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Registration Statement No. 333-_________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
TO FORM S-6
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)
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on pursuant to paragraph (b)
- ------- -----------
60 days after filing pursuant to paragraph (a)(1)
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on pursuant to paragraph (a)(1) of Rule 485.
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If appropriate, check the following box:
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
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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.
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RECONCILIATION AND TIE BETWEEN
FORM N-8B-2 AND THE PROSPECTUS
Item No. of
Form N-8B-2 CAPTION IN PROSPECTUS
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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; The Policy;
Transfers of Cash 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 The Policy
15 Prospectus Summary; Applying Premium Payments
16 The Investment Options; Applying Premium Payments
17 Prospectus Summary; Right to Cancel; The Separate Account and
Valuation; Policy Loans; Exchange
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
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Item No. of
Form N-8B-2 CAPTION IN PROSPECTUS
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46 The Separate Account and Valuation; Access to Cash Values
47 The Investment Options
48 Not applicable
49 Not applicable
50 Not applicable
51 Prospectus Summary; The Company; The Policy; 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
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 28, 1999
TRAVELERS
CORPORATE OWNED VARIABLE
UNIVERSAL LIFE INSURANCE POLICIES
PROSPECTUS
This Prospectus describes Travelers corporate owned 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. You direct
the net premium payment to one or more of the variable funding options (the
"Investment Options") and/or the Fixed Account.
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 three death benefits under the Policy -- the "Level Option," the
"Variable Option," and the "Annual Increase Option." Under any option, the death
benefit will never be less than the Amount Insured (less any outstanding Policy
loans 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 INVESTMENT OPTION 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 , 1999.
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TABLE OF CONTENTS
Glossary of Special Terms............. 3
Prospectus Summary.................... 5
General Description................... 8
Group or Individual Policy.......... 8
The Application..................... 8
How the Policy Works.................. 8
Applying Premium Payments........... 8
The Investment Options................ 9
Policy Benefits and Rights............ 15
Transfers of Contract Value......... 15
Investment Options............... 15
Fixed Account.................... 15
Telephone Transfers.............. 15
Automated Transfers................. 15
Dollar Cost Averaging............ 15
Portfolio Rebalancing............ 16
Lapse and Reinstatement............. 16
Insured Term Rider.................. 16
Exchange Rights..................... 16
Right to Cancel..................... 16
Access to Contract Values............. 17
Policy Loans........................ 17
Consequences..................... 17
Policy Surrenders................... 17
Full Surrenders.................. 17
Partial Withdrawals.............. 17
Death Benefit......................... 18
Option 1............................ 18
Option 2............................ 19
Option 3............................ 19
Payment of Proceeds................. 19
Payment Options..................... 20
Maturity Benefits..................... 20
Charges and Deductions................ 20
Charges Against Premium............. 20
Front-End Sales Charge........... 20
Monthly Deduction Amount............ 21
Cost of Insurance Charge......... 21
Monthly Policy Charge............ 21
Charges Against the Separate
Account.......................... 21
Mortality and Expense Risk
Charge......................... 21
Underlying Fund Expenses............ 21
Transfer Charge..................... 21
Reduction or Elimination of
Charges.......................... 21
The Separate Account and Valuation.... 22
The Travelers Fund UL III for
Variable Life Insurance (Fund UL
III)............................. 22
How the Contract Value Varies.... 22
Accumulation Unit Value.......... 22
Net Investment Factor............ 23
Changes to the Policy................. 23
General............................. 23
Changes in Stated Amount............ 23
Changes in Death Benefit Option..... 24
Additional Policy Provisions.......... 24
Assignment.......................... 24
Limit on Right to Contest and
Suicide Exclusion................ 24
Misstatement as to Sex and Age...... 24
Voting Rights....................... 24
Disregard of Voting Instructions.... 24
Other Matters......................... 25
Statements to Policy Owners......... 25
Suspension of Valuation............. 25
Dividends........................... 25
Mixed and Shared Funding............ 25
Distribution........................ 26
Legal Proceedings and Opinion....... 26
Independent Accountants............. 26
Federal Tax Considerations............ 27
General............................... 27
Tax Status of the Policy.............. 27
Definition of Life Insurance........ 27
Diversification..................... 27
Investor Control.................... 27
Tax Treatment of Policy Benefits...... 28
In General.......................... 28
Modified Endowment Contracts........ 29
Exchanges........................... 29
Aggregation of Modified Endowment
Contracts........................ 30
Policies Which are not Modified
Endowment Contracts.............. 30
Treatment of Loan Interest.......... 30
The Company's Income taxes.......... 30
The Company........................... 30
IMSA................................ 31
Year 2000 Compliance................ 31
Management.......................... 32
Directors of The Travelers
Insurance Company.............. 32
Senior Officers of The Travelers
Insurance Company.............. 33
Example of Policy Charges............. 33
Performance Information............... 34
Illustrations......................... 36
Appendix A............................ A-1
Financial Statements.................. F-1
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GLOSSARY OF SPECIAL TERMS
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ACCUMULATION UNIT -- a standard of measurement used to calculate the values
allocated to the Investment Options.
BENEFICIARY(IES) -- the person(s) named to receive the benefits of this Policy
at the Insured's death.
CASH SURRENDER VALUE -- the Contract Value less any outstanding Policy loan and
surrender charges.
CONTRACT VALUE -- the current value of Accumulation Units credited to each of
the Investment Options available under the Policy, plus the value of the Fixed
Account and 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.
FIXED ACCOUNT -- part of the General Account of the Company.
GENERAL ACCOUNT -- made up of all our assets other than those held in the
Separate Account.
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.
MINIMUM AMOUNT INSURED -- the amount of Death Benefit required to qualify this
Policy as life insurance under federal tax law.
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 the Death
Benefit Interest Factor minus the Contract Value.
NET PREMIUM -- the amount of each premium payment, minus the deduction of any
front-end sales expense charges.
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 DATE -- the date on which the Policy, benefits and provisions of the
Policy become effective.
POLICY MONTH -- monthly periods computed from the Policy Date.
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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.
SEPARATE ACCOUNT -- assets set aside by The Travelers Insurance Company, the
investment experience 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.
TARGET PREMIUM -- the level annual premium above which the sales expense charges
are reduced.
UNDERLYING FUND -- the underlying mutual fund(s) that correspond to each
Investment Option. Each Investment Option invests directly in a Fund.
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.
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PROSPECTUS SUMMARY
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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. In addition, under certain
circumstances, individuals may purchase a Policy. Like other life insurance, it
provides an income-tax free death benefit that is payable to the Beneficiary
upon the death of the Insured. 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 and a Fixed Account. 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
well-known Investment Options. The investment options invest directly in the
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:
EMERGING MARKETS BALANCED
Warburg Pincus Trust Emerging Markets Salomon Brothers Total Return Fund
Portfolio MFS Total Return Portfolio
Fidelity VIP II Asset Manager Portfolio
INTERNATIONAL
Lazard International Stock Portfolio INDEX
Smith Barney International Equity Portfolio Bankers Trust EAFE Index Fund
Bankers Trust Small Cap Index Fund
SMALL CAP Dreyfus Stock Index Fund
Delaware Premium Small Cap Value Series
Dreyfus Small Cap Portfolio BOND
Travelers Disciplined Small Cap Stock Travelers U.S. Government Securities
Portfolio Portfolio
Travelers Convertible Bond Portfolio
MID CAP Putnam Diversified Income Portfolio
Salomon Brothers Cap Fund Travelers High Yield Bond Trust
MFS Emerging Growth Portfolio Salomon Brothers Strategic Bond Fund
MFS Mid Cap Growth Portfolio Greenwich Street Diversified Strategic Income
Strong Schaefer Value Fund II Portfolio
Travelers Disciplined Mid-Cap Stock Portfolio American Odyssey Intermediate-Term Bond Fund
Aim Capital Appreciation Portfolio
Montgomery Variable Series: Growth Fund MONEY MARKET
Travelers Money Market
LARGE CAP
Fidelity Large Cap Portfolio NON-STYLE SPECIFIC
Fidelity Equity Income Utilities Portfolio
NWQ Large Cap Portfolio Social Awareness Stock Portfolio
OpCap Trust Equity Portfolio Jurika & Voyles Core Equity Portfolio
Alliance Growth Portfolio MFS Research Portfolio
Capital Appreciation (Janus) Strategic Stock Portfolio
Dreyfus Capital Appreciation Portfolio
Van Kampen Enterprise Portfolio
Salomon Brothers Investors Fund
Smith Barney Large Capitalization Growth
Portfolio
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.
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FIXED ACCOUNT: The Fixed Account is funded by the assets of the General
Account. The Contract Value allocated to the Fixed Account is credited with
interest daily at a rate declared by the Company. The interest rate declared is
at the Company's sole discretion, but may never be less than 3%.
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 the Investment Options and/or the Fixed Account. You may not
allocate less than 5% of each Net Premium to any Investment Option and/or Fixed
Account. You may change your allocations by writing to the Company or by calling
1-800-842-9368.
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. After that, the Contract Value will be distributed to
each Investment Option in the percentages indicated on your application.
RIGHT TO EXAMINE POLICY: You may return your Policy for any reason and receive
a full refund of your premium or Contract, as required by state law, by mailing
us the Policy and a written request for cancellation within a specified period.
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."
POLICY CHARGES:
- SALES EXPENSES CHARGES -- We deduct a sales charge from each premium
payment received which is guaranteed never to exceed 9% of such Target
Premium in all years and 5% on amounts in excess of the Target Premium in
all years. On a current basis, the sales expense charge is 7% of the
Target Premium for Contract Years 1-7 and 3.5% thereafter.
- MONTHLY DEDUCTION -- deductions taken from the value of your Policy each
month to cover cost of insurance charges, Policy Fee of $5.00 and charges
for optional rider(s).
- SURRENDER CHARGE -- There is no surrender charge.
ASSET-BASED CHARGES: (Not Assessed on Contract Values in the Fixed
Account)
- MORTALITY AND EXPENSE RISK CHARGE -- applies to the assets of the
Investment Options on a daily basis which currently equals an annual rate
of .45% for Policy Years 1 through 4, .25% for Policy Years 5 through 20,
and .05% thereafter. It is guaranteed not to exceed .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.
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.
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- ANNUAL INCREASE OPTION (OPTION 3): the Amount Insured will equal the
Stated Amount of the Policy plus Premiums, minus withdrawals, accumulated
at a specified interest rate not to exceed 10% on an annual basis.
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. As discussed below, any premium payments allocated to the Fixed Account
is credited with a minimum guarantee of 3% in any given year.
- 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. There are restrictions on the transfer of
your Contract Value to and from the Fixed Account. You may do this by writing to
the Company or calling 1-800-334-4298.
You can use automated transfers to take advantage of dollar cost
averaging -- investing a fixed amount at regular intervals. For example, you
might have a set amount transferred from a relatively conservative Investment
Option to a more aggressive one, or to several others.
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.
EXCHANGE RIGHTS: During the first two Policy Years, you can elect to
irrevocably transfer all Contract value in the Investment Options to the Fixed
Account.
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 older Policy Owner attains age 59 1/2. The Company has established
safeguards for monitoring whether a Policy may become a MEC.
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GENERAL DESCRIPTION
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This prospectus describes a flexible premium variable life insurance policy
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 of three death benefit options
- Loans and partial withdrawal privileges
- The ability to increase or decrease the Policy's face amount of insurance
- Additional benefits 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.
GROUP OR INDIVIDUAL POLICY. The policy may be issued either as an individual or
group policy. Under an individual or group policy, the Insured generally will be
an employee. The Certificate, and Group Policy, and Individual Policies are
hereafter collectively referred to as the "Policy."
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 of the three 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 application, and, if approved, we will
issue the Policy.
HOW THE POLICY WORKS
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You make premium payments and direct them to one or more of the available
investment options and the Fixed Account. 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 Option 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.
APPLYING PREMIUM PAYMENTS
We apply the first premium on the later of the Policy 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
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Portfolio unless state law permits us to refund Contract Value under the Right
to Cancel provision. Then, you may invest your Net Premium in any Investment
Option. At the end of the Right to Cancel Period, we direct the net premiums to
the Investment Option(s) and/or the Fixed Account 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
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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 Investment
Options prospectuses which are included with and must accompany this prospectus.
Please read carefully the complete risk disclosure in each Portfolio's
prospectus before investing.
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 Corporation
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.
Dreyfus Stock Index Fund Seeks to provide investment results Mellon Equity Securities
that correspond to the price and yield
performance of publicly traded common
stocks in the aggregate, as
represented by the Standard & Poor's
500 Composite Stock Price Index.
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.
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INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
----------------- -------------------- -----------------------------
AMERICAN ODYSSEY FUNDS, INC.
Intermediate-Term Bond Seeks maximum long-term total return American Odyssey Funds
Fund by investing primarily in Management, Inc.
intermediate-term corporate debt Subadviser: TAMIC
securities, U.S. government
securities, mortgage-related
securities and asset-backed
securities, as well as money market
instruments.
BT INSURANCE FUNDS TRUST
EAFE Equity Index Fund Seeks to replicate, before deduction Bankers Trust Global
of expenses, the total return Investment Management
performance of the EAFE index.
Small Cap Index Fund Seeks to replicate, before deduction Bankers Trust Global
of expenses, the total return Investment Management
performance of the Russell 2000 index.
DELAWARE GROUP PREMIUM
FUND, INC.
Small Cap Value Series Seeks capital appreciation by Delaware Management
investing in small-to mid-cap common Company, Inc.
stocks whose market value appears low
relative to their underlying value or
future earnings and growth potential.
Emphasis will also be placed on
securities of companies that may be
temporarily out of favor or whose
value is not yet recognized by the
market.
FIDELITY'S VARIABLE INSURANCE
PRODUCTS FUND II
VIP II Asset Manager Seeks high total return with reduced Fidelity Management &
Portfolio risk over the long-term by allocating Research Company ("FMR")
its assets among stocks, bonds and
short-term fixed-income instruments.
GREENWICH STREET SERIES
FUND
Diversified Strategic Seeks high current income by investing Mutual Management Corp
Income Portfolio primarily in the following fixed ("MMC")
income securities: U.S. Gov't and Subadviser:
mortgage-related securities, foreign Smith Barney Global Capital
gov't bonds and corporate bonds rated Management, Inc.
below investment grade.
MONTGOMERY FUND III
Montgomery Variable Seeks capital appreciation. Under Montgomery Asset Management
Series Growth Fund normal conditions, it invests at least
65% of its assets in equity
securities.
OCC ACCUMULATION TRUST
Equity Portfolio Seeks long-term capital appreciation OpCap Advisors
through investment in securities
(primarily equity securities) of
companies that are believed by the
adviser to be undervalued in the
marketplace in relation to factors
such as the companies' assets or
earnings.
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INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
----------------- -------------------- -----------------------------
SALOMON BROTHERS VARIABLE
SERIES FUND, INC.
Salomon Brothers Variable Seeks long-term growth of capital. Salomon Brothers Asset
Investors Fund Current income is a secondary Management ("SBAM")
objective.
Salomon Brothers Variable Seeks above-average income (compared SBAM
Total Return Fund to a portfolio invested entirely in
equity securities). Secondarily, seeks
opportunities for growth of capital
and income.
Salomon Brothers Variable Seeks high level of current income. As SBAM
Strategic Bond Fund a secondary objective, the Portfolio
will seek capital appreciation.
Salomon Brothers Variable Seeks capital appreciation through SBAM
Capital Fund investments primarily in common stock,
or securities convertible to common
stocks, which are believed to have
above-average price appreciation
potential and which may also involve
above-average risk.
STRONG VARIABLE INSURANCE
FUNDS, INC.
Strong Schafer Value Seeks primarily long-term capital Strong Capital Management,
Fund II appreciation. Current income is a Inc. Subadviser: Schafer
secondary objective when selecting Capital Management Inc.
investments.
TRAVELERS SERIES FUND, INC.
AIM Capital Appreciation Seeks capital appreciation by Travelers Investment Advisers
Portfolio investing principally in common stock, ("TIA") Subadviser: AIM
with emphasis on medium-sized and Capital Management, Inc.
smaller emerging growth companies.
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) Finance 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.
Putnam Diversified Seeks high current income consistent TIA
Income Portfolio with preservation of capital. The Subadviser: Putnam
Portfolio will allocate its Investment
investments among the U.S. Government Management, Inc.
Sector, the High Yield Sector, and the
International Sector of the fixed
income securities markets.
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INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
----------------- -------------------- -----------------------------
Smith Barney Total return on assets from growth of MMC
International Equity capital and income by investing at
Portfolio 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 MMC
Capitalization Growth investing in equity securities of
Portfolio companies with large market
capitalizations.
Van Kampen Enterprise Capital appreciation through MMC
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.
Disciplined Small Cap Seeks long term capital appreciation TAMIC.
Stock Portfolio by investing primarily (at least 65% Subadviser: TIMCO
of its total assets) in the common
stocks of U.S. Companies with
relatively small market
capitalizations at the time of
investment.
Equity Income Portfolio Seeks reasonable income by investing TAMIC
at least 65% in income-producing Subadviser: FMR
equity securities. The balance may be
invested in all types of domestic and
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.
Jurika & Voyles Core Seeks long-term capital appreciation. TAMIC.
Equity Portfolio The Portfolio invests primarily in the Subadviser: Jurika & Voyles
common stock of quality companies of L.P.
all market capitalizations that offer
current value and significant future
growth potential
Large Cap Portfolio Seeks long-term growth of capital by TAMIC
investing primarily in equity Subadviser: FMR
securities of companies with large
market capitalizations.
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INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
----------------- -------------------- -----------------------------
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.
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
Social Awareness Stock Long-term capital appreciation and MMC
Portfolio 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.
Strategic Stock Portfolio Seeks to provide an above-average TAMIC
total return through a combination of Subadviser: TIMCO
potential capital appreciation and
dividend income by investing primarily
in high dividend yielding stocks
periodically selected from the
companies included in (i) the Dow
Jones Industrial Average and (ii) the
Standard & Poor's 100 Stock Index.
NWQ Large Cap Portfolio Seeks to achieve consistent superior TAMIC
total return with minimum risk to Subadviser: NWQ
principal Investment Management
Company
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.
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INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
----------------- -------------------- -----------------------------
Utilities Portfolio Provide current income by investing in MMC
equity and debt securities of
companies in the utility industries.
WARBURG PINCUS TRUST
Emerging Markets Seeks long-term growth of capital by Warburg Pincus Asset
Portfolio investing primarily in equity Management, Inc.
securities of non-U.S issuers
consisting of companies in emerging
securities markets.
DREYFUS VARIABLE INVESTMENT FUND
Capital Appreciation Seeks primarily to provide long-term The Dreyfus Corporation
Portfolio 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.
Small Cap Portfolio Seeks to maximize capital The Dreyfus Corporation
appreciation.
THE FIXED ACCOUNT
- --------------------------------------------------------------------------------
The Fixed Account is secured by part of the general assets of the Company. The
general assets of the Company include all assets of the Company other than those
held in separate account sponsored by the Company.
The staff of the Securities and Exchange Commission (SEC) does not generally
review the disclosure in the prospectus relating to the Fixed Account.
Disclosure regarding the Fixed Account and the general account may, however, be
subject to certain provisions of the federal securities laws relating to the
accuracy and completeness of statements made in the prospectus.
Under the Fixed Account, the Company assumes the risk of investment gain or loss
and guarantees a specified interest rate. The investment gain or loss of the
Separate Account or any of the variable Investment Options does not affect the
Fixed Account portion of the Policy owner's Contract Value.
We guarantee that, at any time, the Fixed Account Contract Value will not be
less than the amount of the premium payments allocated to the Fixed Account,
plus interest credited, less any prior surrenders or loans. If the Policy owner
effects a surrender, the amount available from the Fixed Account will be reduced
by any applicable charges as described under "Charges and Deductions" in this
prospectus.
Premium payments allocated to the Fixed Account and any transfers made to the
Fixed Account become part of the Company's general account which supports
insurance and annuity obligations. Neither the general account nor any interest
therein is registered under, nor subject to the provisions of, the Securities
Act of 1933 or Investment Company Act of 1940. We will invest the assets of the
Fixed Account at our discretion. Investment income from such Fixed Account
assets will be allocated to us and to the Policies participating in the Fixed
Accounts.
Investment income from the Fixed Account allocated to us includes compensation
for mortality and expense risks borne by us in connection with Fixed Account
Policies. The amount of such investment income allocated to the Policies will
vary in our sole discretion at such rate or rates as we prospectively declare
from time to time.
Rates for any allocations into the Fixed Account are guaranteed for the calendar
quarter. We also guarantee that for the life of the Policy we will credit
interest at not less than 3% per year. Any
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interest credited to amounts allocated to the Fixed Account in excess of 3% per
year will be determined in our sole discretion. You assume the risk that
interest credited to the Fixed Account may not exceed the minimum guarantee of
3% for any given year.
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 in any Policy Year and to charge $10 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.
FIXED ACCOUNT
You may make transfers from the Fixed Account to any other available investment
option(s) twice a year during the 30 days following the semi-annual or annual
anniversary of the Policy Date. The transfers are limited to an amount of up to
25% of the Fixed Account Value on the semi-annual or annual contract effective
date anniversary. (This restriction does not apply to transfers under the Dollar
Cost Averaging Program.) Amounts previously transferred from the Fixed Account
to other Investment Options may not be transferred back to the Fixed Account for
a period of at least six months from the date of transfer. We reserve the right
to waive either of these restrictions.
TELEPHONE TRANSFERS. The Policy Owner may make the request in writing by
mailing such request to the Company at its Home Office, or by telephone (if an
authorization form is on file) by calling 1-800-842-9368. The Company will take
reasonable steps to ensure that telephone transfer requests are genuine. These
steps may include seeking proper authorization and identification prior to
processing telephone requests. Additionally, the Company will confirm telephone
transfers. Any failure to take such measures may result in the Company's
liability for any losses due to fraudulent telephone transfer requests.
AUTOMATED TRANSFERS
DOLLAR-COST AVERAGING. You may establish automated transfers of Contract Values
on a monthly or quarterly basis from any Investment Option(s) to any other
Investment Option(s) through written request or other method acceptable to the
Company. You must have a minimum total Policy Value of $1,000 to enroll in the
Dollar-Cost Averaging program. The minimum total automated transfer amount is
$100.
You may start or stop participation in the Dollar-Cost Averaging program at any
time, but you must give the Company at least 30 days' notice to change any
automated transfer instructions that are currently in place. Automated transfers
are subject to all of the other provisions and terms of the Policy. The Company
reserves the right to suspend or modify transfer privileges at any time and to
assess a processing fee for this service.
Before transferring any part of the Contract Value, Policy Owners should
consider the risks involved in switching between investments available under
this Policy. Dollar-cost averaging requires regular investments regardless of
fluctuating price levels, and does not guarantee profits or prevent losses in a
declining market. Potential investors should consider their financial ability to
continue purchases through periods of low price levels.
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PORTFOLIO REBALANCING. You may elect to have the Company periodically
reallocate values in your policy to match your original (or your latest) funding
option allocation 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 last of the two Insureds dies during the Late Period,
the Death Benefit payable will be reduced by the Monthly Deduction Amount due
plus the amount of any outstanding loan. (See "Death Benefit," below.)
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 both Insureds.
INSURED TERM RIDER
You may choose to purchase the Insured Term Rider as an addition to the Policy.
This rider may not be available in all states.
EXCHANGE RIGHTS
Once the Policy is in effect, you may choose during the first 24 months to
irrevocably transfer all Contract Value of the Investment Options to the Fixed
Account. Upon election of this option, no future transfers to the Investment
Options will be permitted. All future premium payments will be allocated to the
Fixed Account. No evidence of insurability is required to exercise this Option.
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.
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ACCESS TO CONTRACT VALUES
- --------------------------------------------------------------------------------
POLICY LOANS
You may borrow up to 100% of the Policy's Cash Surrender Value. This amount will
be determined on the day we receive the loan request in writing in a form
acceptable to us. We reserve the right to limit loan requests to at least $500.
We will make the loan within seven days of our receipt of the written loan
request. The annual loan interest rate is 5%.
If you have a loan outstanding and request a second loan, we will add the amount
of the outstanding loan to the loan request. We charge 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. Loan amounts will be transferred
from the Fixed Account and when insufficient amounts are available in the
Investment Options. 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 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 and the Fixed Account 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
outstanding loan(s). 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 could also 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 outstanding Policy loans, and any surrender charge.
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).
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. The amount paid to you will be the net amount
requested, minus any applicable Surrender Charges. 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.
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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
Deduction Amount. 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 outstanding Policy
loan and unpaid 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. Under Option
3, (the Annual Increase Option), the amount insured will be equal to stated
amount of the policy plus Premium Payments minus any partial surrenders.
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 to a stated percentage of the Policy's Contract
Value determined as of the first day of each Policy Month. The percentages
differ according to the attained age of the Insured and the definition of life
insurance under Section 7702 selected by you. (Cash Value Accumulation Test or
Guideline Premium Cash Value Corridor Test. The Minimum Amount Insured is set
forth in the Policy and may change as federal income tax laws or regulations
change. The following is a schedule of the applicable percentages for the
Guideline Premium Cash Value Corridor Test. For attained ages not shown, the
applicable percentages will decrease evenly:
ATTAINED AGE OF
YOUNGER INSURED PERCENTAGE
- --------------- ----------
0-40 250
45 215
50 185
55 150
60 130
65 120
70 115
75 105
95+ 100
Federal tax law imposes another cash funding limitation on cash value life
insurance Policies that may increase the Minimum Amount Insured shown above.
This limitation, known as the "guideline premium limitation," generally applies
during the early years of variable universal life insurance Policies.
In the Cash Value Accumulation Test the factors at the end of a Policy Year are
set forth in Appendix A.
The following examples demonstrate the relationship between the Death Benefit,
the Cash Surrender Value and the Minimum Amount Insured under Death Benefit
Options 1. The examples assume an Insured of age 40, a Minimum Amount Insured of
250% 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
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insurance Policy, the Death Benefit cannot be less than the Minimum Amount
Insured (or, in this example, 250% of the Contract Value).
EXAMPLE ONE. If the Contract Value of the Policy equals $10,000, the Minimum
Amount Insured would be $25,000 ($10,000 x 250%). Since the Death Benefit in the
Policy is the greater of the Stated Amount ($50,000) or the Minimum Amount
Insured ($25,000), 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 $100,000 ($40,000 x 250%). The resulting Death Benefit
would be $100,000 since the Death Benefit is the greater of the Stated Amount
($50,000) or the Minimum Amount Insured ($100,000).
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,
250% of the Contract Value).
EXAMPLE ONE. If the Contract Value of the Policy equals $10,000, the Minimum
Amount Insured would be $25,000 ($10,000 x 250%). 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 ($25,000) was greater.
EXAMPLE TWO. If the Contract Value of the Policy equals $60,000, then the
Minimum Amount Insured would be $150,000 ($60,000 x 250%). The resulting Death
Benefit would be $150,000 because the Minimum Amount Insured ($150,000) is
greater than the Stated Amount plus the Contract Value ($50,000 + $60,000 =
$110,000).
OPTION 3 -- ANNUAL INCREASE OPTION
In the following examples of an Option 3 Annual Increase Option, the Death
Benefit is generally equal to the Stated Amount of $50,000 plus premium payments
paid minus partial surrenders, accumulated at the specified interest rates.
EXAMPLE ONE. If the Contract Value of the Policy equals $10,000, the Minimum
Amount Insured would be $25,000 ($10,000 x 250%). The Death Benefit ($52,650)
would be equal to the Stated Amount ($50,000) plus premium payments ($2,500)
aggregated at 6.00% for one year, unless the Minimum Amount Insured ($25,000)
was greater.
EXAMPLE TWO. If the Contract Value of the Policy equals $40,000, the Minimum
Amount Insured would be $100,000 ($40,000 x 250%). The Death Benefit would be
$100,000 since the Death Benefit is greater of the Stated Amount plus Premium
Payments Aggregated at 6.00% for one year ($54,000) or the Minimum Amount
Insured ($100,000).
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 Policy loan, 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
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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 Death Benefit 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
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 younger
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 outstanding Policy loan or
unpaid Deduction Amount. 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
- --------------------------------------------------------------------------------
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 7.0% of the Target Premium for the first
seven Policy Years and 3.5% thereafter. The sales charge is guaranteed not to
exceed 9% of such Target Premium payments in all Contract Years and 5% on
amounts in excess of the Target Premium.
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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 and the Fixed Account values
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 Deduction Amount will vary from month to month. The Monthly
Deduction Amount consists of the Cost of Insurance Charge, Monthly Policy Charge
and Charges for any Rider(s).
COST OF INSURANCE CHARGE. The amount of the Cost of Insurance deduction depends
on of 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 and risk class of the Insured
and duration from issue.
MONTHLY POLICY CHARGE. This $5 charge is used to cover expenses associated with
maintaining the policy.
CHARGES AGAINST THE SEPARATE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. We deduct a daily charge for mortality and
expense risks. This current charge is at an annual rate of 0.45% for Policy
Years 1-4; .25% for Policy Years 5-20, and .05% thereafter. It is guaranteed not
to exceed .75% for all years. The mortality risk assumed is that the cost of
insurance charge specified in the Policy may not be enough to meet actual
claims. The expense risk assumed is that expenses incurred in issuing and
administering the Policies will exceed the administrative charges set forth in
the Policy.
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 to each of the
underlying Mutual Funds are described in the individual 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 four times in any
Policy Year, and to charge $10 for any additional transfers.
REDUCTION OR ELIMINATION OF CHARGES
We may offer the Policy in arrangements where a corporation, employer or trustee
will own a group of policies on the lives of certain employees, or in other
situations where groups of policies will be purchased at one time. We may reduce
or eliminate the mortality and expense risk charge, sales charges and
administrative charges in such arrangements to reflect the reduced sales
expenses, administrative costs and/or mortality and expense risks expected as a
result of sales to a particular group.
We will not reduce or eliminate any charges if the reduction or elimination will
be unfairly discriminatory to any person.
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THE SEPARATE ACCOUNT AND VALUATION
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THE TRAVELERS FUND UL III FOR VARIABLE LIFE INSURANCE (FUND UL III)
The Travelers Fund 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.
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 and the
persons entitled to payments under the Policy. 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 Fund UL III
in connection in the Investment Options in connection with premium payments
allocated to 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 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 and the Fixed 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.)
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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.
CHANGES TO THE POLICY
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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 (Note: you can also make
these changes by telephone)
Written requests for changes should be sent to the Company's Home Office at One
Tower Square, Hartford, Connecticut, 06183. The Company's telephone number is
(860) 422-3985.
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.
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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 Stated Amount
will be adjusted so the Net Amount at risk remains level. 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. The following Changes in
Death Benefit Options are permissible:
Option 1-2
Option 2-1
Option 3-1
It is not permitted to change from Option 3 to 2; Option 1 to 3, and 2 to 3.
ADDITIONAL POLICY PROVISIONS
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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 outstanding Policy loan, 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.
DISREGARD OF VOTING INSTRUCTIONS
When permitted by state insurance regulatory authorities, we may disregard
voting instructions if the instructions would cause a change in the investment
objective or policies of the Separate Account or an Investment Option, or if it
would cause the approval or disapproval of an
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investment advisory Policy of an Investment Option. In addition, we may
disregard voting instructions in favor of changes in the investment policies or
the investment adviser of any Investment Options which are initiated by a Policy
Owner if we reasonably disapprove of such changes. A change would be disapproved
only if the proposed change is contrary to state law or prohibited by state
regulatory authorities, or if we determine that the change would have an adverse
effect on our general account (i.e., if the proposed investment policy for an
Investment Option may result in overly speculative or unsound investments.) If
we do disregard voting instructions, a summary of that action and the reasons
for such action would be included in the next annual report to Policy Owners.
OTHER MATTERS
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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;
- 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. We reserve the right to suspend or postpone the date of any
payment of any benefit or values associated with the fixed account for up to six
months.
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 funds
may be available to variable products of other companies not affiliated with
Travelers. This is called "shared funding." Although we -- and the funds -- do
not anticipate any disadvantages either to variable life insurance or to
variable annuity Policy Owners, the Investment Options' 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
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Investment Options' 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 fund. Please consult the prospectuses
of the Investment Options 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. The Policies will be
sold by life insurance sales representatives who are registered representatives
of the Company or certain other registered broker-dealers. The maximum
commission payable by the Company for distribution would be no greater than 35%
of the actual premium paid in the first twelve months. Any sales representative
or employee will be qualified to sell variable life insurance Policies under
applicable federal and state laws. Each broker/dealer is registered with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 and
all are members of the National Association of Securities Dealers, Inc.
CFBDS, Inc. serves as principal underwriter of the Policies.
LEGAL PROCEEDINGS AND OPINION
There are no pending material legal proceedings affecting the Separate Account.
Legal matters in connection with the federal laws and regulations affecting the
issue and sale of the Contract described in this prospectus, as well as 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 reviewed by the General Counsel of
the Company.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of The Travelers Insurance Company and
Subsidiaries as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
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FEDERAL TAX CONSIDERATIONS
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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.
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
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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 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.
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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-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
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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.) 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
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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) 422-3985.
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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.
IMSA
The Company is a member of the Insurance Marketplace Standards Association
("IMSA"), and as such may use the IMSA logo and IMSA membership in its
advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and service for individually
sold life insurance and annuities. IMSA members have adopted policies and
procedures that demonstrate a commitment to honesty, fairness and integrity in
all customer contacts involving the sale and service of individual life
insurance and annuity products.
YEAR 2000 COMPLIANCE
The Company is highly dependent on computer systems and systems applications for
conducting its ongoing business functions. In 1996, the Company began the
process of identifying, assessing and implementing changes to computer programs
to address the year 2000 issue and developed a comprehensive plan to address the
issue. The issue involves the ability of computer systems that have time
sensitive programs to recognize properly the year 2000. The inability to do so
could result in major failures or miscalculations that would disrupt the
Company's ability to meet its customer and other obligations on a timely basis.
The Company is in the process of implementing necessary changes, in accordance
with its Year 2000 plan, to bring all its critical business systems into year
2000 compliance. As part of, and following, achievement of year 2000 compliance,
systems have been, and will continue to be, subjected to a certification process
which validates the renovated code before it is certified for use in production.
In addition, the Company is developing contingency plans to be used in the event
of an unexpected failure, which may result from the complex interrelationships
among our clients, business partners, and other parties upon whom it relies.
The total pre-tax cost associated with the required modifications and
conversions is expected to be insignificant and is being expensed as incurred in
the period 1996 through 1999, and is not expected to have a material effect on
its financial position, results of operations or liquidity. The Company also has
third party customers, financial institutions, vendors and others with which it
conducts business and has communicated with them on their plans to address and
resolve year 2000 issues on a timely basis. While it is likely that these
efforts by third party vendors will be successful, it is possible that a series
of failures by third parties could have a material adverse effect on the
Company's results of operations in future years.
31
36
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.
DIRECTOR
NAME AND POSITION SINCE PRINCIPAL BUSINESS
----------------- -------- ------------------
Jay S. Benet................... 1996 Senior Vice President since February 1994; Chief
Director Financial Officer, Chief Accounting Officer, and
Controller since January, 1999 and Vice President
(1990-1994) of The Travelers Insurance Company; Partner
(1986-1990) of Coopers & Lybrand.
Katherine M. Sullivan.......... 1996 Senior Vice President and General Counsel since May
Director 1996 of The Travelers Insurance Company; Senior Vice
President and General Counsel (1994-1996) Connecticut
Mutual; Special Counsel & Chief of Staff (1988-1994)
Aetna Life & Casualty.
George C. Kokulis.............. 1996 Senior Vice President since September 1995, Vice
Director President (1993-1995) of The Travelers Insurance
Company.
Michael A. Carpenter........... 1995 Co-chairman, Salomon Smith Barney since October 1998;
Director Chairman since June 1996 and President and Chief
Executive Officer June 1995-1998 of The Travelers
Insurance Company; Vice Chairman since February 1998;
Executive Vice President (1995-1998) of Citigroup Inc.;
Chairman, President and Chief Executive Officer
(1989-1994), Kidder Peabody Group Inc.
Robert I. Lipp................. 1992 Chairman, President and Chief Executive Officer since
Director April 1996 of Travelers Property Casualty Corp.; Chief
Executive Officer and Director since December 1993 of
The Travelers Insurance Group Inc.; Vice Chairman and
Director of Citigroup Inc. since 1991; Chairman and
Chief Executive Officer of Commercial Credit Company
(1991-1993); Executive Vice President (1986-1991),
Primerica Corporation.
Marc P. Weill*................. 1994 Senior Vice President-Investments since 1993 and Chief
Director Investment Officer since 1995 of The Travelers
Insurance Group Inc.; Senior Vice President and Chief
Investment Officer of Citigroup Inc. since 1992; Vice
President (1990-1992), Primerica Corporation; Vice
President (1989-1990), Smith Barney Inc.
J. Eric Daniels................ 1998 President and Chief Executive Officer since December
Director 1998 of The Travelers Insurance Company; Chief
Operating Officer of Global Consumer Bank of Citibank.
- ---------------
* Principal business address: Citigroup Inc., 153 East 53rd St., New York, New
York 10043
32
37
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.
NAME POSITION WITH INSURANCE COMPANY
---- -------------------------------
Stuart Baritz................ Senior Vice President
Barry Jacobson............... Senior Vice President
Russell H. Johnson........... Senior Vice President
Warren H. May................ Senior Vice President
Jay S. Fishman............... Senior Vice President
David A. Tyson............... Senior Vice President
F. Denney Voss............... Senior Vice President
Elizabeth C. Senior Vice President
Georgakopoulos.............
Christine M. Modie........... Senior Vice President
Information relating to the management of the underlying funds is contained in
the applicable prospectuses.
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.
Male, Age 45
Guarantee Issue
Non-Smoker
Annual Premium: $25,000 for seven years
Hypothetical Gross Annual Investment
Rate of Return: 8%
Face Amount: $436,557
Level Death Benefit Option
Current Charges
TOTAL MONTHLY DEDUCTION
FOR THE POLICY YEAR
-----------------------
COST OF
POLICY CUMULATIVE INSURANCE ADMINISTRATIVE
YEAR PREMIUMS SALES LOAD CHARGES CHARGES
- ------ ---------- ---------- --------- --------------
1 $ 25,000 $1,750 $ 497 $60
2 $ 50,000 $1,750 $1,337 $60
3 $ 75,000 $1,750 $1,430 $60
5 $125,000 $1,750 $1,306 $60
10 $175,000 $ 0 $1,674 $60
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
any period of time.
33
38
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 that invest in underlying funds that were in
existence prior to the date on which 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.
AVERAGE ANNUAL RETURNS
(To be provided by amendment)
34
39
HYPOTHETICAL EXAMPLE(*)
Male nonsmoker age 45 with a level death benefit
of $300,000 and annual premium payments of $5,000
(To be provided by amendment)
35
40
ILLUSTRATIONS
- --------------------------------------------------------------------------------
The following pages are intended to illustrate how the Contract Value, Cash
Surrender Value and Death Benefit can change over time for Policies issued to a
45 year old male. The difference between the Contract Value and the Cash
Surrender Value in these illustrations represents the Surrender Charge that
would be incurred upon a full surrender of the Policy.
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, mortality and expense risk charge, and administrative
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 monthly administrative charge 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 7% for
years 1-7 and 3.5% thereafter. The illustrations reflect 0% deduction for
premiums over Target Premiums in all years.
The guaranteed illustrations reflect a deduction from each Target Premium of 9%
in all years and 5% on amounts paid in excess of the Target Premium.
The values shown in these illustrations vary according to assumptions used for
charges, and gross rates of investment returns. For the first four policy years
the current charges consist of .45% mortality and expense risk charge, .25% in
years 5-20 and .05% thereafter. In all policy years, the guaranteed charges
consist of a .75% mortality and expense risk. For all policy years the current
and guaranteed charges consist of .89% 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 1998.
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
- -1.34%, 4.66% and 10.66%, respectively on a current basis for years 1-4; then to
approximate net annual rates of -1.14%; 4.60%; 10.86% in years 5-20 and to
approximate net annual rates of -0.94%; 5.06%; 11.06% thereafter. On a
guaranteed basis the annual gross investment rates of 6.0% and 12% correspond to
approximate net annual rates of -1.64%; 4.36% and 10.36% 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 charge for Investment Option expenses for all illustrations is an average of
the investment advisory fees and other expenses charged by all of the Investment
Options. The Investment Option expenses for some of the Investment Options
reflect an expense reimbursement agreement currently in effect. For the year
ended December 31, 1998, these reimbursement agreements affected the total
operating expenses of the Investment Options as follows:
[To be inserted by amendment]
Although these reimbursement arrangements are expected to continue in subsequent
years, the effect of discontinuance could be higher expenses charged to Policy
Owners.
As stated above, the examples illustrate values that would result based upon
hypothetical uniform gross investment rates of return of 0%, 6% and 12%. The
values would be different from those shown if the gross rates averaged 0%, 6%,
and 12% over a period of years, but fluctuated above and below those averages.
36
41
The illustrations also 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.
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%.
37
42
APPENDIX A
- --------------------------------------------------------------------------------
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%
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%
A-1
43
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Travelers
Insurance Company and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income and retained earnings and cash flows
for each of the years in the three-year period ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
January 26, 1998
F-1
44
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
------ ------ ------
REVENUES
Premiums $1,583 $1,387 $1,504
Net investment income 2,037 1,950 1,884
Realized investment gains 199 65 106
Other revenues 354 284 204
- -------------------------------------------------------------------------------------------
Total Revenues $4,173 $3,686 $3,698
- -------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,341 1,187 1,206
Interest credited to contractholders 829 863 997
Amortization of deferred acquisition costs and value of
insurance in force 293 281 290
General and administrative expenses 427 380 368
- -------------------------------------------------------------------------------------------
Total Benefits and Expenses 2,890 2,711 2,861
- -------------------------------------------------------------------------------------------
Income from continuing operations before federal income taxes 1,283 975 837
- -------------------------------------------------------------------------------------------
Federal income taxes:
Current expense 434 284 233
Deferred 10 58 57
- -------------------------------------------------------------------------------------------
Total Federal Income Taxes 444 342 290
- -------------------------------------------------------------------------------------------
Income from continuing operations 839 633 547
- -------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes
Income from operations (net of taxes of $0, $0 and $18) -- -- 72
Gain on disposition (net of taxes of $0, $14 and $68) -- 26 131
- -------------------------------------------------------------------------------------------
Income from Discontinued Operations -- 26 203
- -------------------------------------------------------------------------------------------
Net income 839 659 750
Retained earnings beginning of year 2,471 2,312 1,562
Dividends to parent 500 500 --
- -------------------------------------------------------------------------------------------
Retained Earnings End of Year $2,810 $2,471 $2,312
===========================================================================================
See Notes to Consolidated Financial Statements.
F-2
45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
December 31, 1997 1996
- ----------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value (cost,
$20,682; $19,284) $21,511 $19,637
Equity securities, at fair value (cost, $480; $330) 512 338
Mortgage loans 2,869 2,920
Real estate held for sale 134 297
Trading securities, at market value 800 --
Policy loans 1,872 1,910
Short-term securities 1,102 902
Other invested assets 1,702 1,253
- ----------------------------------------------------------------------------------
Total Investments $30,502 $27,257
- ----------------------------------------------------------------------------------
Cash 58 74
Investment income accrued 338 355
Premium balances receivable 106 105
Reinsurance recoverables 4,339 3,858
Deferred acquisition costs and value of insurance in force 2,312 2,133
Separate and variable accounts 11,319 8,127
Other assets 1,052 1,064
- ----------------------------------------------------------------------------------
Total Assets $50,026 $42,973
- ----------------------------------------------------------------------------------
LIABILITIES
Contractholder funds 14,913 14,189
Future policy benefits 12,569 11,762
Policy and contract claims 378 536
Trading securities sold not yet purchased, at market value 462 --
Separate and variable accounts 11,309 8,115
Commercial paper -- 50
Deferred federal income taxes 409 57
Other liabilities 2,661 1,936
- ----------------------------------------------------------------------------------
Total Liabilities $42,701 $36,645
- ----------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized,
issued and outstanding 100 100
Additional paid-in capital 3,187 3,170
Retained earnings 2,810 2,471
Unrealized investment gains, net of taxes 1,228 587
- ----------------------------------------------------------------------------------
Total Shareholder's Equity $ 7,325 $ 6,328
- ----------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $50,026 $42,973
==================================================================================
See Notes to Consolidated Financial Statements.
F-3
46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 1,519 $ 1,387 $ 1,346
Net investment income received 2,059 1,910 1,855
Other revenues received 180 131 90
Benefits and claims paid (1,230) (1,060) (846)
Interest credited to contractholders (853) (820) (960)
Operating expenses paid (445) (343) (615)
Income taxes paid (368) (328) (63)
Trading account investments, (purchases) sales, net (54) -- --
Other 18 (70) (137)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 826 807 670
Net cash used in discontinued operations -- (350) (596)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations $ 826 $ 457 $ 74
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 2,259 1,928 1,974
Mortgage loans 663 917 680
Proceeds from sales of investments
Fixed maturities 7,592 9,101 6,773
Equity securities 341 479 379
Mortgage loans 207 178 704
Real estate held for sale 169 210 253
Purchases of investments
Fixed maturities (11,143) (11,556) (10,748)
Equity securities (483) (594) (305)
Mortgage loans (771) (470) (144)
Policy loans, net 38 (23) (325)
Short-term securities, (purchases) sales, net (2) 498 291
Other investments, (purchases) sales, net (260) (137) (267)
Securities transactions in course of settlement 311 (52) 258
Net cash provided by investing activities of discontinued operations -- 348 1,425
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (used in) Investing Activities $ (1,079) $ 827 $ 948
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of commercial paper, net (50) (23) (1)
Contractholder fund deposits 3,544 2,493 2,705
Contractholder fund withdrawals (2,757) (3,262) (3,755)
Dividends to parent company (500) (500) --
Other -- 9 --
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (used in) Financing Activities $ 237 $ (1,283) $ (1,051)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ (16) $ 1 $ (29)
- ----------------------------------------------------------------------------------------------------------------------
Cash at December 31, $ 58 $ 74 $ 73
======================================================================================================================
See Notes to Consolidated Financial Statements.
F-4
47
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 and Subsidiaries (the Company) is a wholly
owned subsidiary of The Travelers Insurance Group Inc. (TIGI), an indirect
wholly owned subsidiary of Travelers Group Inc. (Travelers Group). 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 subsidiaries of the Company are The Travelers Life and
Annuity Company (TLAC) and Primerica Life Insurance Company (Primerica Life)
and its subsidiary National Benefit Life Insurance Company (NBL).
- TRAVELERS LIFE AND ANNUITY offers fixed and variable deferred annuities,
payout annuities and term, universal and variable life and long-term care
insurance to individuals and small businesses. It also provides group
pension products, including guaranteed investment contracts and group
annuities for employer-sponsored retirement and savings plans. These
products are primarily marketed through The Copeland Companies (Copeland),
an indirect, wholly owned subsidiary of the Company, the Financial
Consultants of Salomon Smith Barney, an affiliate of the Company, and a
nationwide network of independent agents. The Company's Corporate and
Other Segment was absorbed into Travelers Life and Annuity during the
second quarter of 1996.
- PRIMERICA LIFE INSURANCE offers individual life products, primarily term
insurance, to consumers through a nationwide sales force of approximately
80,000 full and part-time independent agents.
As discussed in Note 2 of Notes to Consolidated Financial Statements, in
January 1995 the group life insurance and related businesses of the Company
were sold to Metropolitan Life Insurance Company (MetLife). Also in January
1995, the group medical component was exchanged for a 42% interest in The
MetraHealth Companies, Inc. (MetraHealth). The Company's interest in
MetraHealth was sold on October 2, 1995 and through that date was accounted
for on the equity method. The Company's discontinued operations reflect the
results of the medical insurance business not transferred, the equity
interest in the earnings of MetraHealth through October 2, 1995 (date of
sale) and the gains from the sales of these businesses.
In September 1995, Travelers Group made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings Inc.,
which at the time was a wholly owned subsidiary of Travelers Group and was
the indirect owner of the business of Transport Life Insurance Company
(Transport Life). Immediately prior to this distribution, the Company
distributed Transport Life, an indirect wholly owned subsidiary of the
Company, to TIGI, as a return of capital.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 with the 1997
presentation.
F-5
48
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Accounting Changes
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In February, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (FAS 132). FAS 132
supersedes the disclosure requirements in FASB Statements No. 87, "Employers'
Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefits Pension Plans and Termination of Benefits,"
and No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." FAS 132 addresses disclosure only and does not address measurement
or recognition. In addition to other disclosure changes, FAS 132 allows
employers to disclose total contributions to multi-employer plans without
disaggregating the amounts attributable to pensions and other postretirement
benefits. This statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Effective December 31,
1997, the Company adopted FAS 132. The adoption of this standard did not have
any impact on results of operations, financial condition or liquidity.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 125
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are
based on an approach that focuses on control. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. FAS 125 provides standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The requirements of FAS 125 are effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and are to be applied
prospectively. However, in December 1996 the FASB issued Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125," which delays until January 1,
1998 the effective date for certain provisions. Application of FAS 125 prior
to the effective date or retroactively is not permitted. The adoption of the
provisions of FAS 125 effective January 1, 1997 did not have a material
impact on results of operations, financial condition or liquidity. The
adoption of the provisions of FAS 127 effective January, 1998 are
not expected to have a material impact on the results of operations,
financial condition or liquidity.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes accounting standards for the impairment of long-lived assets and
certain identifiable intangibles to be disposed. This statement requires a
write down to fair value when long-lived assets to be held and used are
impaired. The statement also requires long-lived assets to be disposed (e.g.,
real estate held for sale) be carried at the lower of cost or fair value less
cost to sell, and does not allow such assets to be depreciated. The adoption
of this standard did not have a material impact on the Company's financial
condition, results of operations or liquidity.
F-6
49
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans as well as transactions in which an entity issues
its equity instruments to acquire goods or services from non-employees. This
statement defines a fair value-based method of accounting for employee stock
options or similar equity instruments, and encourages all entities to adopt
this method of accounting for all employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Entities electing to remain with the accounting method
prescribed in APB 25 must make pro-forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined
by FAS 123 had been applied. FAS 123 is applicable to fiscal years beginning
after December 15, 1995. The Company has elected to continue to account for
its stock-based employee compensation plans using the accounting method
prescribed by APB 25 and has included in the notes to consolidated financial
statements the pro-forma disclosures required by FAS 123. See Note 9. The
Company has adopted FAS 123 for its stock-based non-employee compensation
plans.
Accounting Policies
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks. 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.
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.
Equity securities, which include common and nonredeemable 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, 1997 and 1996.
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, 1997 and 1996.
F-7
50
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Trading securities are carried at market value. Realized and unrealized gains
and losses on trading securities are included in investment income.
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.
Accrual of income, included in other assets, 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, equity options, forward contracts and interest rate swaps
and caps, as a means of hedging exposure to interest rate, equity price and
foreign currency risk. Hedge accounting is 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.
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.
Forward contracts, equity options, and interest rate swaps and caps were not
significant at December 31, 1997 and 1996. Information concerning derivative
financial instruments is included in Note 6.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pretax
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.
POLICY LOANS
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.
DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE
Costs of acquiring individual life insurance, annuities and long-term care
business, 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 and long-term care 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
10- to 25-year amortization period is used; for long-term care business, a
10- to 20-year period is used, and a 10- to 20-year period is employed for
annuities. Deferred acquisition costs are reviewed periodically for
recoverability to determine if any adjustment is required.
F-8
51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The value of insurance in force is an asset recorded at the time of
acquisition of an insurance company. 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 is reviewed periodically for recoverability to determine
if any adjustment is required.
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 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 is regularly reviewed for indication of
impairment in value that in the view of management would be other than
temporary. Impairments would be recognized in operating results if a
permanent diminution in value is deemed to have occurred.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal life,
pension investment and certain deferred annuity contracts. Contractholder
fund balances are increased by 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 9.45%.
FUTURE POLICY BENEFITS
Benefit reserves 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 10.0%, 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.
F-9
52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company, whose insurance subsidiaries are domiciled principally in
Connecticut and Massachusetts, prepares statutory financial statements in
accordance with the accounting practices prescribed or permitted by the
insurance departments of those states. Prescribed statutory accounting
practices include certain publications of the National Association of
Insurance Commissioners as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed. The impact of any permitted
accounting practices on statutory surplus of the Company is not material.
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.
OTHER REVENUES
Other revenues include surrender, mortality and administrative charges and
fees as earned on investment, universal life and other insurance contracts.
Other revenues also include gains and losses on dispositions of assets and
operations other than realized investment gains and losses and revenues of
non-insurance subsidiaries.
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, 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. The deferred
federal income tax asset is recognized to the extent that future realization
of the tax benefit is more likely than not, with a valuation allowance for
the portion that is not likely to be recognized.
Future Application of Accounting Standards
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund and
other insurance-related assessments, how to measure that liability, and when
an asset may be recognized for the recovery of such assessments through
premium tax offsets or policy surcharges. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998, and the effect
of initial adoption is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not allowed. The
Company has not yet determined when it will implement this SOP and does not
anticipate any material impact on the Company's financial condition, results
of operations or liquidity.
F-10
53
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All items
that are required to be recognized under accounting standards as components
of comprehensive income are to be reported in a financial statement that is
displayed with the same prominence as other financial statements. FAS 130
stipulates that comprehensive income reflect the change in equity of an
enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income will thus
represent the sum of net income and other comprehensive income, although FAS
130 does not require the use of the terms comprehensive income or other
comprehensive income. The accumulated balance of other comprehensive income
shall be displayed separately from retained earnings and additional paid-in
capital in the statement of financial position. FAS 130 is effective for
fiscal years beginning after December 15, 1997. The Company anticipates that
the adoption of FAS 130 will result primarily in reporting unrealized gains
and losses on investments in debt and equity securities in comprehensive
income.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (FAS 131). FAS 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that selected information about those operating
segments be reported in interim financial statements. FAS 131 supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise" (FAS 14). FAS 131 requires that all
public enterprises report financial and descriptive information about its
reportable operating segments. Operating segments are defined as components
of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. FAS 131 is effective for
fiscal years beginning after December 15, 1997. The Company is currently
determining the impact of the adoption of FAS 131.
2. DISPOSITIONS AND DISCONTINUED OPERATIONS
On January 3, 1995, the Company and its affiliates completed the sale of
their group life and related non-medical group insurance businesses to
MetLife for $350 million and recognized in the first quarter of 1995 a gain
of $20 million net of taxes. In connection with the sale, the Company ceded
100% of its risks in the group life and related businesses to MetLife on an
indemnity reinsurance basis, effective January 1, 1995. In connection with
the reinsurance transaction, the Company transferred assets with a fair
market value of approximately $1.5 billion to MetLife, equal to the statutory
reserves and other liabilities transferred.
On January 3, 1995, the Company and MetLife and certain of their affiliates,
formed the MetraHealth joint venture by contributing their group medical
businesses to MetraHealth, in exchange for shares of common stock of
MetraHealth. No gain was recognized as a result of this transaction . Upon
formation of the joint venture, the Company owned 42% of the outstanding
capital stock of MetraHealth, TIGI owned 8% and the other 50% was owned by
MetLife and its affiliates. In March 1995, MetraHealth acquired HealthSpring,
Inc. for common stock of MetraHealth resulting in a reduction in the
participation of the Company and TIGI, and MetLife in the MetraHealth venture
to 48.25% each. As the medical insurance business of the Company came due for
renewal, the risks were transferred to MetraHealth and the related operating
results for this medical insurance business were reported by the Company in
1995 as part of discontinued operations.
F-11
54
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On October 2, 1995, the Company and its affiliates completed the sale of
their ownership in MetraHealth to United HealthCare Corporation and through
that date had accounted for its interest in MetraHealth on the equity method.
Gross proceeds to the Company in 1995 were $708 million in cash, an after-tax
gain of $111 million was recognized. During 1996 the Company received a
contingency payment based on MetraHealth's 1995 results. In conjunction with
this payment, certain reserves associated with the group medical business and
exit costs related to the discontinued operations were reevaluated resulting
in a final after-tax gain of $26 million.
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's Managed Care and Employee Benefit Operations
(MCEBO) segment prior to 1995. The Company's discontinued operations in 1996
and 1995 reflect the results of the medical insurance business not
transferred, the equity interest in the earnings of MetraHealth through
October 2, 1995 (date of sale) and the gains from sales of these businesses.
Revenues from discontinued operations were insignificant for the year ended
December 31, 1996 and $1.2 billion for the year ended December 31, 1995.
In September 1995, Travelers Group made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings Inc.,
which at the time was a wholly owned subsidiary of Travelers Group and was
the indirect owner of the business of Transport Life. Immediately prior to
this distribution, the Company distributed Transport, an indirect wholly
owned subsidiary of the Company, to TIGI as a return of capital, resulting in
a reduction in additional paid-in capital of $334 million. The results of
Transport through September 1995 are included in income from continuing
operations.
3. COMMERCIAL PAPER AND LINES OF CREDIT
The Company issues commercial paper directly to investors. No commercial
paper was outstanding at December 31, 1997 and $50 million was outstanding at
December 31, 1996. The Company maintains unused credit availability under
bank lines of credit at least equal to the amount of the outstanding
commercial paper. Interest expense related to the commercial paper was not
significant in 1997 or 1996.
Travelers Group, Commercial Credit Company (CCC) (an indirect wholly owned
subsidiary of Travelers Group) and the Company have an agreement with a
syndicate of banks to provide $1.0 billion of revolving credit, to be
allocated to any of Travelers Group, CCC or the Company. The Company's
participation in this agreement is limited to $250 million. The revolving
credit facility consists of a five-year revolving credit facility that
expires in 2001. At December 31, 1997, $50 million was allocated to the
Company. Under this facility the Company is required to maintain certain
minimum equity and risk-based capital levels. At December 31, 1997, the
Company was in compliance with these provisions. There were no amounts
outstanding under this agreement at December 31, 1997 and 1996. If the
Company had borrowings on this facility, the interest rate would be based
upon LIBOR plus a negotiated margin.
F-12
55
\ THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. 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. During 1997, new universal life business was
reinsured under an 80%/20% quota share reinsurance program and new term life
business was reinsured under a 90%/10% quota share reinsurance program.
Maximum retention of $1.5 million is generally reached on policies in excess
of $7.5 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
$1.5 million.
The Company writes workers' compensation business through its Accident
Department. This business is ceded 100% to an affiliate, The Travelers
Indemnity Company.
A summary of reinsurance financial data reflected within the consolidated
statement of operations and retained earnings is presented below ($ in
millions):
---------------------------------------------------------------------
WRITTEN PREMIUMS 1997 1996 1995
---------------------------------------------------------------------
Direct $2,148 $1,982 $2,166
Assumed from:
Non-affiliated companies 1 5 --
Ceded to:
Affiliated companies (280) (284) (374)
Non-affiliated companies (273) (309) (302)
---------------------------------------------------------------------
Total Net Written Premiums $1,596 $1,394 $1,490
=====================================================================
---------------------------------------------------------------------
EARNED PREMIUMS 1997 1996 1995
---------------------------------------------------------------------
Direct $2,170 $1,897 $2,067
Assumed from:
Non-affiliated companies 1 5 --
Ceded to:
Affiliated companies (321) (219) (283)
Non-affiliated companies (291) (315) (298)
---------------------------------------------------------------------
Total Net Earned Premiums $1,559 $1,368 $1,486
=====================================================================
F-13
56
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reinsurance recoverables at December 31, 1997 and 1996 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
----------------------------------------------------------
REINSURANCE RECOVERABLES 1997 1996
----------------------------------------------------------
Life and Accident and Health
Business:
Non-affiliated companies $1,362 $1,497
Property-Casualty Business:
Affiliated companies 2,977 2,361
----------------------------------------------------------
Total Reinsurance Recoverables $4,339 $3,858
==========================================================
Total reinsurance recoverables at December 31, 1997 and 1996 include $697
million and $720 million, respectively, from MetLife in connection with the
sale of the Company's group life and related businesses. See Note 2.
5. SHAREHOLDER'S EQUITY
Additional Paid-In Capital
The increase of $17 million in additional paid-in capital during 1997 is due
to tax benefits related to exercising Travelers Group stock options by the
Company's employees.
Unrealized Investment Gains (Losses)
An analysis of the change in unrealized gains and losses on investments is
shown in Note 13.
Shareholder's Equity and Dividend Availability
The Company's statutory net income, which includes all insurance
subsidiaries, was $754 million, $656 million, and $235 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company's statutory capital and surplus was $4.12 billion and $3.44
billion at December 31, 1997 and 1996, respectively.
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. Statutory surplus
of $551 million is available in 1998 for dividend payments by the Company
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 is in
compliance with these covenants at December 31, 1997 and 1996.
F-14
57
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures, equity options, forward contracts and interest rate swaps as a means
of hedging exposure to foreign currency, equity price changes and/or interest
rate risk on anticipated transactions or existing assets and liabilities. The
Company does not hold or issue derivative instruments for trading purposes.
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 forward contracts and
interest rate swaps, credit risk is limited to the amounts calculated to be
due the Company on such contracts. Financial futures contracts and purchased
listed option contracts have little credit risk since organized exchanges are
the counterparties.
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 which 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 to 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, 1997 and 1996, the Company held financial futures contracts
with notional amounts of $625 million and $169 million, respectively, and a
deferred gain of $.7 million and a deferred loss of $4.1 million and a
deferred gain of $1.2 million, and a deferred loss of $.1 million,
respectively. Total losses of $5.8 million and gains of $2.0 million from
financial futures were deferred at December 31, 1997 and 1996, respectively,
relating to anticipated investment purchases and investment product sales,
and are reported as other liabilities. At December 31, 1997 and 1996, the
Company's futures contracts had no fair value because these contracts were
marked to market and settled in cash daily.
The off-balance sheet risks of equity options, forward contracts, and
interest rate swaps were not significant at December 31, 1997 and 1996.
F-15
58
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company purchased a 5-year interest rate cap, with a notional amount of
$200 million, from Travelers Group in 1995 to hedge against losses that could
result from increasing interest rates. This instrument, which does not have
off-balance sheet risk, gives the Company the right to receive payments if
interest rates exceed specific levels at specific dates. The premium of $2
million paid for this instrument is being amortized over its life. The
interest rate cap asset is reported at fair value which is $0 and $1 million
at December 31, 1997 and 1996, respectively.
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, 1997 and 1996.
Fair Value of Certain Financial Instruments
The Company uses various financial instruments in the normal course of its
business. Fair values of financial instruments that are considered insurance
contracts are not required to be disclosed and are not included in the
amounts discussed.
At December 31, 1997 and 1996, investments in fixed maturities had a carrying
value and a fair value of $21.5 billion and $19.6 billion, respectively. See
Notes 1 and 13.
At December 31, 1997 and 1996, mortgage loans had a carrying value of $2.9
billion, which approximated fair value. In estimating fair value, the Company
used interest rates reflecting the higher returns required in the current
real estate financing market.
The carrying values of $143 million and $174 million of financial instruments
classified as other assets approximated their fair values at December 31,
1997 and 1996, respectively. The carrying values of $2.0 billion and $850
million of financial instruments classified as other liabilities also
approximated their fair values at December 31, 1997 and 1996, respectively.
Fair value is determined using various methods, including discounted cash
flows, as appropriate for the various financial instruments.
At December 31, 1997, contractholder funds with defined maturities had a
carrying value of $2.3 billion and a fair value of $2.3 billion, compared
with a carrying value of $1.4 billion and a fair value of $1.5 billion at
December 31, 1996. 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 $9.7 billion and a
fair value of $9.5 billion at December 31, 1997, compared with a carrying
value of $9.1 billion and a fair value of $8.8 billion at December 31, 1996.
These contracts generally are valued at surrender value.
The assets of separate accounts providing a guaranteed return had a carrying
value and a fair value of $260 million and $260 million, respectively, at
December 31, 1997, compared with a carrying value and a fair value of $217
million and $217 million, respectively, at December 31, 1996. The liabilities
of separate accounts providing a guaranteed return had a carrying value and a
fair value of $209 million and $206 million, respectively, at December 31,
1997, compared with a carrying value and a fair value of $208 million and
$204 million, respectively, at December 31, 1996.
F-16
59
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The carrying values of cash, short-term securities, trading securities,
investment income accrued, trading securities sold not purchased, and
commercial paper approximated their fair values.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
7. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
See Note 6 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. 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. In April 1997, the
lawsuit was removed to the U.S. District Court for the Southern District of
Georgia, and in October 1997, the lawsuit was remanded to the Superior Court
of Richmond County. Later in October 1997, the defendants answered the
complaint, denied liability and asserted numerous affirmative defenses. In
February 1998, the Superior Court of Richmond County transferred the lawsuit
to the Superior Court of Gwinnett County, Georgia, and certified the transfer
order for immediate appellate review. Also in February 1998, plaintiffs
served an application for appellate review of the transfer order; defendants
subsequently opposed that application; and later in February 1998, the Court
of Appeals of the State of Georgia granted plaintiffs' application for
appellate review. Pending appeal proceedings in the trial court have been
stayed. The Company intends 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, 1997, 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.
8. BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by an affiliate. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by an affiliate. The Company's share of net expense for the
qualified pension and other postretirement benefit plans was not significant
for 1997, 1996 and 1995. Beginning January 1, 1996, the Company's other
postretirement benefit plans were amended to restrict benefit eligibility to
retirees and certain retiree-eligible employees. Previously, covered
employees could become eligible for postretirement benefits if they reached
retirement age while working for the Company.
F-17
60
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Through plans sponsored by TIGI, the Company also provides defined
contribution pension plans for certain agents. Company contributions are
primarily a function of production. The expense for these plans was not
significant in 1997, 1996 and 1995.
401(k) Savings Plan
Substantially all of the Company's employees are eligible to participate in a
401(k) savings plan sponsored by Travelers Group. Prior to January 1, 1996,
the Company made matching contributions to the 401(k) savings plan on behalf
of participants in the amount of 50% of the first 5% of pre-tax contributions
made by the employee, plus an additional variable matching contribution based
on the profitability of TIGI and its subsidiaries. During 1996, the Company
made matching contributions in an amount equal to the lesser of 100% of the
pre-tax contributions made by the employee or $1,000. Effective January 1,
1997, the Company discontinued matching contributions for the majority of its
employees. The Company's expenses in connection with the 401(k) savings plan
were not significant in 1997, 1996 and 1995.
9. 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 Travelers Insurance Company (Life Department) handles banking functions
for the life and annuity operations of Travelers Life and 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, 1997 and 1996, the
pool totaled approximately $2.6 billion and $2.9 billion, respectively. The
Company's share of the pool amounted to $725 million and $196 million at
December 31, 1997 and 1996, respectively, and is included in short-term
securities in the consolidated balance sheet.
The Company sells structured settlement annuities to The Travelers Indemnity
Company in connection with the settlement of certain policyholder
obligations. Such deposits were $88 million, $40 million, and $38 million for
1997, 1996 and 1995, respectively.
The Company markets deferred annuity products and life and health insurance
through its affiliate, Salomon Smith Barney. Premiums and deposits related to
these products were $1.0 billion, $820 million, and $583 million in 1997,
1996 and 1995, respectively.
At December 31, 1996, the Company had an investment of $22 million in bonds
of its affiliate, CCC. This was included in fixed maturities in the
consolidated balance sheet.
F-18
61
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company had an investment of $1.15 billion and $648 million in common
stock of Travelers Group at December 31, 1997 and 1996, respectively. This
investment is carried at fair value.
The Company participates in a stock option plan sponsored by Travelers Group
that provides for the granting of stock options in Travelers Group common
stock to officers and key employees. To further encourage employee stock
ownership, during 1997 Travelers Group introduced the WealthBuilder stock
option program. Under this program all employees meeting certain requirements
have been granted Travelers Group stock options.
The Company applies APB 25 and related interpretations in accounting for
stock options. Since stock options under the Travelers Group plans are issued
at fair market value on the date of award, no compensation cost has been
recognized for these awards. FAS 123 provides an alternative to APB 25
whereby fair values may be ascribed to options using a valuation model and
amortized to compensation cost over the vesting period of the options.
Had the Company applied FAS 123 in accounting for Travelers Group stock
options, net income would have been the pro forma amounts indicated below:
-----------------------------------------------------------------------
YEAR ENDING DECEMBER 31, 1997 1996 1995
($ IN MILLIONS)
-----------------------------------------------------------------------
Net income, as reported $839 $659 $750
-----------------------------------------------------------------------
FAS 123 pro forma adjustments, (9) (3) (1)
after tax
-----------------------------------------------------------------------
Net income, pro forma $830 $656 $749
The Company has an interest rate cap agreement with Travelers Group. See Note
6.
10. LEASES
Most leasing functions for TIGI and its subsidiaries are administered by TAP.
In 1996, TAP assumed the obligations for several leases. Rent expense related
to all leases are shared by the companies on a cost allocation method based
generally on estimated usage by department. Rent expense was $15 million, $24
million, and $22 million in 1997, 1996 and 1995, respectively.
--------------------------------------------------
YEAR ENDING DECEMBER 31, MINIMUM OPERATING
($ in millions) RENTAL PAYMENTS
--------------------------------------------------
1998 $ 49
1999 44
2000 43
2001 45
2002 43
Thereafter 337
--------------------------------------------------
Total Rental Payments $561
==================================================
F-19
62
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Future sublease rental income of approximately $73 million will partially
offset these commitments. Also, the Company will be reimbursed for 50% of the
rental expense for a particular lease totaling $218 million, by an affiliate.
Minimum future capital lease payments are not significant.
The Company is reimbursed for use of furniture and equipment through cost
sharing agreements by its affiliates.
11. FEDERAL INCOME TAXES
EFFECTIVE TAX RATE
---------------------------------------------------------------------
For The Year Ended December 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
Income Before Federal Income Taxes $1,283 $ 975 $ 837
Statutory Tax Rate 35% 35% 35%
---------------------------------------------------------------------
Expected Federal Income Taxes 449 341 293
Tax Effect of:
Non-taxable investment income (4) (3) (4)
Other, net (1) 4 1
=====================================================================
Federal Income Taxes $ 444 $ 342 $ 290
=====================================================================
Effective Tax Rate 35% 35% 35%
---------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 410 $ 263 $ 220
Foreign 24 21 13
---------------------------------------------------------------------
Total 434 284 233
---------------------------------------------------------------------
Deferred:
United States 10 57 52
Foreign -- 1 5
---------------------------------------------------------------------
Total 10 58 57
---------------------------------------------------------------------
Federal Income Taxes $ 444 $ 342 $ 290
=====================================================================
Tax benefits allocated directly to shareholder's equity for the years ended
December 31, 1997, 1996 and 1995 were $17 million, $8 million and $7 million,
respectively.
F-20
63
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 1997 and 1996 were comprised
of the tax effects of temporary differences related to the following assets
and liabilities:
($ in millions) 1997 1996
------- -------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 550 $ 510
Contractholder funds 11 32
Operating lease reserves 68 71
Other employee benefits 102 104
Other 139 121
- -----------------------------------------------------------------------------------
Total 870 838
- -----------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of 608 571
insurance in force
Investments, net 484 131
Other 87 93
- -----------------------------------------------------------------------------------
Total 1,179 795
- -----------------------------------------------------------------------------------
Net Deferred Tax (Liability) Asset Before Valuation Allowance (309) 43
Valuation Allowance for Deferred Tax Assets (100) (100)
- -----------------------------------------------------------------------------------
Net Deferred Tax Liability After Valuation Allowance $ (409) $ (57)
- -----------------------------------------------------------------------------------
Starting in 1994 and continuing for at least five years, the Company and its
life insurance subsidiaries will 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.
A net deferred tax asset valuation allowance of $100 million has been
established to reduce the deferred tax asset on investment losses to the
amount that, based upon available evidence, is more likely than not to be
realized. Reversal of the valuation allowance is contingent upon the
recognition of future capital gains in the Company's consolidated life
insurance company federal income tax return through 1998, and if
life/non-life consolidation is elected in 1999, the consolidated federal
income tax return of Travelers Group commencing in 1999, or a change in
circumstances which causes the recognition of the benefits to become more
likely than not. There was no change in the valuation allowance during 1997.
The initial recognition of any benefit produced by the reversal of the
valuation allowance will be recognized by reducing goodwill.
At December 31, 1997, 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,
which, under provisions of the Tax Reform Act of 1984, will not increase
after 1983, is estimated to be $932 million. This amount has not been
subjected to current income taxes but, under certain conditions that
management considers to be remote, may become subject to income taxes in
future years. At current rates, the maximum amount of such tax (for which no
provision has been made in the financial statements) would be approximately
$326 million.
F-21
64
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. NET INVESTMENT INCOME
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $1,460 $1,387 $1,248
Mortgage loans 291 334 419
Policy loans 137 156 166
Real estate held for sale 88 94 111
Other, including trading 150 77 97
securities
---------------------------------------------------------------------
2,126 2,048 2,041
---------------------------------------------------------------------
Investment expenses 89 98 157
---------------------------------------------------------------------
Net investment income $2,037 $1,950 $1,884
---------------------------------------------------------------------
13. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
REALIZED INVESTMENT GAINS
Fixed maturities $71 $(63) $(43)
Equity securities (9) 47 36
Mortgage loans 59 49 47
Real estate held for sale 67 33 18
Other 11 (1) 48
---------------------------------------------------------------------
Total Realized Investment Gains $199 $65 $106
---------------------------------------------------------------------
F-22
65
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Changes in net unrealized investment gains (losses) that are included as a
separate component of shareholder's equity were as follows:
-------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
-------------------------------------------------------------------------
UNREALIZED INVESTMENT GAINS
Fixed maturities $ 446 $ (323) $1,974
Equity securities 25 (35) 46
Other 520 220 200
-------------------------------------------------------------------------
Total Realized Investment Gains 991 (138) 2,220
-------------------------------------------------------------------------
Related taxes 350 (43) 778
-------------------------------------------------------------------------
Change in unrealized investment gains
(losses) 641 (95) 1,442
Balance beginning of year 587 682 (760)
-------------------------------------------------------------------------
Balance End of Year $1,228 $ 587 $ 682
-------------------------------------------------------------------------
Included in Other are gains of $506 million, $203 million and $214 million
for 1997, 1996 and 1995, respectively, related to appreciation of Travelers
Group stock.
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale were
$7.6 billion, $10.2 billion and $6.8 billion in 1997, 1996 and 1995,
respectively. Gross gains of $170 million, $107 million and $80 million and
gross losses of $99 million, $175 million and $124 million in 1997, 1996 and
1995, 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 $5.1 billion and
$4.6 billion at December 31, 1997 and 1996, respectively.
F-23
66
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of investments in fixed maturities were as
follows:
- ---------------------------------------------------------------------------------------
DECEMBER 31, 1997 GROSS GROSS
($ in millions) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 3,842 $ 124 $ 2 $ 3,964
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,580 149 1 1,728
Obligations of states, municipalities
and political subdivisions 78 8 -- 86
Debt securities issued by
foreign governments 622 31 4 649
All other corporate bonds 14,548 547 24 15,071
Redeemable preferred stock 12 1 -- 13
- ---------------------------------------------------------------------------------------
Total Available For Sale $20,682 860 31 $21,511
- ---------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1996 GROSS GROSS
($ in millions) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 3,821 $ 71 $ 23 $ 3,869
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,329 56 4 1,381
Obligations of states, municipalities and
political subdivisions 89 1 1 89
Debt securities issued by foreign
governments 618 26 3 641
All other corporate bonds 13,421 273 43 13,651
Redeemable preferred stock 6 -- -- 6
- ----------------------------------------------------------------------------------------
Total Available For Sale $19,284 $ 427 $ 74 $19,637
- ----------------------------------------------------------------------------------------
F-24
67
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1997,
by contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
----------------------------------------------------------
($ in millions) AMORTIZED FAIR
COST VALUE
----------------------------------------------------------
MATURITY:
Due in one year or less $ 1,184 $ 1,191
Due after 1 year through 5 years 5,200 5,335
Due after 5 years through 10 years 5,332 5,515
Due after 10 years 5,124 5,506
---------------------------------------------------------
16,840 17,547
---------------------------------------------------------
Mortgage-backed securities 3,842 3,964
---------------------------------------------------------
Total Maturity $20,682 $21,511
---------------------------------------------------------
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, 1997 and 1996, the Company held CMOs classified as available
for sale with a fair value of $2.1 billion and $2.0 billion, respectively.
Approximately 72% and 88%, respectively, of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 1997
and 1996. In addition, the Company held $1.9 billion and $1.9 billion of
GNMA, FNMA or FHLMC mortgage-backed pass-through securities at December 31,
1997 and 1996, respectively. Virtually all of these securities are rated AAA.
F-25
68
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Equity Securities
The cost and fair values of investments in equity securities were as follows:
-----------------------------------------------------------------------------
EQUITY SECURITIES:
GROSS GROSS
($ in millions) UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------
DECEMBER 31, 1997
Common stocks $179 $ 34 $ 11 $202
Non-redeemable preferred stocks 301 13 4 310
-----------------------------------------------------------------------------
Total Equity Securities $480 $ 47 $ 15 $512
-----------------------------------------------------------------------------
DECEMBER 31, 1996
Common stocks $212 $ 39 $ 30 $221
Non-redeemable preferred stocks 118 2 3 117
-----------------------------------------------------------------------------
Total Equity Securities $330 $ 41 $ 33 $338
-----------------------------------------------------------------------------
Proceeds from sales of equity securities were $341 million, $487 million and
$379 million in 1997, 1996 and 1995, respectively. Gross gains of $53
million, $64 million and $27 million and gross losses of $62 million, $11
million and $2 million in 1997, 1996 and 1995, respectively, were realized on
those sales.
Mortgage Loans and Real Estate Held For Sale
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest rates
below market.
At December 31, 1997 and 1996, the Company's mortgage loan and real estate
held for sale portfolios consisted of the following ($ in millions):
----------------------------------------------------------
1997 1996
----------------------------------------------------------
Current Mortgage Loans $2,866 $2,869
Underperforming Mortgage Loans 3 51
----------------------------------------------------------
Total 2,869 2,920
----------------------------------------------------------
Real Estate Held For Sale 134 297
----------------------------------------------------------
Total $3,003 $3,217
----------------------------------------------------------
F-26
69
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 1997 are as
follows:
------------------------------------------------
YEAR ENDING DECEMBER 31,
($ in millions)
------------------------------------------------
Past Maturity $ 54
1998 243
1999 252
2000 321
2001 393
2002 121
Thereafter 1,485
------------------------------------------------
Total $2,869
================================================
Joint Venture
In October 1997, the Company and Tishman Speyer Properties (Tishman), a
worldwide real estate owner, developer and manager, formed a joint real
estate venture with an initial equity commitment of $792 million. The Company
and certain of its affiliates committed $420 million in real estate equity
and $100 million in cash while Tishman committed $272 million in properties
and cash. Both companies are serving as asset managers for the venture and
Tishman is primarily responsible for the venture's real estate acquisition
and development efforts.
Trading Securities
Trading securities are held in a special purpose subsidiary, Tribeca
Investments LLC.
-----------------------------------------------------
TRADING SECURITIES OWNED 1997
Merger arbitrage $352
Convertible bond arbitrage 370
Other 78
-----------------------------------------------------
Total $800
-----------------------------------------------------
TRADING SECURITIES SOLD NOT YET PURCHASED
Merger arbitrage $213
Convertible bond arbitrage 249
-----------------------------------------------------
Total $462
-----------------------------------------------------
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.
F-27
70
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Concentrations
At December 31, 1997 and 1996, the Company had no concentration of credit
risk in a single investee exceeding 10% of consolidated shareholder's equity.
The Company participates in a short-term investment pool maintained by an
affiliate. See Note 9.
Included in fixed maturities are below investment grade assets totaling $1.4
billion and $1.1 billion at December 31, 1997 and 1996, respectively. The
Company defines its below investment grade assets as those securities rated
"Ba1" or below by external rating agencies, or the equivalent by internal
analysts when a public rating does not exist. Such assets include publicly
traded below investment grade bonds and certain other privately issued bonds
that are classified as below investment grade loans.
The Company had concentrations of investments, primarily fixed maturities, in
the following industries:
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
Banking $2,215 $1,959
Finance 1,556 1,823
Electric Utilities 1,377 1,093
Asset-Backed Credit Cards 778 688
-------------------------------------------------
Below investment grade assets included in the preceding table were not
significant.
At December 31, 1997 and 1996, concentrations of mortgage loans were for
properties located in highly populated areas in the states listed below:
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
California $794 $643
New York 310 297
-------------------------------------------------
Other mortgage loan investments are relatively evenly dispersed throughout
the United States, with no holdings in any state exceeding $284 million and
$258 million at December 31, 1997 and 1996, respectively.
Concentrations of mortgage loans by property type at December 31, 1997 and
1996 were as follows:
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
Office $1,382 $1,208
Agricultural 771 693
Apartment 204 291
Hotel 201 217
-------------------------------------------------
F-28
71
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, 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 totaling approximately $7 million and $18 million at
December 31, 1997 and 1996, respectively. 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 amounted to $.9 million in 1997 and $5 million in 1996. Interest
on these assets, included in net investment income, aggregated $.2 million
and $2 million in 1997 and 1996, respectively.
14. DEPOSIT FUNDS AND RESERVES
At December 31, 1997, the Company had $24.0 billion of life and annuity
deposit funds and reserves. Of that total, $13.0 billion is not subject to
discretionary withdrawal based on contract terms. The remaining $11.0 billion
is for life and annuity products that are subject to discretionary withdrawal
by the contractholder. Included in the amount that is subject to
discretionary withdrawal is $2.0 billion of liabilities that are
surrenderable with market value adjustments. Also included are an additional
$5.2 billion of the life insurance and individual annuity liabilities which
are subject to discretionary withdrawals, and have an average surrender
charge of 4.8%. In the payout phase, these funds are credited at
significantly reduced interest rates. The remaining $3.8 billion of
liabilities are surrenderable without charge. More than 16.8% of these relate
to individual life products. These risks would have to be underwritten again
if transferred to another carrier, which is considered a significant
deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding
policy loans and related accrued interest prior to payout.
F-29
72
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
- --------------------------------------------------------------------------------
Net Income From Continuing Operations $ 839 $ 633 $ 547
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized gains (199) (65) (106)
Deferred federal income taxes 10 58 57
Amortization of deferred policy
acquisition costs and value of
insurance in force 293 281 290
Additions to deferred policy
acquisition costs (471) (350) (454)
Investment income accrued 14 2 (9)
Premium balances receivable 3 (6) (8)
Insurance reserves and accrued expenses 131 (1) 291
Other 206 255 62
- --------------------------------------------------------------------------------
Net cash provided by operating activities 826 807 670
Net cash used in discontinued operations -- (350) (596)
Net cash provided by operations $ 826 $ 457 $ 74
- --------------------------------------------------------------------------------
16. NON-CASH INVESTING AND FINANCING ACTIVITIES
Significant noncash investing and financing activities include: a) the
conversion of $119 million of real estate held for sale to other invested
assets as a joint venture in 1997; b) the 1995 transfer of assets with a fair
market value of approximately $1.5 billion and statutory reserves and other
liabilities of approximately $1.5 billion to MetLife (see Note 2); c) the
1995 return of capital of Transport to TIGI (see Note 2); d) the acquisition
of real estate through foreclosures of mortgage loans amounting to $10
million, $117 million and $97 million in 1997, 1996 and 1995, respectively;
e) the acceptance of purchase money mortgages for sales of real estate
aggregating $4 million, $23 million and $27 million in 1997, 1996 and 1995,
respectively.
F-30
73
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
($ IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
Premiums $ 395 $ 374 $1,228 $1,114
Net investment income 528 515 1,616 1,513
Realized investment gains 9 60 121 82
Other revenues 124 85 341 258
- -----------------------------------------------------------------------------------------------
Total Revenues 1,056 1,034 3,306 2,967
- -----------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 330 310 1,027 944
Interest credited to contractholders 221 210 646 612
Amortization of deferred acquisition
costs and value of insurance in force 81 74 234 220
General and administrative expenses 105 109 337 311
- -----------------------------------------------------------------------------------------------
Total Benefits and Expenses 737 703 2,244 2,087
- -----------------------------------------------------------------------------------------------
Income from operations before federal
income taxes 319 331 1,062 880
Federal income taxes 113 115 372 305
- -----------------------------------------------------------------------------------------------
Net income 206 216 690 575
Dividends to parent -- (100) (110) (300)
Retained earnings at beginning of period 3,184 2,630 2,810 2,471
- -----------------------------------------------------------------------------------------------
Retained earnings at end of period $3,390 $2,746 $3,390 $2,746
===============================================================================================
See Notes to Condensed Consolidated Financial Statements.
1
74
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
SEPTEMBER 30, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Investments $33,603 $30,502
Separate and variable accounts 13,149 11,319
Reinsurance recoverable 3,667 3,753
Deferred acquisition costs and value of
insurance in force 2,480 2,312
Other assets 2,104 1,554
- ---------------------------------------------------------------------------------------
Total Assets $55,003 $49,440
- ---------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $16,335 $14,913
Benefit and other insurance reserves 12,439 12,361
Separate and variable accounts 13,138 11,309
Other liabilities 5,104 3,532
- ---------------------------------------------------------------------------------------
Total Liabilities 47,016 42,115
- ---------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Capital stock, par value $2.50; 40 million
shares authorized, issued and outstanding 100 100
Additional paid-in capital 3,215 3,187
Retained earnings 3,390 2,810
Accumulated other changes in equity from
nonowner sources 810 535
Unrealized gain on Citigroup Inc. stock, net of
tax 472 693
- ---------------------------------------------------------------------------------------
Total Shareholder's Equity 7,987 7,325
- ---------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $55,003 $49,440
=======================================================================================
See Notes to Condensed Consolidated Financial Statements.
2
75
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
INCREASE (DECREASE) IN CASH
($ IN MILLIONS)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 325 $ 529
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,985 1,468
Mortgage loans 623 369
Proceeds from sales of investments
Fixed maturities 8,900 5,821
Equity securities 87 272
Mortgage loans 6 158
Real estate held for sale 51 56
Purchases of investments
Fixed maturities (12,629) (8,167)
Equity securities (184) (390)
Mortgage loans (319) (463)
Real Estate -- (33)
Policy loans, net 10 36
Short-term securities proceeds (purchases), net (1,110) 123
Other investments purchases, net (86) (117)
Securities transactions in course of
settlement, net 1,063 205
- -------------------------------------------------------------------------------
Net cash used in investing activities (1,603) (662)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of short-term debt, net -- (50)
Contractholder fund deposits 3,206 2,450
Contractholder fund withdrawals (1,804) (1,991)
Dividends to parent company (110) (300)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 1,292 109
- -------------------------------------------------------------------------------
Net increase (decrease) in cash 14 (24)
Cash at beginning of period 58 74
- -------------------------------------------------------------------------------
Cash at end of period $ 72 $ 50
===============================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid -- 1
Income taxes paid $ 297 $ 247
===============================================================================
See Notes to Condensed Consolidated Financial Statements.
3
76
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim consolidated financial statements of The Travelers Insurance
Company (TIC) and, collectively with its subsidiaries (the Company), an
indirect, wholly owned subsidiary of Citigroup Inc. (Citigroup), have been
prepared in conformity with generally accepted accounting principles (GAAP)
and are unaudited. 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, 1997.
Certain financial information that is normally included in financial
statements prepared in accordance with GAAP but is not required for interim
reporting purposes has been condensed or omitted.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
ACCOUNTING CHANGES
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS 125" (FAS 127), which was effective for transfers and
pledges of certain financial assets and collateral made after December 31,
1997. The adoption of FAS 127 created additional assets and liabilities on
the Company's condensed consolidated statement of financial position related
to the recognition of securities provided and received as collateral. At
September 30, 1998, the impact of FAS 127 on the Company's condensed
consolidated statement of financial position was not significant.
Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS
130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. All items that are required to be recognized under accounting
standards as components of comprehensive income are required to be reported
in an annual financial statement that is displayed with the same prominence
as other financial statements. FAS 130 stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from
transactions and other events and circumstances from nonowner sources.
Comprehensive income will accordingly represent the sum of net income and
other changes in stockholder's equity from nonowner sources. The accumulated
balance of changes in equity from nonowner sources is required to be
displayed separately from retained earnings and additional paid-in capital in
the condensed consolidated balance sheet. The adoption of FAS 130 resulted
primarily in the Company reporting unrealized gains and losses on investments
in debt and equity securities (other than those unrealized gains or losses
related to Citigroup stock) in changes in equity from nonowner sources. The
Company's total changes in equity from nonowner sources are as follows:
4
77
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
($ in millions) 1998 1997 1998 1997
---- ---- ---- ----
Net income $206 $216 $690 $575
Other changes in equity from nonowner sources 206 238 275 208
--- --- --- ---
Total Changes in Equity from Nonowner Sources $412 $454 $965 $783
==== ==== ==== ====
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE
On July 1, 1998, the Company adopted (effective January 1, 1998) the
Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants' 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,
statement of operations or liquidity.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments imbedded 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 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. FAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Upon initial application of FAS 133, hedging relationships must be
designated anew and documented pursuant to the provisions of this statement.
The Company has not yet determined the impact that FAS 133 will have on its
consolidated financial statements.
2. MERGER
On October 8, 1998, Citicorp merged with and into a newly formed, wholly
owned subsidiary of Travelers Group Inc. (Travelers Group) (the Merger) and
subsequently, Travelers Group changed its name to Citigroup Inc.
Upon consummation of the Merger, Citigroup became a bank holding company
subject to the provisions of the Bank Holding Company Act of 1956 (the BHCA)
and the terms of an Order of the Federal Reserve Board effective September
23, 1998 (the Order).
5
78
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
The BHCA precludes a bank holding company and its affiliates from engaging in
certain activities, generally including insurance underwriting. Under the BHCA
in its current form, Citigroup has two years from October 8, 1998 to comply with
all applicable provisions of the BHCA. Such period may be extended, at the
discretion of the Federal Reserve Board, for three additional one-year periods
so long as the extension is not deemed to be detrimental to the public interest
(the BHCA Compliance Period).
It is not expected that the restrictions of the BHCA or the Order will impede
the Company's existing businesses in any material respect, although the Company
may be limited in its ability to make certain acquisitions. At this time, the
Company believes that its compliance with applicable law and the Order will not
have a material adverse effect on the Company's financial condition or results
of operations.
Before the expiration of the BHCA Compliance Period, each of the Company and
Citigroup will evaluate its alternatives in order to comply with the laws
applicable at the expiration of the BHCA Compliance Period.
3. COMMERCIAL PAPER AND LINES OF CREDIT
TIC issues commercial paper directly to investors. No commercial paper was
outstanding at September 30, 1998 or December 31, 1997. TIC maintains unused
credit available under bank lines of credit at least equal to the amount of
the outstanding commercial paper. No interest was paid in 1998 and interest
expense was not significant in the first nine months of 1997.
Citigroup, Commercial Credit Company (CCC) (an indirect, wholly owned
subsidiary of Travelers Group) and TIC have an agreement with a syndicate of
banks to provide $1.0 billion of revolving credit, to be allocated to any of
Citigroup, CCC 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 2001. At August 6, 1998, $700 million was allocated to
Citigroup, $300 million was allocated to CCC and $0 was allocated to TIC.
Under this facility TIC is required to maintain certain minimum equity and
risk-based capital levels. At September 30, 1998, TIC was in compliance with
these provisions. There were no amounts outstanding under this agreement at
September 30, 1998 or December 31, 1997. If TIC had borrowings outstanding
under this facility, the interest rate would be based upon LIBOR plus a
negotiated margin.
4. SHAREHOLDER'S EQUITY
Statutory capital and surplus of the Company was $4.1 billion at December 31,
1997. 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. The maximum amount of
dividends available to be paid to the Company's shareholder in 1998 without
prior approval of the Connecticut Insurance Department is $551 million. The
Company paid $110 million in dividends to its parent during the nine months
ended September 30, 1998.
6
79
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
Litigation
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
September 30, 1998, 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.
In March 1997, a purported class action entitled Patterman v. The Travelers,
Inc. 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. The Company intends to
vigorously contest the litigation.
6. RELATED PARTY TRANSACTION
Included in short-term investments is a 90 day variable rate note receivable
from Citigroup issued on August 28, 1998. The rate is based upon the AA
Financial commercial paper rate plus 14 basis points. The current rate is
5.47%. The balance at September 30, 1998 is $500 million. Citigroup may
prepay this note at anytime without any prepayment penalties.
7
80
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 to 33-778, 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.
C.G.S. Section 33-778 provides an exclusive remedy; a Connecticut corporation
cannot indemnify a director or officer to an extent either greater or less than
that authorized by the statute, e.g., pursuant to its certificate of
incorporation, by-laws, or any separate contractual arrangement. However, the
statute does specifically authorize a corporation to procure indemnification
insurance to provide greater indemnification rights. The premiums for such
insurance may be shared with the insured individuals on an agreed basis.
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.
81
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.
3. The undertaking to file reports.
4. The signatures.
Written consents of the following persons:
A Consent of Katherine M. Sullivan, General Counsel, to 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. To be filed by amendment.
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.
2. Not Applicable.
3(a). Distribution and Principal Underwriting Agreement among the Registrant,
The Travelers Insurance Company and CFBDS, Inc. To be filed by
amendment.
3(b). Selling Agreement. To be filed by amendment.
3(c). Agents Agreements, including schedule of sales commissions. To be filed
by amendment.
4. None
5. Variable Life Insurance Contracts. To be filed by amendment
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.)
82
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. Participation Agreements To be filed by amendment.
9. None
10. Application for Variable Life Insurance Contracts. To be filed by
amendment.
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 Jay S. Benet, Michael A. Carpenter, J. Eric Daniels,
George C. Kokulis, Robert I. Lipp, Katherine M. Sullivan and Marc P.
Weill.
83
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 28th
day of January 1999.
THE TRAVELERS FUND UL III FOR VARIABLE LIFE INSURANCE
(Registrant)
THE TRAVELERS INSURANCE COMPANY
(Depositor)
By: * JAY S. BENET
--------------------------------------
Jay S. Benet
Senior Vice President, Chief Financial Officer,
Chief Accounting Officer and Controller
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 28th day of January 1999.
*MICHAEL A. CARPENTER Director, Chairman of the Board
- ----------------------------
(Michael A. Carpenter)
*J. ERIC DANIELS Director, President and Chief Executive Officer
- ----------------------------
(J. Eric Daniels)
*JAY S. BENET Director, Senior Vice President, Chief Financial
- ---------------------------- Officer, Chief Accounting Officer and Controller
(Jay S. Benet)
*GEORGE C. KOKULIS Director and Senior Vice Presidnet
- ----------------------------
(George C. Kokulis)
*ROBERT I. LIPP Director
- ----------------------------
(Robert I. Lipp)
*KATHERINE M. SULLIVAN Director, Senior Vice President and
- ---------------------------- General Counsel
(Katherine M. Sullivan)
*MARC P. WEILL Director and Senior Vice President
- ----------------------------
(Marc P. Weill)
*By: /s/ ERNEST J. WRIGHT
----------------------------------------
Ernest J. Wright, Attorney-in-Fact
84
EXHIBIT INDEX
- -------------
Written Consents Method of Filing
- ---------------- ----------------
A. Consent of Katherine M. Sullivan, General Counsel, to Electronically
filing of her opinion as an exhibit to this Registration See Exhibit 11
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 To be filed by
illustrations contained in the prospectus. amendment
C. Consent of KPMG LLP, Independent Certified Electronically
Public Accountants.
D. Powers of Attorney. See Exhibit 12
EXHIBITS
1. Resolution of the Board of Directors of The Travelers Insurance Electronically
Company authorizing the establishment of the Registrant.
3(a). Distribution and Principal Underwriting Agreement among the To be filed by
Registrant, The Travelers Insurance Company and CFBDS, Inc. amendment
3(b). Selling Agreement. To be filed by
amendment
3(c). Agents Agreements, including schedule of sales commissions. To be filed by
amendment
5. Variable Life Insurance Contracts. To be filed by
amendment
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.)
85
EXHIBIT Method of Filing
- ------- ----------------
8. Participation Agreements To be filed by
amendment
10. Application for Variable Life Insurance Contracts To be filed by
amendment
11. Opinion of counsel as to the legality of the securities being Electronically
registered.
12(a) Powers of Attorney authorizing Ernest J. Wright or Kathleen A. Electronically
McGah as signatory for Michael A. Carpenter, J. Eric Daniels,
Jay S. Benet, George C. Kokulis, Robert I. Lipp, Katherine M.
Sullivan and Marc P. Weill.