $ 153
---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 269 $ 210
---------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The Travelers Insurance Company (TIC, together with its subsidiaries,
the Company), is a wholly owned subsidiary of The Travelers Insurance
Group Inc. (TIGI), an indirect wholly owned subsidiary of Citigroup
Inc. (Citigroup). Citigroup is a diversified holding company whose
businesses provide a broad range of financial services to consumer and
corporate customers around the world. The condensed consolidated
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 condensed
consolidated financial statements include the accounts of the Company
and its insurance and non-insurance subsidiaries on a fully
consolidated basis. In the opinion of management, the interim financial
statements reflect all adjustments necessary (all of which were normal
recurring adjustments) for a fair presentation for the periods
reported. The accompanying condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000.
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
2001 presentation.
2. CHANGES IN ACCOUNTING PRINCIPLES AND ACCOUNTING STANDARDS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities"
(FAS 133). FAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives),
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the consolidated balance
sheet and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a)
a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a recognized asset or liability
or of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for
changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting
designation.
The Company uses derivative financial instruments, including financial
futures contracts, interest rate swaps, currency swaps, equity swaps,
options and forward contracts, as a means of hedging exposure to
interest rate, equity price change and foreign currency risk. The
Company, through Tribeca Investments LLC, a subsidiary that is a
broker/dealer, holds and issues derivative instruments for trading
purposes.
To qualify as a hedge, 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.
7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
For fair value hedges, changes in the fair value of derivatives are
reflected in realized investment gains (losses), together with changes
in the fair value of the related hedged item. The net amount is
reflected in current earnings under the new rules and is substantially
similar to the amounts under the previous accounting practice.
For cash flow hedges, the accounting treatment depends on the
effectiveness of the hedge. To the extent these 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. 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. At June 30, 2001, the amount that
is expected to be reclassified into pretax earnings over the next
twelve months to adjust these variable cash flows is approximately $150
million loss. To the extent these derivatives are not effective,
changes in their fair values are immediately included in realized
investment gains (losses). The Company's cash flow hedges primarily
include hedges of foreign denominated funding agreements and floating
rate available-for-sale securities. While the earnings impact of cash
flow hedges are similar to the previous accounting practice, the
amounts included in the accumulated other changes in equity from
nonowner sources will vary depending on market conditions.
For net investment hedges, in which derivatives hedge the foreign
currency exposure of a net investment in a foreign operation, the
accounting treatment will similarly depend on the effectiveness of the
hedge. The effective portion of the change in fair value of the
derivative, including any forward premium or discount, is reflected in
the accumulated other changes in equity from nonowner sources as part
of the derivative instrument hedging activity gains (losses). For the
quarter ended June 30, 2001 the amount included in derivative
instrument hedging activity gains (losses) was $(.7) million. The
ineffective portion is reflected in realized investment gains (losses).
Derivatives that are either hedging instruments that are not designated
or do not qualify as hedges under the new rules are also carried at
fair value with changes in value reflected in realized investment gains
(losses).
The effectiveness of these hedging relationships is evaluated on a
retrospective and prospective basis using quantitative measures of
correlation. If a hedge relationship is found to be ineffective, it no
longer qualifies as a hedge and any excess gains or losses attributable
to such ineffectiveness as well as subsequent changes in fair value are
recognized in realized investment gains (losses). During the second
quarter of 2001 the amount of hedge ineffectiveness that was recognized
in realized investment gains was $6 million, $4 million for fair value
hedges and $2 million for cash flow hedges.
For those hedge relationships that are terminated, hedge designations
removed, or forecasted transactions that are no longer expected to
occur, the hedge accounting treatment described in the paragraphs above
will no longer apply. For fair value hedges, any changes to the hedged
item remain as part of the basis of the asset 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 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 was
discontinued because a forecasted transaction will not
8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
occur when scheduled, any changes in fair value of the end-user
derivative are immediately reflected in realized investment gains
(losses). During the second quarter of 2001 there were no such
discontinued forecasted transactions.
As a result of adopting FAS 133, the Company recorded a charge of $6
million after tax, reflected as a cumulative catch-up adjustment in the
condensed consolidated statement of income and a charge of $29 million
after tax, reflected as a cumulative catch-up adjustment in the
accumulated other changes in equity from nonowner sources section of
shareholder's equity. The Company expects to include an approximately
$95 million loss into earnings over the twelve months ending December
31, 2001, for derivatives designated as cash flow hedges at transition.
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND RETAINED
BENEFICIAL INTERESTS IN SECURITIZED FINANCIAL ASSETS
In April 2001, the Company adopted the FASB Emerging Issues Task Force
(EITF) EITF 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial
Assets" (EITF 99-20). EITF 99-20 establishes guidance on the
recognition and measurement of interest income and impairment on
certain investments, e.g., certain asset-backed securities. The
recognition of impairment resulting from the adoption of EITF 99-20 was
recorded as a cumulative catch-up adjustment. Interest income on
beneficial interest falling within the scope of EITF 99-20 is to be
recognized prospectively. As a result of adopting EITF 99-20, the
Company recorded a charge of $3 million after tax, reflected as a
cumulative catch-up adjustment in the condensed consolidated statement
of income. The implementation of this EITF did not have a significant
impact on results of operations, financial condition or liquidity.
BUSINESS COMBINATIONS
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" (FAS 141). FAS 141 prohibits
the use of the pooling-of-interests method and requires that a single
method, the purchase method of accounting, be used for all business
combinations initiated after June 30, 2001. FAS 141 also addressed the
initial recognition and measurement of goodwill and other intangible
assets acquired in business combinations and requires intangible assets
to be recognized apart from goodwill if certain tests are met. FAS 141
applies to all business combinations initiated after June 30, 2001 and
to all business combinations accounted for using the purchase method
for which the date of acquisition is July 1, 2001, or later. The
Company has not yet determined the impact that FAS 141 will have on its
consolidated financial statements.
GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142).
FAS 142 addresses the initial recognition and measurement of intangible
assets acquired either singly or with a group of other assets, as well
as the measurement of goodwill and other intangible assets subsequent
to their initial acquisition. FAS 142 changes the accounting for
goodwill and intangible assets that have indefinite useful lives from
an amortization approach to an impairment-only approach that requires
that those assets be tested at least annually for impairment.
Intangible assets that have
9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
finite useful lives will continue to be amortized over their useful
lives, but without an arbitrary ceiling on their useful lives. FAS 142
is required to be applied starting with fiscal years beginning after
December 15, 2001 and is required to be applied at the beginning of an
entity's fiscal year. The statement is to be applied to all goodwill
and other intangible assets recognized in an entity's financial
statements at that date. Impairment losses for goodwill and indefinite
lived intangible assets that arise due to the initial application of
FAS 142 (resulting from an impairment test) are to be reported as a
change in accounting principle. Retroactive application is not
permitted. The Company has not yet determined the impact that FAS 142
will have on its consolidated financial statements.
3. COMMERCIAL PAPER AND LINES OF CREDIT
TIC has issued commercial paper directly to investors in prior years.
No commercial paper was outstanding at June 30, 2001 or December 31,
2000. TIC must maintain bank lines of credit at least equal to the
amount of the outstanding commercial paper. Citigroup and TIC had an
agreement with a syndicate of banks to provide $1.0 billion of
revolving credit, to be allocated to Citigroup or TIC. TIC's
participation in this agreement was limited to $250 million. The
agreement consisted of a five-year revolving credit facility that
expired in June 2001. At June 30, 2001 and December 31, 2000, no credit
under this agreement was allocated to TIC.
4. SHAREHOLDER'S EQUITY
Statutory capital and surplus of the Company was $5.16 billion at
December 31, 2000. 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 $984 million is available by the
end of the year 2001 for such dividends without prior approval of the
Connecticut Insurance Department. The Company paid $315 million and
$340 million in dividends to its parent during the six months ended
June 30, 2001 and 2000, respectively.
5. COMMITMENTS AND CONTINGENCIES
The Company is a defendant or co-defendant in various litigation
matters in the normal course of business. Although there can be no
assurances, as of June 30, 2001, the Company believes, based on
information currently available, that 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.
10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
6. 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.
TRAVELERS LIFE & ANNUITY (TLA) core offerings include individual
annuity, individual life, corporate owned life insurance (COLI) and
group annuity insurance products distributed by TIC and The Travelers
Life and Annuity Company (TLAC) under the Travelers name. Among the
range of individual products offered are fixed and variable deferred
annuities, payout annuities and term, universal and variable life
insurance. The COLI product is a variable universal life product
distributed through independent specialty brokers. The group products
include institutional pensions, including guaranteed investment
contracts (GICs), payout annuities, group annuities sold to
employer-sponsored retirement and savings plans and structured finance
transactions. The majority of the annuity business and a substantial
portion of the life business written by TLA are accounted for as
investment contracts, with the result that the deposits collected are
reported as liabilities and are not included in revenues.
The PRIMERICA LIFE INSURANCE business segment consolidates primarily
the business of Primerica Life, Primerica Life Insurance Company of
Canada, CitiLife and National Benefit Life Insurance Company. The
Primerica Life Insurance business segment offers individual life
products, primarily term insurance, to customers through a nationwide
sales force of approximately 94,000 full and part-time licensed
Personal Financial Analysts.
11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
BUSINESS SEGMENT INFORMATION:
--------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED TRAVELERS LIFE & PRIMERICA LIFE
JUNE 30, 2001 ($ in millions) ANNUITY INSURANCE TOTAL
--------------------------------------------------------------------------------------------------------------------
BUSINESS VOLUME:
----------------
Premiums $ 150 $285 $435
Deposits 3,075 - 3,075
----- -------- -----
Total business volume 3,225 285 3,510
Net investment income 663 74 737
Interest credited to contractholders 300 - 300
Amortization of deferred acquisition costs 43 51 94
Total expenditures for deferred acquisition costs 143 82 225
Federal income taxes on Operating Income 109 52 161
Operating Income(1) $226 $98 $324
Segment Assets $66,321 $7,461 $73,782
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED TRAVELERS LIFE & PRIMERICA LIFE
JUNE 30, 2000 ($ in millions) ANNUITY INSURANCE TOTAL
--------------------------------------------------------------------------------------------------------------------
BUSINESS VOLUME:
----------------
Premiums $219 $277 $496
Deposits 2,930 - 2,930
----- -------- -----
Total business volume 3,149 277 3,426
Net investment income 632 71 703
Interest credited to contractholders 248 - 248
Amortization of deferred acquisition costs 41 47 88
Total expenditures for deferred acquisition costs 131 69 200
Federal income taxes on Operating Income 100 51 151
Operating Income(1) $205 $96 $301
Segment Assets $60,918 $7,220 $68,138
--------------------------------------------------------------------------------------------------------------------
(1) Excludes realized gains or losses, net of tax and the cumulative effect of
the changes in accounting principles, net of tax.
12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
BUSINESS SEGMENT RECONCILIATION:
------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
JUNE 30 ($ in millions) 2001 2000
------------------------------------------------------------------------------------------
INCOME:
Total operating income of segments $324 $301
Realized investment gains, net of tax 6 14
Cumulative effect of change in accounting for
derivative instruments and hedging activity, net
of tax - -
Cumulative effect of change in accounting for
securitized financial assets, net of tax (3) -
------------------------------------------------------------------------------------------
Net Income $327 $315
==========================================================================================
13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
BUSINESS SEGMENT INFORMATION:
--------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED TRAVELERS LIFE & PRIMERICA LIFE
JUNE 30, 2001 ($ in millions) ANNUITY INSURANCE TOTAL
--------------------------------------------------------------------------------------------------------------------
BUSINESS VOLUME:
----------------
Premiums $ 487 $ 569 $ 1,056
Deposits 6,995 - 6,995
----- ---- -----
Total business volume 7,482 569 8,051
Net investment income 1,309 152 1,461
Interest credited to contractholders 586 - 586
Amortization of deferred acquisition costs 85 101 186
Total expenditures for deferred acquisition costs 277 149 426
Federal income taxes on Operating Income 210 102 312
Operating Income(1) $ 431 $ 195 $ 626
Segment Assets $66,321 $7,461 $73,782
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED TRAVELERS LIFE & PRIMERICA LIFE
JUNE 30, 2000 ($ in millions) ANNUITY INSURANCE TOTAL
--------------------------------------------------------------------------------------------------------------------
BUSINESS VOLUME:
----------------
Premiums $499 $548 $1,047
Deposits 5,782 - 5,782
----- -------- -----
Total business volume 6,281 548 6,829
Net investment income 1,219 139 1,358
Interest credited to contractholders 493 - 493
Amortization of deferred acquisition costs 82 91 173
Total expenditures for deferred acquisition costs 252 130 382
Federal income taxes on Operating Income 192 98 290
Operating Income(1) $392 $186 $578
Segment Assets $60,918 $7,220 $68,138
--------------------------------------------------------------------------------------------------------------------
(1) Excludes realized gains or losses, net of tax and the cumulative effect of
the changes in accounting principles, net of tax.
14
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
BUSINESS SEGMENT RECONCILIATION:
---------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30 ($ in millions) 2001 2000
---------------------------------------------------------------------------------------
INCOME:
-------
Total operating income of segments $626 $578
Realized investment gains (losses), net of tax 66 (87)
Cumulative effect of change in accounting for
derivative instruments and hedging activity, net
of tax (6) -
Cumulative effect of change in accounting for
securitized financial assets, net of tax (3) -
---------------------------------------------------------------------------------------
Net Income $683 $491
=======================================================================================
15
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction H(2)(a) of Form 10-Q.
CONSOLIDATED OVERVIEW ($ in millions)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenues $1,352 $1,365 $2,949 $2,574
====== ====== ====== ======
Net income $ 327 $ 315 $ 683 $ 491
====== ====== ====== ======
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company), is comprised of two business segments, Travelers Life & Annuity and
Primerica Life Insurance. Operating income, defined as income before net
realized investment gains or losses and cumulative effect of changes in
accounting principles, was $324 million and $626 million for the quarter and six
months ended June 30, 2001, respectively, up from $301 million and $578 million
for the 2000 comparable periods. Revenues increased 15% between the six month
periods, driven by strong business volume, and remained level between the 2001
and 2000 quarters. The increased business volume also drove the 4% increase in
benefits and expenses for the six months ended June 30, 2001, respectively.
The following discussion presents in more detail each business segment's
performance.
TRAVELERS LIFE & ANNUITY
------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2001 2000
($ in millions) ---- ----
Revenues $963 $999
==== ====
Net income(1) $225 $220
==== ====
(1) Includes net realized investment gains of $2 million and a $(3) million
charge from the cumulative effect of change in accounting principle in 2001, and
net realized investment gains of $15 million in 2000.
Travelers Life & Annuity (TLA) core offerings include individual annuity,
individual life, corporate owned life insurance (COLI) and group annuity
insurance products distributed by TIC and The Travelers Life and Annuity Company
(TLAC) under the Travelers name. Among the range of individual products offered
are fixed and variable deferred annuities, payout annuities and term, universal
and variable life insurance. The COLI product is a variable universal life
product distributed through independent specialty brokers. The group products
include institutional pensions, including guaranteed investment contracts
(GICs), payout annuities, group annuities sold to employer-sponsored retirement
and savings plans and structured finance transactions. The majority of the
annuity business and a substantial portion of the life business written by TLA
are accounted for as investment contracts, with the result that the deposits
collected are reported as liabilities and are not included in revenues.
16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
Operating income was $226 million in the second quarter of 2001 compared to $205
million in the second quarter of 2000. The 10% improvement in 2001 reflects
higher net investment income principally driven by increased business volumes
and one-time investment transactions. During the second quarter of 2001, TLA
achieved double-digit business volume growth in group annuity account balances
and direct periodic life premiums versus the prior year quarter, reflecting
growth in retirement savings and estate planning products. Total operating
expenses decreased in the second quarter of 2001 compared to 2000 due to the
absence of expenses related to the long-term care insurance business, of which
90% was sold during the third quarter of 2000. The long-term care transaction
also reduced the amount of premium revenue reported in the second quarter of
2001.
The cross-selling of TLA products through CitiStreet Retirement Services,
Primerica Financial Services (Primerica), Citibank and Salomon Smith Barney
(SSB) distribution channels, along with improved sales through a nationwide
network of independent financial professionals and strong group sales through
various intermediaries, reflect ongoing efforts to build market share by
strengthening relationships in key distribution channels.
Increased gross individual annuities sales and strong net retention margins,
kept account balances level at $28.4 billion at June 30, 2001, compared to $28.0
billion at December 31, 2000 despite declining market conditions. Net premiums
and deposits increased 13% in the second quarter of 2001 to $1.7 billion from
$1.5 billion in the second quarter of 2000. Sales continue to reflect the
cross-selling initiatives at all of the Citigroup affiliates, and also reflect
strong penetration into outside broker/dealer channels.
Group annuity account balances and benefit reserves reached $19.4 billion at
June 30, 2001, up 22% from $15.8 billion at June 30, 2000. The group annuity
businesses experienced continued strong sales momentum in all products,
particularly fixed rate GICs. Net premiums and deposits (excluding Citigroup's
employee pension plan deposits) of $1.4 billion in the second quarter of 2001
remained level with the comparable period of 2000.
Direct periodic premiums for individual life insurance of $142.1 million in the
second quarter of 2001 were up 25% from $113.4 million in the comparable period
of 2000, reflecting strong core agency results. Life insurance in force was
$71.7 billion at June 30, 2001, up from $68.3 billion at December 31, 2000.
PRIMERICA LIFE INSURANCE
------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2001 2000
($ in millions) ---- ----
Revenues $389 $366
==== ====
Net income(1) $102 $ 95
==== ====
(1) Includes realized investment gains of $4 million in 2001, and net realized
investment losses of $1 million in 2000.
17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
The Primerica Life business segment offers individual life products, primarily
term insurance, to customers through a nationwide sales force of approximately
94,000 full and part-time licensed Personal Financial Analysts.
Operating income was $98 million in the second quarter of 2001 compared to $96
million in the second quarter of 2000. The 2% improvement in 2001 reflects
growth in life insurance in force and strong net investment income, partially
offset by increased infrastructure investment, including international
expansion.
Earned premiums net of reinsurance were $285 million in the second quarter of
2001 compared to $277 million in the prior year period, including $268 million
and $260 million, respectively, for Primerica individual term life policies.
Total life insurance in force reached $422.9 billion at June 30, 2001, up from
$412.7 billion at December 31, 2000, reflecting good policy persistency and
stable sales. The face amount of new term life insurance sales was $18.6 billion
for the three-month period ended June 30, 2001, compared to $18.5 billion for
the prior year period.
TRAVELERS LIFE & ANNUITY
------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2001 2000
($ in millions) ---- ----
Revenues $2,127 $1,890
====== ======
Net income(1) $ 455 $ 338
====== ======
(1) Includes realized investment gains of $32 million and a $(8) million charge
from the cumulative effects of changes in accounting principles in 2001, and
net realized investment losses of $54 million in 2000.
Operating income increased 10% to $431 million in the six months ended June 30,
2001, compared to $392 million in the six months ended June 30, 2000. Earnings
growth was driven by business volume, investment performance, including one time
transactions, and a higher capital base.
For individual annuities, net sales were $1.7 billion in 2001 versus $1.5
billion in 2000. Net written premiums and deposits were $3.2 billion in the
first six months of 2001, up 7% from $3.0 billion in the comparable period of
2000.
Group annuity net premiums and deposits were $3.9 billion in the first six
months of 2001, up 35% from $2.9 billion in the prior year period.
For individual life insurance, direct periodic premiums were $378 million for
the first half of 2001, up 64% from $230 million in the prior year period. The
face amount of individual life insurance issued during the first half of 2001
was $6.7 billion, up from $5.7 billion in the prior period of 2000.
18
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
PRIMERICA LIFE INSURANCE
------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2001 2000
($ in millions) ---- ----
Revenues $822 $684
==== ====
Net income(1) $228 $153
==== ====
(1) Includes realized investment gains of $34 million and a $(1) million charge
from the cumulative effect of change in accounting principle in 2001, and
net realized investment losses of $33 million in 2000.
Earnings before gains on investments for the first six months of 2001 increased
5% to $195 million, compared to $186 million in the first six months of 2000.
The face amount of new term life insurance sales was $34.9 billion in the first
six months of 2000, up from $33.5 billion in the prior year period.
INSURANCE REGULATIONS
Risk-based capital requirements are used as minimum capital requirements by the
National Association of Insurance Commissioners and the states to identify
companies that merit further regulatory action. At December 31, 2000, the
Company had adjusted capital in excess of amounts requiring any regulatory
action.
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. A maximum of $984
million is available by the end of 2001 for such dividends without prior
approval of the Connecticut Insurance Department. The Company paid $315 million
and $340 million in dividends to its parent during the six months ended June 30,
2001 and 2000, respectively.
FUTURE APPLICATIONS OF ACCOUNTING STANDARDS
See Note 2 of Notes to Condensed 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, proposed legislation and the resolution of legal
proceedings.
19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
3.01 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").
3.02 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.
(b) REPORTS ON FORM 8-K
None
20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
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 INSURANCE COMPANY
-------------------------------
(Registrant)
Date August 13, 2001 /s/ Glenn D. Lammey
------------------- -----------------------------------------------------
Glenn D. Lammey
Executive Vice President,
Chief Financial Officer and Chief Accounting Officer
(Principal Financial Officer and Principal Accounting
Officer)
21
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
RULE 484 UNDERTAKING
Sections 33-770 et seq inclusive of the Connecticut General Statutes ("C.G.S.")
regarding indemnification of directors and officers of Connecticut corporations
provides in general that Connecticut corporations shall indemnify their
officers, directors and certain other defined individuals against judgments,
fines, penalties, amounts paid in settlement and reasonable expenses actually
incurred in connection with proceedings against the corporation. The
corporation's obligation to provide such indemnification generally does not
apply unless (1) the individual is wholly successful on the merits in the
defense of any such proceeding; or (2) a determination is made (by persons
specified in the statute) that the individual acted in good faith and in the
best interests of the corporation and in all other cases, his conduct was at
least not opposed to the best interests of the corporation, and in a criminal
case he had no reasonable cause to believe his conduct was unlawful; or (3) the
court, upon application by the individual, determines in view of all of the
circumstances that such person is fairly and reasonably entitled to be
indemnified, and then for such amount as the court shall determine. With respect
to proceedings brought by or in the right of the corporation, the statute
provides that the corporation shall indemnify its officers, directors and
certain other defined individuals, against reasonable expenses actually incurred
by them in connection with such proceedings, subject to certain limitations.
Citigroup Inc. also provides liability insurance for its directors and officers
and the directors and officers of its subsidiaries, including the Registrant.
This insurance provides for coverage against loss from claims made against
directors and officers in their capacity as such, including, subject to certain
exceptions, liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
UNDERTAKING TO REPRESENT REASONABLENESS OF CHARGES
The Company hereby represents that the aggregate charges under the Policy of the
Registrant described herein are reasonable in relation to the services rendered,
the expenses expected to be incurred, and the risks assumed by the Company.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
1. The facing sheet.
2. The Prospectus consisting of 53 pages.
3. The undertaking to file reports.
4. The signatures.
Written consents of the following persons:
A Consent of Kathleen A. McGah, Deputy General Counsel, to the filing of
her opinion as an exhibit to this Registration Statement and to the
reference to her opinion under the caption "Legal Proceedings and
Opinion" in the Prospectus. (See Exhibit 11 below.)
B. Consent and Actuarial Opinion pertaining to the illustrations contained
in the prospectus.
C. Consent of KPMG LLP, Independent Certified Public Accountants.
D. Powers of Attorney. (See Exhibit 12 below.)
EXHIBITS
1. Resolution of the Board of Directors of The Travelers Insurance Company
authorizing the establishment of the Registrant. (Incorporated herein by
reference to Exhibit 1 to the Registration Statement on S-6, File No.
333-71349, filed January 28, 1999.)
2. Not Applicable.
3(a). Distribution and Principal Underwriting Agreement among the Registrant,
The Travelers Insurance Company and Travelers Distribution LLC
(Incorporated herein by reference to Exhibit 3(a) to Post Effective
Amendment No. 4 to the Registration Statement on Form N-4, File No.
333-58783 filed February 26, 2001.)
3(b). Selling Agreement, including schedule of sales commissions. To be
provided in a subsequent amendment.
4. None
5. Variable Life Insurance Contract.
6(a). Charter of The Travelers Insurance Company, as amended on October 19,
1994. (Incorporated herein by reference to Exhibit 6(a) to the
Registration Statement filed on Form N-4, File No. 333-40193, filed
November 13, 1997.)
6(b). By-Laws of The Travelers Insurance Company, as amended on October 20,
1994. (Incorporated herein by reference to Exhibit 6(b) to the
Registration Statement filed on Form N-4, File No. 333-40193, filed
November 13, 1997.)
7. None
8. Specimen Participation Agreements. (Incorporated herein by reference to
Exhibit 5. to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-6 filed April 18, 2001.)
9. None
10. Application for Variable Life Insurance Contracts.
11. Opinion of counsel as to the legality of the securities being
registered.
12. Power of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as
signatory for George C. Kokulis. (Incorporated herein by reference to
Exhibit 12 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-6 filed April 18, 2001.)
Powers of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as
signatories for Glenn D. Lammey, Marla Berman Lewitus and William R.
Hogan (Incorporated herein by reference to Exhibit 12 to Post-Effective
Amendment No. 2 to the Registration Statement on Form S-6, File No.
333-71349, filed April 20, 2001.)
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant, The
Travelers Fund UL III for Variable Life Insurance, has duly caused this
registration statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the city of Hartford and state of Connecticut, on the 15th
day of October, 2001.
THE TRAVELERS FUND UL III FOR VARIABLE LIFE INSURANCE
(Registrant)
THE TRAVELERS INSURANCE COMPANY
(Depositor)
By:*GLENN D. LAMMEY
------------------------------------
Glenn D. Lammey, Chief Financial Officer,
Chief Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
on the 15th day of October, 2001.
*GEORGE C. KOKULIS
---------------------- Director, Chairman of the Board, President
(George C. Kokulis) and Chief Executive Officer
(Principal Executive Officer
*GLENN D. LAMMEY
---------------------- Director, Chief Financial Officer
(Glenn D. Lammey) Chief Accounting Officer
(Principal Financial Officer)
*MARLA BERMAN LEWITUS Director,
----------------------
(Marla Berman Lewitus)
*WILLIAM R. HOGAN Director
----------------------
(William R. Hogan)
*By: /s/Ernest J. Wright, Attorney-in-Fact
EXHIBIT INDEX
Written Consents Method of Filing
---------------- ----------------
A Consent of Kathleen A. McGah, Deputy General Counsel, to the filing See Exhibit 11
of her opinion as an exhibit to this Registration Statement and to the
reference to her opinion under the caption "Legal Proceedings and
Opinion" in the Prospectus. (See Exhibit 11 below.)
B. Consent and Actuarial Opinion pertaining to the Electronically
illustrations contained in the prospectus.
C. Consent of KPMG LLP, Independent Certified Public Accountants. Electronically
EXHIBITS
5. Variable Life Insurance Contract. Electronically
10. Application for Variable Life Contract. Electronically
11. Opinion of counsel as to the legality of the securities being registered. Electronically