<PAGE> 1
Registration Statement No. 333-69773
811-07411
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
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 II FOR VARIABLE LIFE INSURANCE
B. Name of Depositor: THE TRAVELERS LIFE AND ANNUITY 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 Life and Annuity Company
One Tower Square
Hartford, Connecticut 06183
It is proposed that this filing will become effective (check appropriate box):
______ immediately upon filing pursuant to paragraph (b)
______ on ___________ pursuant to paragraph (b)
______ 60 days after filing pursuant to paragraph (a)(1)
______ on __________ pursuant to paragraph (a)(1) of Rule 485.
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 Survivorship 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 Survivorship Life Insurance Policies is being registered
under the Securities Act of 1933.
F. Approximate date of proposed public offering:
<PAGE> 2
As soon as practicable following the effectiveness of the
Registration Statement
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
______ Check the box if it is proposed that this filing will become effective
on __________ at ___ pursuant to Rule 487. ______
<PAGE> 3
Pre-Effective Amendment No. 1 to the Registration Statement filed on Form
S-6 is hereby incorporated by reference in its entirety.
<PAGE> 4
THE TRAVELERS FUND UL II
FOR VARIABLE LIFE INSURANCE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments in eligible funds at market value:
Capital Appreciation Fund, 67,152 shares (cost $4,552,584) .................. $ 4,884,670
Dreyfus Stock Index Fund, 124,298 shares (cost $4,015,088) .................. 4,042,184
Fidelity's Variable Insurance Products Fund, 273,899 shares (cost $6,491,545) 7,214,058
Fidelity's Variable Insurance Products Fund II, 38,967 shares (cost $666,781) 707,638
Greenwich Street Series Fund, 45,735 shares (cost $811,196) ................. 802,641
Managed Assets Trust, 23,344 shares (cost $435,181) ......................... 466,640
Money Market Portfolio, 1,814,516 shares (cost $1,814,516) .................. 1,814,516
Templeton Variable Products Series Fund, 161,165 shares (cost $3,148,588) ... 3,265,956
The Travelers Series Trust, 60,229 shares (cost $732,181) ................... 733,844
Travelers Series Fund Inc., 696,710 shares (cost $11,527,948) ............... 12,335,010
------------
Total Investments (cost $34,195,608) ...................................... $ 36,267,157
Receivables:
Dividends ..................................................................... 54,172
Premium payments and transfers from other Travelers accounts .................. 3,420,732
Other assets .................................................................... 115
------------
Total Assets .............................................................. 39,742,176
------------
LIABILITIES:
Payables:
Contract surrenders and transfers to other Travelers accounts ............... 3,343,772
Insurance charges ........................................................... 6,228
Administrative charges ...................................................... 777
------------
Total Liabilities ......................................................... 3,350,777
------------
NET ASSETS: ..................................................................... $ 36,391,399
============
</TABLE>
See Notes to Financial Statements
-1-
<PAGE> 5
THE TRAVELERS FUND UL II
FOR VARIABLE LIFE INSURANCE
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends ..................................................................... $ 1,109,332
EXPENSES:
Insurance charges ............................................................. $ 181,666
Administrative charges ........................................................ 22,708
------------
Total expenses .............................................................. 204,374
------------
Net investment income ..................................................... 904,958
------------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold .............................................. 156,819,235
Cost of investments sold .................................................... 154,533,547
------------
Net realized gain (loss) .................................................. 2,285,688
Change in unrealized gain (loss) on investments:
Unrealized gain at December 31, 1997 ........................................ 606,203
Unrealized gain at December 31, 1998 ........................................ 2,071,549
------------
Net change in unrealized gain (loss) for the year ......................... 1,465,346
------------
Net realized gain (loss) and change in unrealized gain (loss) ........... 3,751,034
------------
Net increase in net assets resulting from operations .......................... $ 4,655,992
============
</TABLE>
See Notes to Financial Statements
-2-
<PAGE> 6
THE TRAVELERS FUND UL II
FOR VARIABLE LIFE INSURANCE
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income ......................................... $ 904,958 $ 113,261
Net realized gain (loss) from investment transactions ......... 2,285,688 59,827
Net change in unrealized gain (loss) on investments ........... 1,465,346 604,862
------------- -------------
Net increase in net assets resulting from operations ........ 4,655,992 777,950
------------- -------------
UNIT TRANSACTIONS:
Participant premium payments
(applicable to 13,807,247 and 6,023,535 units, respectively) 23,714,477 9,467,190
Participant transfers from other Travelers accounts
(applicable to 112,904,264 and 3,924,751 units, respectively) 180,481,902 6,145,464
Contract surrenders
(applicable to 1,573,510 and 597,609 units, respectively) ... (2,923,386) (983,426)
Participant transfers to other Travelers accounts
(applicable to 114,570,535 and 3,898,149 units, respectively) (180,744,823) (5,898,576)
------------- -------------
Net increase in net assets resulting from unit transactions ... 20,528,170 8,730,652
------------- -------------
Net increase in net assets .................................. 25,184,162 9,508,602
NET ASSETS:
Beginning of year ............................................. 11,207,237 1,698,635
------------- -------------
End of year ................................................... $ 36,391,399 $ 11,207,237
============= =============
</TABLE>
See Notes to Financial Statements
-3-
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Fund UL II for Variable Life Insurance ("Fund UL II") is a
separate account of The Travelers Life and Annuity Company ("Travelers
Life"), a wholly owned subsidiary of The Travelers Insurance Company ("The
Travelers"), an indirect wholly owned subsidiary of Citigroup Inc. (formerly
Travelers Group Inc.), and is available for funding certain variable life
insurance contracts issued by Travelers Life. Fund UL II is registered under
the Investment Company Act of 1940, as amended, as a unit investment trust.
Participant premium payments applied to Fund UL II are invested in one or
more eligible funds in accordance with the selection made by the owner. As of
December 31, 1998, the eligible funds available under Fund UL II were:
Managed Assets Trust; Capital Appreciation Fund; Money Market Portfolio
(formerly Cash Income Trust); U.S. Government Securities Portfolio, Utilities
Portfolio, Zero Coupon Bond Fund Portfolio Series 2000 and Zero Coupon Bond
Fund Portfolio Series 2005 of The Travelers Series Trust; Alliance Growth
Portfolio, Smith Barney Large Cap Value Portfolio (formerly Smith Barney
Income and Growth Portfolio), Smith Barney High Income Portfolio, MFS Total
Return Portfolio and AIM Capital Appreciation Portfolio of Travelers Series
Fund Inc.; Total Return Portfolio of Greenwich Street Series Fund (all of
which are managed by affiliates of The Travelers); Templeton Bond Fund (Class
1 shares), Templeton Stock Fund (Class 1 shares) and Templeton Asset
Allocation Fund (Class 1 shares) of Templeton Variable Products Series Fund;
High Income Portfolio, Growth Portfolio and Equity-Income Portfolio of
Fidelity's Variable Insurance Products Fund; Asset Manager Portfolio of
Fidelity's Variable Insurance Products Fund II; and Dreyfus Stock Index Fund.
All of the funds are Massachusetts business trusts, except for Travelers
Series Fund Inc. and Dreyfus Stock Index Fund which are incorporated under
Maryland law. Not all funds may be available in all states or to all contract
owners.
Effective December 18, 1998, Zero Coupon Bond Fund Portfolio Series 1998 of
The Travelers Series Trust was fully liquidated.
The following is a summary of significant accounting policies consistently
followed by Fund UL II in the preparation of its financial statements.
SECURITY VALUATION. Investments are valued daily at the net asset values per
share of the underlying funds.
SECURITY TRANSACTIONS. Security transactions are accounted for on the trade
date. Dividend income is recorded on the ex-dividend date.
FEDERAL INCOME TAXES. The operations of Fund UL II form a part of the total
operations of Travelers Life and are not taxed separately. Travelers Life is
taxed as a life insurance company under the Internal Revenue Code of 1986, as
amended (the "Code"). Under existing federal income tax law, no taxes are
payable on the investment income of Fund UL II. Fund UL II is not taxed as a
"regulated investment company" under Subchapter M of the Code.
OTHER. 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 expenses during the
reporting period. Actual results could differ from those estimates.
-4-
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS - CONTINUED
2. INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments were
$178,419,828 and $156,819,235, respectively, for the year ended December 31,
1998. Realized gains and losses from investment transactions are reported on
an identified cost basis. The cost of investments in eligible funds was
$34,195,608 at December 31, 1998. Gross unrealized appreciation for all
investments at December 31, 1998 was $2,179,408. Gross unrealized
depreciation for all investments at December 31, 1998 was $107,859.
3. CONTRACT CHARGES
Insurance charges and administrative charges of 0.80% and 0.10%,
respectively, of the average net assets of Fund UL II on an annual basis, are
deducted for mortality and expense risks and administrative expenses assumed
by Travelers Life during the first fifteen years that a policy is in effect.
Beginning in the sixteenth year that a policy is in effect, these charges are
reduced to 0.45% and 0%, respectively on an annual basis. As of December 31,
1998 all contract owners had insurance charges and administrative charges of
0.80% and 0.10%, respectively.
Travelers Life receives contingent surrender charges on full or partial
contract surrenders. Such charges are computed by applying various
percentages to premiums and/or stated contract amounts (as described in the
prospectus). Travelers Life received $31,109 and $25,191 in satisfaction of
such contingent surrender charges for the years ended December 31, 1998 and
1997, respectively.
-5-
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. NET CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------
UNIT NET
UNITS VALUE ASSETS
----- ----- ------
<S> <C> <C> <C>
Capital Appreciation Fund .......................... 1,136,698 $ 4.311 $ 4,900,354
Dreyfus Stock Index Fund ........................... 2,631,052 2.779 7,311,554
Fidelity's Variable Insurance Products Fund
Equity-Income Portfolio .......................... 1,806,947 2.176 3,931,251
Growth Portfolio ................................. 1,037,155 2.524 2,617,318
High Income Portfolio ............................ 504,806 1.426 720,027
Fidelity's Variable Insurance Products Fund II
Asset Manager Portfolio .......................... 428,153 1.652 707,498
Greenwich Street Series Fund
Total Return Portfolio ........................... 518,132 1.549 802,485
Managed Assets Trust ........................... 145,138 3.215 466,548
Money Market Portfolio ......................... 1,134,441 1.603 1,818,755
Templeton Variable Products Series Fund
Templeton Asset Allocation Fund (Class 1 shares) . 477,886 1.638 782,791
Templeton Bond Fund (Class 1 shares) ............. 156,953 1.257 197,289
Templeton Stock Fund (Class 1 shares) ............ 1,418,179 1.611 2,284,793
The Travelers Series Trust
U.S. Government Securities Portfolio ............. 406,054 1.410 572,389
Utilities Portfolio .............................. 51,014 1.974 100,721
Zero Coupon Bond Fund Portfolio Series 2000 ...... 28,611 1.187 33,959
Zero Coupon Bond Fund Portfolio Series 2005 ...... 60,699 1.287 78,142
Travelers Series Fund Inc.
AIM Capital Appreciation Portfolio ............... 1,499,046 1.369 2,052,888
Alliance Growth Portfolio ........................ 1,831,608 2.185 4,001,168
MFS Total Return Portfolio ....................... 919,153 1.638 1,505,540
Smith Barney High Income Portfolio ............... 383,898 1.251 480,156
Smith Barney Large Cap Value Portfolio ........... 592,895 1.730 1,025,773
-----------
Net Contract Owners' Equity ........................ $36,391,399
===========
</TABLE>
-6-
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
INVESTMENT OPTIONS NO. OF MARKET
SHARES VALUE
----------- -----------
<S> <C> <C>
CAPITAL APPRECIATION FUND (13.5%)
Total (Cost $4,552,584) ........................................ 67,152 $ 4,884,670
----------- -----------
DREYFUS STOCK INDEX FUND (11.1%)
Total (Cost $4,015,088) ........................................ 124,298 4,042,184
----------- -----------
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND (19.9%)
Equity-Income Portfolio (Cost $3,610,485) ...................... 153,901 3,912,160
Growth Portfolio (Cost $2,104,206) ............................. 57,538 2,581,729
High Income Portfolio (Cost $776,854) .......................... 62,460 720,169
----------- -----------
Total (Cost $6,491,545) ...................................... 273,899 7,214,058
----------- -----------
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II (2.0%)
Asset Manager Portfolio
Total (Cost $666,781) ........................................ 38,967 707,638
----------- -----------
GREENWICH STREET SERIES FUND (2.2%)
Total Return Portfolio
Total (Cost $811,196) ........................................ 45,735 802,641
----------- -----------
MANAGED ASSETS TRUST (1.3%)
Total (Cost $435,181) ........................................ 23,344 466,640
----------- -----------
MONEY MARKET PORTFOLIO (5.0%)
Total (Cost $1,814,516) ...................................... 1,814,516 1,814,516
----------- -----------
TEMPLETON VARIABLE PRODUCTS SERIES FUND (9.0%)
Templeton Asset Allocation Fund (Class 1 shares) (Cost $778,273) 34,858 782,909
Templeton Bond Fund (Class 1 shares) (Cost $193,910) ........... 17,825 197,327
Templeton Stock Fund (Class 1 shares) (Cost $2,176,405) ........ 108,482 2,285,720
----------- -----------
Total (Cost $3,148,588) ...................................... 161,165 3,265,956
----------- -----------
THE TRAVELERS SERIES TRUST (2.0%)
U.S. Government Securities Portfolio (Cost $535,664) ........... 44,617 526,475
Utilities Portfolio (Cost $88,733) ............................. 5,864 100,740
Zero Coupon Bond Fund Portfolio Series 2000 (Cost $33,888) ..... 3,131 32,121
Zero Coupon Bond Fund Portfolio Series 2005 (Cost $73,896) ..... 6,617 74,508
----------- -----------
Total (Cost $732,181) ........................................ 60,229 733,844
----------- -----------
TRAVELERS SERIES FUND INC. (34.0%)
AIM Capital Appreciation Portfolio (Cost $5,173,476) ........... 367,620 5,323,144
Alliance Growth Portfolio (Cost $3,408,323) .................... 152,092 4,001,538
MFS Total Return Portfolio (Cost $1,441,370) ................... 88,389 1,505,263
Smith Barney High Income Portfolio (Cost $510,753) ............. 37,843 479,090
Smith Barney Large Cap Value Portfolio (Cost $994,026) ......... 50,766 1,025,975
----------- -----------
Total (Cost $11,527,948) ..................................... 696,710 12,335,010
----------- -----------
TOTAL INVESTMENT OPTIONS (100%)
(COST $34,195,608) ............................................. $36,267,157
===========
</TABLE>
-7-
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF FUND UL II OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS
ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND DREYFUS STOCK INDEX FUND EQUITY-INCOME PORTFOLIO
---------------------------- ---------------------------- ----------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends .......................... $ 74,869 $ 8 $ 38,721 $ 35,376 $ 85,961 $ 14,787
------------ ------------ ------------ ------------ ------------ ------------
EXPENSES:
Insurance charges .................. 20,764 5,532 18,973 4,820 18,997 4,048
Administrative charges ............. 2,596 689 2,372 542 2,375 508
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss) ... 51,509 (6,213) 17,376 30,014 64,589 10,231
------------ ------------ ------------ ------------ ------------ ------------
REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain (loss) from investment
transactions:
Proceeds from investments sold ... 8,939,564 20,971 29,878,196 37,365 252,634 71,633
Cost of investments sold ......... 7,651,328 18,398 29,148,808 30,549 208,954 69,809
------------ ------------ ------------ ------------ ------------ ------------
Net realized gain (loss) ....... 1,288,236 2,573 729,388 6,816 43,680 1,824
------------ ------------ ------------ ------------ ------------ ------------
Change in unrealized gain (loss) on
investments:
Unrealized gain (loss) beginning
of year ........................ 105,992 (8,725) 86,164 (445) 99,327 3,309
Unrealized gain (loss) end of year 332,086 105,992 27,096 86,164 301,675 99,327
------------ ------------ ------------ ------------ ------------ ------------
Net change in unrealized gain
(loss) for the year .......... 226,094 114,717 (59,068) 86,609 202,348 96,018
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net
assets resulting from operations 1,565,839 111,077 687,696 123,439 310,617 108,073
------------ ------------ ------------ ------------ ------------ ------------
UNIT TRANSACTIONS:
Participant premium payments ....... 1,598,260 594,332 1,639,480 482,167 1,065,449 283,616
Participant transfers from other
Travelers accounts ............... 9,781,587 435,944 36,723,998 448,073 1,874,478 809,707
Contract surrenders ................ (358,636) (101,952) (333,118) (76,416) (342,648) (78,809)
Participant transfers to other
Travelers accounts ............... (8,883,995) (9,284) (32,413,993) (22,182) (151,989) (56,274)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net
assets resulting from unit
transactions ................... 2,137,216 919,040 5,616,367 831,642 2,445,290 958,240
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in
net assets ................... 3,703,055 1,030,117 6,304,063 955,081 2,755,907 1,066,313
NET ASSETS:
Beginning of year ................ 1,197,299 167,182 1,007,491 52,410 1,175,344 109,031
------------ ------------ ------------ ------------ ------------ ------------
End of year ...................... $ 4,900,354 $ 1,197,299 $ 7,311,554 $ 1,007,491 $ 3,931,251 $ 1,175,344
============ ============ ============ ============ ============ ============
</TABLE>
-8-
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
GROWTH PORTFOLIO HIGH INCOME PORTFOLIO ASSET MANAGER PORTFOLIO TOTAL RETURN PORTFOLIO
- -------------------------- -------------------------- -------------------------- --------------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 124,603 $ 6,210 $ 49,003 $ 3,008 $ 44,447 $ 4,398 $ 38,676 $ 19,156
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
12,316 3,490 4,741 1,423 3,774 882 5,776 1,528
1,540 427 593 181 471 109 722 186
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
110,747 2,293 43,669 1,404 40,202 3,407 32,178 17,442
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
172,237 74,627 57,305 134,453 84,980 13,082 173,048 15,259
146,160 71,855 60,868 133,952 81,260 12,936 163,752 13,281
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
26,077 2,772 (3,563) 501 3,720 146 9,296 1,978
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
65,515 155 28,905 338 14,373 (27) 6,485 479
477,523 65,515 (56,685) 28,905 40,857 14,373 (8,555) 6,485
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
412,008 65,360 (85,590) 28,567 26,484 14,400 (15,040) 6,006
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
548,832 70,425 (45,484) 30,472 70,406 17,953 26,434 25,426
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
878,682 391,611 291,102 59,161 316,953 92,210 247,970 143,153
667,426 379,350 195,962 408,795 133,229 172,963 234,893 307,511
(248,686) (85,506) (50,099) (17,011) (65,210) (22,869) (60,314) (17,089)
(49,786) (55,077) (48,116) (127,062) (11,280) (6,382) (121,404) (6,601)
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
1,247,636 630,378 388,849 323,883 373,692 235,922 301,145 426,974
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
1,796,468 700,803 343,365 354,355 444,098 253,875 327,579 452,400
820,850 120,047 376,662 22,307 263,400 9,525 474,906 22,506
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 2,617,318 $ 820,850 $ 720,027 $ 376,662 $ 707,498 $ 263,400 $ 802,485 $ 474,906
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
-9-
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF FUND UL II OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS
ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
TEMPLETON ASSET ALLOCATION
FUND
MANAGED ASSETS TRUST MONEY MARKET PORTFOLIO (CLASS 1 SHARES)
--------------------------- --------------------------- ---------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ........................... $ 16,040 $ 2,064 $ 115,285 $ 36,259 $ 30,464 $ 5,560
------------ ------------ ------------ ------------ ------------ ------------
EXPENSES:
Insurance charges ................... 1,786 371 18,666 5,861 5,100 1,239
Administrative charges .............. 223 46 2,333 729 638 155
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss) .... 14,031 1,647 94,286 29,669 24,726 4,166
------------ ------------ ------------ ------------ ------------ ------------
REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain (loss) from investment
transactions:
Proceeds from investments sold .... 43,382 10,996 40,088,922 4,046,511 138,697 21,111
Cost of investments sold .......... 37,679 9,921 40,088,922 4,046,511 136,460 19,574
------------ ------------ ------------ ------------ ------------ ------------
Net realized gain (loss) ........ 5,703 1,075 -- -- 2,237 1,537
------------ ------------ ------------ ------------ ------------ ------------
Change in unrealized gain (loss) on
investments:
Unrealized gain (loss) beginning of
year ............................ 4,755 (191) -- -- 1,084 532
Unrealized gain (loss) end of year 31,459 4,755 -- -- 4,636 1,084
------------ ------------ ------------ ------------ ------------ ------------
Net change in unrealized gain
(loss) for the year ........... 26,704 4,946 -- -- 3,552 552
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ....... 46,438 7,668 94,286 29,669 30,515 6,255
------------ ------------ ------------ ------------ ------------ ------------
UNIT TRANSACTIONS:
Participant premium payments ........ 148,771 37,766 13,513,324 5,786,468 318,867 163,825
Participant transfers from other
Travelers accounts ................ 212,553 52,750 37,931,466 586,545 261,063 174,058
Contract surrenders ................. (21,950) (8,752) (555,249) (188,106) (80,180) (30,046)
Participant transfers to other
Travelers accounts ................ (9,263) (4,922) (50,565,449) (5,568,887) (76,895) (7,361)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net
assets resulting from unit
transactions .................... 330,111 76,842 324,092 616,020 422,855 300,476
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net
assets ........................ 376,549 84,510 418,378 645,689 453,370 306,731
NET ASSETS:
Beginning of year ................. 89,999 5,489 1,400,377 754,688 329,421 22,690
------------ ------------ ------------ ------------ ------------ ------------
End of year ....................... $ 466,548 $ 89,999 $ 1,818,755 $ 1,400,377 $ 782,791 $ 329,421
============ ============ ============ ============ ============ ============
</TABLE>
-10-
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
TEMPLETON BOND FUND TEMPLETON STOCK FUND U.S. GOVERNMENT SECURITIES
(CLASS 1 SHARES) (CLASS 1 SHARES) PORTFOLIO UTILITIES PORTFOLIO
- --------------------------- --------------------------- --------------------------- ---------------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 12,130 $ 17 $ 166,239 $ 32,428 $ 46,257 $ 2,262 $ 3,805 $ 45
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,546 188 16,676 4,790 2,991 194 604 183
193 23 2,084 612 374 24 75 23
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
10,391 (194) 147,479 27,026 42,892 2,044 3,126 (161)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
73,913 2,010 25,950,404 48,702 13,179 17,836 15,147 1,782
75,268 1,984 26,094,788 41,905 12,003 16,929 11,670 1,686
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(1,355) 26 (144,384) 6,797 1,176 907 3,477 96
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,000 1 (7,984) 8,229 738 (60) 6,150 (19)
3,417 1,000 109,315 (7,984) (9,189) 738 12,007 6,150
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
2,417 999 117,299 (16,213) (9,927) 798 5,857 6,169
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
11,453 831 120,394 17,610 34,141 3,749 12,460 6,104
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
26,582 36,154 895,395 498,265 50,942 41,530 18,753 8,128
121,110 79,416 26,650,363 510,409 456,331 3,283 30,394 42,770
(9,468) (2,478) (212,082) (109,716) (14,039) (1,585) (15,675) (1,855)
(66,157) (282) (26,276,598) (11,811) (2,990) (222) (162) (448)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
72,067 112,810 1,057,078 887,147 490,244 43,006 33,310 48,595
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
83,520 113,641 1,177,472 904,757 524,385 46,755 45,770 54,699
113,769 128 1,107,321 202,564 48,004 1,249 54,951 252
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 197,289 $ 113,769 $ 2,284,793 $ 1,107,321 $ 572,389 $ 48,004 $ 100,721 $ 54,951
============ ============ ============ ============ ============ ============ ============ ============
</TABLE>
-11-
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF FUND UL II OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS
ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND ZERO COUPON BOND FUND ZERO COUPON BOND FUND
PORTFOLIO PORTFOLIO PORTFOLIO
SERIES 1998 SERIES 2000 SERIES 2005
--------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ........................................... $ 6 $ 141 $ 1,849 $ 508 $ 3,678 $ 827
-------- -------- -------- -------- -------- --------
EXPENSES:
Insurance charges ................................... 7 2 122 30 331 60
Administrative charges .............................. 1 -- 16 4 41 7
-------- -------- -------- -------- -------- --------
Net investment income (loss) .................... (2) 139 1,711 474 3,306 760
-------- -------- -------- -------- -------- --------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold .................... 2,999 174 17,524 1,064 5,292 11,539
Cost of investments sold .......................... 3,068 175 16,901 1,044 4,973 10,990
-------- -------- -------- -------- -------- --------
Net realized gain (loss) ........................ (69) (1) 623 20 319 549
-------- -------- -------- -------- -------- --------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of year .......... (113) (2) (184) -- (192) (1)
Unrealized gain (loss) end of year ................ -- (113) (1,767) (184) 612 (192)
-------- -------- -------- -------- -------- --------
Net change in unrealized gain (loss) for the year 113 (111) (1,583) (184) 804 (191)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in net assets
resulting from operations ......................... 42 27 751 310 4,429 1,118
-------- -------- -------- -------- -------- --------
UNIT TRANSACTIONS:
Participant premium payments ........................ 327 (14) 3,385 3,315 28,748 10,172
Participant transfers from other Travelers accounts . 56 2,706 38,105 6,056 35,774 6,064
Contract surrenders ................................. (543) (159) (2,567) (423) (6,320) (1,750)
Participant transfers to other Travelers accounts ... (2,484) -- (14,973) -- (109) (28)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in net assets
resulting from unit transactions ................ (2,644) 2,533 23,950 8,948 58,093 14,458
-------- -------- -------- -------- -------- --------
Net increase (decrease) in net assets ........... (2,602) 2,560 24,701 9,258 62,522 15,576
NET ASSETS:
Beginning of year ................................. 2,602 42 9,258 -- 15,620 44
-------- -------- -------- -------- -------- --------
End of year ....................................... $ -- $ 2,602 $ 33,959 $ 9,258 $ 78,142 $ 15,620
======== ======== ======== ======== ======== ========
</TABLE>
-12-
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
AIM CAPITAL APPRECIATION SMITH BARNEY HIGH INCOME
PORTFOLIO ALLIANCE GROWTH PORTFOLIO MFS TOTAL RETURN PORTFOLIO PORTFOLIO
- ----------------------------- ----------------------------- ----------------------------- -----------------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2,031 $ -- $ 157,237 $ -- $ 41,658 $ -- $ 35,061 $ --
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
14,139 2,387 18,971 4,148 7,456 1,054 3,277 1,108
1,767 292 2,371 541 932 131 410 139
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(13,875) (2,679) 135,895 (4,689) 33,270 (1,185) 31,374 (1,247)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
50,364,424 42,017 281,429 100,575 99,593 14,712 137,335 26,074
50,138,696 35,849 211,143 83,028 86,784 13,588 130,279 24,019
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
225,728 6,168 70,286 17,547 12,809 1,124 7,056 2,055
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
14,449 8 127,693 (541) 19,330 (254) 14,581 (1,162)
149,668 14,449 593,215 127,693 63,893 19,330 (31,663) 14,581
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
135,219 14,441 465,522 128,234 44,563 19,584 (46,244) 15,743
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
347,072 17,930 671,703 141,092 90,642 19,523 (7,814) 16,551
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
604,531 226,505 1,009,403 367,916 507,102 75,606 196,364 75,443
62,271,932 395,085 1,692,140 615,480 550,889 398,068 201,227 99,684
(176,136) (59,627) (217,311) (110,871) (73,465) (11,785) (21,906) (12,595)
(61,632,098) (4,654) (245,697) (5,050) (52,303) (10,432) (102,054) (550)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,068,229 557,309 2,238,535 867,475 932,223 451,457 273,631 161,982
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,415,301 575,239 2,910,238 1,008,567 1,022,865 470,980 265,817 178,533
637,587 62,348 1,090,930 82,363 482,675 11,695 214,339 35,806
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 2,052,888 $ 637,587 $ 4,001,168 $ 1,090,930 $ 1,505,540 $ 482,675 $ 480,156 $ 214,339
============ ============ ============ ============ ============ ============ ============ ============
</TABLE>
-13-
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF FUND UL II OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS
ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
SMITH BARNEY LARGE CAP VALUE
PORTFOLIO COMBINED
------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ........................................... $ 21,312 $ -- $ 1,109,332 $ 163,054
------------- ------------- ------------- -------------
EXPENSES:
Insurance charges ................................... 4,653 964 181,666 44,302
Administrative charges .............................. 581 123 22,708 5,491
------------- ------------- ------------- -------------
Net investment income (loss) .................... 16,078 (1,087) 904,958 113,261
------------- ------------- ------------- -------------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold .................... 29,031 35,099 156,819,235 4,747,592
Cost of investments sold .......................... 23,783 29,782 154,533,547 4,687,765
------------- ------------- ------------- -------------
Net realized gain (loss) ........................ 5,248 5,317 2,285,688 59,827
------------- ------------- ------------- -------------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of year .......... 18,135 (283) 606,203 1,341
Unrealized gain (loss) end of year ................ 31,949 18,135 2,071,549 606,203
------------- ------------- ------------- -------------
Net change in unrealized gain (loss) for the year 13,814 18,418 1,465,346 604,862
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations ....................... 35,140 22,648 4,655,992 777,950
------------- ------------- ------------- -------------
UNIT TRANSACTIONS:
Participant premium payments ........................ 354,087 89,861 23,714,477 9,467,190
Participant transfers from other Travelers accounts . 416,926 210,747 180,481,902 6,145,464
Contract surrenders ................................. (57,784) (44,026) (2,923,386) (983,426)
Participant transfers to other Travelers accounts ... (17,028) (1,067) (180,744,823) (5,898,576)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from unit transactions ................ 696,201 255,515 20,528,170 8,730,652
------------- ------------- ------------- -------------
Net increase (decrease) in net assets ........... 731,341 278,163 25,184,162 9,508,602
NET ASSETS:
Beginning of year ................................. 294,432 16,269 11,207,237 1,698,635
------------- ------------- ------------- -------------
End of year ....................................... $ 1,025,773 $ 294,432 $ 36,391,399 $ 11,207,237
============= ============= ============= =============
</TABLE>
-14-
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS - CONTINUED
7. SCHEDULE OF UNITS FOR FUND UL II FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND DREYFUS STOCK INDEX FUND EQUITY-INCOME PORTFOLIO
--------------------------- --------------------------- ---------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 444,866 77,659 460,680 31,576 597,615 70,383
Units purchased and transferred from
other Travelers accounts ......... 3,060,194 410,307 14,840,446 477,006 1,446,746 604,747
Units redeemed and transferred to
other Travelers accounts ......... (2,368,362) (43,100) (12,670,074) (47,902) (237,414) (77,515)
----------- ----------- ----------- ----------- ----------- -----------
Units end of year .................. 1,136,698 444,866 2,631,052 460,680 1,806,947 597,615
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
GROWTH PORTFOLIO HIGH INCOME PORTFOLIO ASSET MANAGER PORTFOLIO
------------------------- ------------------------- -------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 449,618 80,468 250,378 17,292 181,740 7,858
Units purchased and transferred from
other Travelers accounts ......... 729,395 453,937 323,773 341,485 296,426 194,847
Units redeemed and transferred to
other Travelers accounts ......... (141,858) (84,787) (69,345) (108,399) (50,013) (20,965)
---------- ---------- ---------- ---------- ---------- ----------
Units end of year .................. 1,037,155 449,618 504,806 250,378 428,153 181,740
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN PORTFOLIO MANAGED ASSETS TRUST MONEY MARKET PORTFOLIO
--------------------------- --------------------------- ---------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 318,844 17,497 33,700 2,471 909,353 510,210
Units purchased and transferred from
other Travelers accounts ......... 319,279 317,987 122,196 36,681 32,514,069 4,201,770
Units redeemed and transferred to
other Travelers accounts ......... (119,991) (16,640) (10,758) (5,452) (32,288,981) (3,802,627)
----------- ----------- ----------- ----------- ----------- -----------
Units end of year .................. 518,132 318,844 145,138 33,700 1,134,441 909,353
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON ASSET ALLOCATION
FUND TEMPLETON BOND FUND TEMPLETON STOCK FUND
(CLASS 1 SHARES) (CLASS 1 SHARES) (CLASS 1 SHARES)
--------------------------- --------------------------- ---------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 212,085 16,725 96,130 110 689,681 139,885
Units purchased and transferred from
other Travelers accounts ......... 363,199 219,569 123,125 98,390 17,899,636 623,191
Units redeemed and transferred to
other Travelers accounts ......... (97,398) (24,209) (62,302) (2,370) (17,171,138) (73,395)
----------- ----------- ----------- ----------- ----------- -----------
Units end of year .................. 477,886 212,085 156,953 96,130 1,418,179 689,681
=========== =========== =========== =========== =========== ===========
</TABLE>
-15-
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS - CONTINUED
7. SCHEDULE OF UNITS FOR FUND UL II
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES ZERO COUPON BOND FUND
PORTFOLIO UTILITIES PORTFOLIO PORTFOLIO SERIES 1998
-------------------------- ------------------------ -------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 37,194 1,080 32,611 186 2,347 40
Units purchased and transferred from
other Travelers accounts ......... 381,386 37,586 27,452 34,029 339 2,452
Units redeemed and transferred to
other Travelers accounts ......... (12,526) (1,472) (9,049) (1,604) (2,686) (145)
-------- -------- -------- -------- -------- --------
Units end of year .................. 406,054 37,194 51,014 32,611 -- 2,347
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND ZERO COUPON BOND FUND
PORTFOLIO PORTFOLIO AIM CAPITAL APPRECIATION
SERIES 2000 SERIES SERIES 2005 PORTFOLIO
----------------------- --------------------- ---------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 8,316 -- 13,500 42 541,898 58,901
Units purchased and transferred from
other Travelers accounts ......... 35,127 8,703 52,454 15,066 51,302,755 536,587
Units redeemed and transferred to
other Travelers accounts ......... (14,832) (387) (5,255) (1,608) (50,345,607) (53,590)
------- ------- ------- ------- ----------- --------
Units end of year .................. 28,611 8,316 60,699 13,500 1,499,046 541,898
======= ======= ======= ======= =========== ========
</TABLE>
<TABLE>
<CAPTION>
SMITH BARNEY HIGH INCOME
ALLIANCE GROWTH PORTFOLIO MFS TOTAL RETURN PORTFOLIO PORTFOLIO
------------------------- -------------------------- --------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 638,546 61,648 326,125 9,490 170,588 32,158
Units purchased and transferred from
other Travelers accounts ......... 1,437,723 649,958 673,650 332,791 309,772 149,150
Units redeemed and transferred to
other Travelers accounts ......... (244,661) (73,060) (80,622) (16,156) (96,462) (10,720)
---------- ---------- ---------- ---------- ---------- ----------
Units end of year .................. 1,831,608 638,546 919,153 326,125 383,898 170,588
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SMITH BARNEY LARGE CAP
VALUE PORTFOLIO COMBINED
-------------------------------- --------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Units beginning of year ............ 185,237 12,845 6,601,052 1,148,524
Units purchased and transferred from
other Travelers accounts ......... 452,369 202,047 126,711,511 9,948,286
Units redeemed and transferred to
other Travelers accounts ......... (44,711) (29,655) (116,144,045) (4,495,758)
------------ ------------ ------------ ------------
Units end of year .................. 592,895 185,237 17,168,518 6,601,052
============ ============ ============ ============
</TABLE>
-16-
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
To the Owners of Variable Life Insurance Contracts of
The Travelers Fund UL II for Variable Life Insurance:
We have audited the accompanying statement of assets and liabilities of The
Travelers Fund UL II for Variable Life Insurance as of December 31, 1998, and
the related statement of operations for the year then ended and the statement of
changes in net assets for each of the two years in the period then ended. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of shares owned as of December 31, 1998, by correspondence with the
underlying funds. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Travelers Fund UL II for
Variable Life Insurance as of December 31, 1998, the results of its operations
for the year then ended and the changes in its net assets for each of the two
years in the period then ended, in conformity with generally accepted accounting
principles.
KPMG LLP
Hartford, Connecticut
February 17, 1999
-17-
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Life and Annuity Company:
We have audited the accompanying balance sheets of The Travelers Life and
Annuity Company as of December 31, 1998 and 1997, and the related statements of
income, changes in retained earnings and accumulated other changes in equity
from non-owner sources and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of The Travelers Life and Annuity
Company as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
January 25, 1999
F-1
<PAGE> 22
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF INCOME
($ in thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 23,677 $ 35,190 $ 17,462
Net investment income 171,003 168,653 151,326
Realized investment gains (losses) 18,493 44,871 (9,613)
Fee income 14,687 5,004 1,336
Other 14,199 3,159 940
- -------------------------------------------------------------------------- ------------- --------------
Total Revenues 242,059 256,877 161,451
- -------------------------------------------------------------------------- ------------- --------------
BENEFITS AND EXPENSES
Current and future insurance benefits 81,371 95,639 77,285
Interest credited to contractholders 51,535 35,165 35,607
Amortization of deferred acquisition costs and
value in insurance in force 17,031 6,036 3,286
Operating expenses 3,937 10,462 5,691
- -------------------------------------------------------------------------- ------------- --------------
Total Benefits and Expenses 153,874 147,302 121,869
- -------------------------------------------------------------------------- ------------- --------------
Income before federal income taxes 88,185 109,575 39,582
- -------------------------------------------------------------------------- ------------- --------------
Federal income taxes:
Current 18,917 33,859 29,456
Deferred expense (benefit) 11,783 4,344 (15,665)
- -------------------------------------------------------------------------- ------------- --------------
Total Federal Income Taxes 30,700 38,203 13,791
- -------------------------------------------------------------------------- ------------- --------------
Net income $ 57,485 $ 71,372 $ 25,791
========================================================================== ============= ==============
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE> 23
THE TRAVELERS LIFE AND ANNUITY COMPANY
BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------------------------------------------------------------------------------------ ---------------- -----------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $1,707,347; $1,571,121) $1,838,681 $1,678,120
Equity securities, at fair value (cost, $25,826; $15,092) 26,685 16,289
Mortgage loans 174,565 160,247
Short-term securities 126,176 169,229
Other invested assets 136,122 121,242
- ------------------------------------------------------------------------------------------ ---------------- -----------------
Total Investments 2,302,229 2,145,127
- ------------------------------------------------------------------------------------------ ---------------- -----------------
Separate accounts 2,178,474 812,059
Deferred acquisition costs and value of insurance in force 194,213 90,966
Premium balances receivable 16,074 9,288
Deferred federal income taxes 12,395 33,661
Other assets 41,119 61,904
- ------------------------------------------------------------------------------------------ ---------------- -----------------
Total Assets $4,744,504 $3,153,005
- ------------------------------------------------------------------------------------------ ---------------- -----------------
LIABILITIES
Future policy benefits $963,171 $971,602
Contractholder funds 947,411 818,971
Separate accounts 2,178,474 812,059
Other liabilities 114,690 84,712
- ------------------------------------------------------------------------------------------ ---------------- -----------------
Total Liabilities 4,203,746 2,687,344
- ------------------------------------------------------------------------------------------ ---------------- -----------------
SHAREHOLDER'S EQUITY
Common stock, par value $100; 100,000 shares authorized, 30,000 issued and outstanding 3,000 3,000
Additional paid-in capital 167,314 167,314
Retained earnings 282,555 225,070
Accumulated other changes in equity from non-owner sources 87,889 70,277
- ------------------------------------------------------------------------------------------ ---------------- -----------------
Total Shareholder's Equity 540,758 465,661
- ------------------------------------------------------------------------------------------ ---------------- -----------------
Total Liabilities and Shareholder's Equity $4,744,504 $3,153,005
========================================================================================== ================ =================
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 24
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CHANGES IN RETAINED EARNINGS AND ACCUMULATED
OTHER CHANGES IN EQUITY FROM NON-OWNER SOURCES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------ ---------------- ----------------- -------------------
STATEMENTS OF CHANGES IN RETAINED EARNINGS 1998 1997 1996
- ------------------------------------------------------ ---------------- ----------------- -------------------
<S> <C> <C> <C>
Balance, beginning of year $225,070 $167,698 $157,907
Net income 57,485 71,372 25,791
Dividends to parent - 14,000 16,000
- ------------------------------------------------------ ---------------- ----------------- -------------------
Balance, end of year $282,555 $225,070 $167,698
====================================================== ================ ================= ===================
- ------------------------------------------------------ ---------------- ----------------- -------------------
STATEMENTS OF ACCUMULATED OTHER CHANGES
IN EQUITY FROM NON-OWNER SOURCES
- ------------------------------------------------------ ---------------- ----------------- -------------------
Balance, beginning of year $70,277 $33,856 $35,330
Unrealized gains (losses), net of tax 17,612 36,421 (1,474)
- ------------------------------------------------------ ---------------- ----------------- -------------------
Balance, end of year $87,889 $70,277 $33,856
====================================================== ================ ================= ===================
- ------------------------------------------------------ ---------------- ----------------- -------------------
SUMMARY OF CHANGES IN EQUITY
FROM NON-OWNER SOURCES
- ------------------------------------------------------ ---------------- ----------------- -------------------
Net Income $57,485 $71,372 $25,791
Other changes in equity from
non-owner sources 17,612 36,421 (1,474)
- ------------------------------------------------------ ---------------- ----------------- -------------------
Total changes in equity from
non-owner sources $75,097 $107,793 $24,317
====================================================== ================ ================= ===================
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 25
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ in thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------- --------------- --------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 22,300 $ 34,553 $ 6,472
Net investment income received 146,158 170,460 71,083
Benefits and claims paid (90,872) (90,820) (70,331)
Interest credited to contractholders (51,535) (35,165) (813)
Operating expenses paid (75,632) (40,868) (5,482)
Income taxes paid (25,214) (22,440) (23,931)
Other (596) (7,702) (6,857)
- ----------------------------------------------------------------------------------- --------------- --------------- -------------
Net Cash Provided by (Used in) Operating Activities (75,391) 8,018 (29,859)
- ----------------------------------------------------------------------------------- --------------- --------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 113,456 81,899 20,301
Mortgage loans 25,462 8,972 37,789
Proceeds from sales of investments
Fixed maturities 1,095,976 856,846 978,970
Equity securities 6,020 12,404 12,818
Mortgage loans - 5,483 22,437
Real estate held for sale - 4,493 -
Purchases of investments
Fixed maturities (1,320,704) (1,020,803) (994,443)
Equity securities (13,653) (6,382) (5,412)
Mortgage loans (39,158) (41,967) (21,450)
Policy loans (2,010) (1,144) (1,750)
Short-term securities, (purchases) sales, net 43,054 (88,067) (19,688)
Other investments, (purchases) sales, net 1,110 (51,502) (6,160)
Securities transactions in course of settlement 36,459 10,526 (51,703)
- ----------------------------------------------------------------------------------- --------------- --------------- -------------
Net Cash Used in Investing Activities (53,988) (229,242) (28,291)
- ----------------------------------------------------------------------------------- --------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 211,476 325,932 96,490
Contractholder fund withdrawals (83,036) (89,145) (22,340)
Dividends to parent company - (14,000) (16,000)
- ----------------------------------------------------------------------------------- --------------- --------------- -------------
Net Cash Provided by Financing Activities 128,440 222,787 58,150
- ----------------------------------------------------------------------------------- --------------- --------------- -------------
Net increase (decrease) in cash (939) 1,563 -
- ----------------------------------------------------------------------------------- --------------- --------------- -------------
Cash at December 31, $624 $1,563 $ -
=================================================================================== =============== =============== =============
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 26
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO 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 Life and Annuity Company (the Company) is a wholly owned
subsidiary of The Travelers Insurance Company (TIC), an indirect wholly
owned subsidiary of Citigroup Inc. (Citigroup), formerly Travelers Group
Inc. The financial statements and accompanying footnotes of the Company are
prepared in conformity with generally accepted accounting principles. 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.
The Company offers a variety of variable annuity products where the
investment risk is borne by the contractholder, not the Company, and the
benefits are not guaranteed. The premiums and deposits related to these
products are reported in separate accounts. The Company considers it
necessary to differentiate, for financial statement purposes, the results
of the risks it has assumed from those it has not. See also Note 6.
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, 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). This
statement 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. Effective January 1, 1998, the
Company adopted the collateral provisions of FAS 125 which were not
effective until 1998 in accordance with Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of
SFAS 125". The adoption of the collateral provisions of FAS 125 created
additional assets and liabilities on the Company's statement of financial
position related to the recognition of securities provided and received as
collateral. There was no impact on the results of operations from the
adoption of the collateral provisions of FAS 125.
F-6
<PAGE> 27
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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. This statement 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 thus represents the sum of net
income and other changes in equity from non-owner sources. The accumulated
balance of other changes in equity from non-owner sources is required to be
displayed separately from retained earnings and additional paid-in capital
in the balance sheet. The adoption of FAS 130 resulted in the Company
reporting unrealized gains and losses on investments in debt and equity
securities in changes in equity from non-owner sources. See Note 3.
Disclosures About Segments of an Enterprise and Related Information
During 1998, Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (FAS
131) became effective. 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. This
statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise". 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
decisionmaker in deciding how to allocate resources and in assessing
performance. The Company only has one reportable operating segment and
therefore, no additional disclosures are required under FAS 131.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
During the third quarter of 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 had no impact on the Company's financial condition,
statement of operations or liquidity.
F-7
<PAGE> 28
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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. The effective yield used to determine amortization is
calculated based upon actual historical and projected future cash flows,
which are obtained from a widely-accepted securities data provider. 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 non-redeemable preferred
stocks, are classified as "available for sale" and are 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
current real estate financing market. Impaired loans were insignificant at
December 31, 1998 and 1997.
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.
Other invested assets include real estate joint ventures and partnership
investments accounted for on the equity method of accounting. All changes
in equity of these investments are recorded in net investment income.
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.
Included in investments are invested assets associated with Structured
Settlement Guaranteed Separate Accounts where the investment risk is borne
by the Company. See Note 6.
F-8
<PAGE> 29
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, options, forward contracts and interest rate swaps and
caps, as a means of hedging exposure to interest rate 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, and options, and interest rate caps were not significant
at December 31, 1998 and 1997. Information concerning derivative financial
instruments is included in Note 4.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pre-tax
revenues based upon specific identification of the investments sold on the
trade date. Also included are gains and losses arising from the
remeasurement of the local currency value of foreign investments to U.S.
dollars, the functional currency of the Company.
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.
SEPARATE ACCOUNTS
The Company has separate account assets and liabilities representing funds
for which investment income and investment gains and losses accrue directly
to, and investment risk is borne by, the contractholders. Each of these
accounts have specific investment objectives. The assets and liabilities of
these accounts are carried at fair value, and amounts assessed to the
contractholders for management services are included in fee income.
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.
The Company also has a separate account for structured settlement annuity
obligations where the investment risk is borne by the Company. The assets
and liabilities of this separate account are included in investments,
future policy benefits and contractholder funds for financial reporting
purposes. See Note 6.
F-9
<PAGE> 30
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE
Costs of acquiring individual life insurance and annuity 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 are amortized in relation to
anticipated premiums; universal life in relation to estimated gross
profits; and annuity contracts employing a level yield method. A 15 to 20
year amortization period is used for life insurance, and a 7 to 20 year
period is employed for annuities. Deferred acquisition costs are reviewed
periodically for recoverability to determine if any adjustment is required.
Adjustments, if any, are charged to income.
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 annuity
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 an interest rate of 16% for the
annuity business acquired. The 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.
Adjustments, if any, are charged to income.
FUTURE POLICY BENEFITS
Benefit reserves represent liabilities for future insurance policy
benefits. Benefit reserves for life insurance and annuity policies have
been computed based upon mortality, morbidity, persistency and interest
assumptions applicable to these coverages, which range from 3.0% to 7.5%,
including a provision for adverse deviation. These assumptions consider
Company experience and industry standards. The assumptions vary by plan,
age at issue, year of issue and duration.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal
life, certain individual annuity contracts, and structured settlement
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 3.3% to 7.2%.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company, domiciled in the State of Connecticut, prepares statutory
financial statements in accordance with the accounting practices prescribed
or permitted by the State of Connecticut Insurance Department. Prescribed
statutory accounting practices include certain publications of the National
Association of Insurance Commissioners (NAIC) as well as state laws,
regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
The impact of any permitted accounting practices on the statutory surplus
of the Company is not material.
F-10
<PAGE> 31
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The NAIC recently completed a process intended to codify statutory
accounting practices for certain insurance enterprises. As a result of this
process, the NAIC will issue a revised statutory Accounting Practices and
Procedures Manual - version effective January 1, 2001 (the revised Manual)
that will be effective January 1, 2001 for the calendar year 2001 statutory
financial statements. It is expected that the State of Connecticut will
require that, effective January 1, 2001, insurance companies domiciled in
Connecticut prepare their statutory basis financial statements in
accordance with the revised Manual subject to any deviations prescribed or
permitted by the Connecticut insurance commissioner. The Company has not
yet determined the impact that this change will have on its statutory
capital and surplus.
PREMIUMS
Premiums are recognized as revenues when due. Reserves are established for
the portion of premiums that will be earned in future periods.
OTHER REVENUES
Other revenues include surrender, mortality and administrative charges, and
fees earned on investment and other insurance contracts.
FEDERAL INCOME TAXES
The provision for federal income taxes comprises 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 plans to implement SOP 97-3 in the first
quarter of 1999 and expects there to be no material impact on the Company's
financial condition, results of operations or liquidity.
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
balance sheet and measure those instruments at fair value.
F-11
<PAGE> 32
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 financial statements.
2. REINSURANCE
The Company participates in reinsurance in order to limit losses, minimize
exposure to large risks, provide capacity for future growth and to effect
business-sharing arrangements. The Company remains primarily liable as the
direct insurer on all risks reinsured.
Life insurance in force ceded to TIC at December 31, 1998 and 1997 was
$69.6 million and $76.4 million, respectively. Life insurance premiums
ceded were $4.2 million, $2.4 million and $1.3 million in 1998, 1997 and
1996, respectively. Life insurance premiums ceded to non-affiliates were
insignificant. Life insurance in force ceded to non-affiliates at December
31, 1998 and 1997, was $8.8 billion and $4.5 billion, respectively.
3. SHAREHOLDER'S EQUITY
Unrealized Investment Gains (Losses)
See Note 11 for an analysis of the change in unrealized gains and losses on
investments.
Shareholder's Equity and Dividend Availability
The Company's statutory net income (loss) was $(3.2) million, $80.3 million
and $17.9 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Statutory capital and surplus was $328.2 million at both December 31, 1998
and 1997.
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 $32.8 million is available in 1999 for dividend payments by the
Company without prior approval of the Connecticut Insurance Department.
F-12
<PAGE> 33
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
TAX EFFECTS ALLOCATED TO EACH COMPONENT OF
OTHER CHANGES IN EQUITY FROM NON-OWNER SOURCES
<TABLE>
<CAPTION>
For the years ended December 31, PRE-TAX AMOUNT TAX EXPENSE/ AFTER-TAX
($ in thousands) (BENEFIT) AMOUNT
---------------------------------------------------------------- --------------- ---------------- --------------
<S> <C> <C> <C>
1998
Unrealized gain on investment securities:
Unrealized holding gains arising during year $45,589 $15,957 $29,632
Less: reclassification adjustment for gains
realized in net income 18,493 6,473 12,020
---------------------------------------------------------------- --------------- ---------------- --------------
Other changes in equity from non-owner sources $27,096 $9,484 $17,612
================================================================ =============== ================ ==============
1997
Unrealized gain on investment securities:
Unrealized holding gains arising during year $100,903 $35,316 $65,587
Less: reclassification adjustment for gains
realized in net income 44,871 15,705 29,166
---------------------------------------------------------------- --------------- ---------------- --------------
Other changes in equity from non-owner sources $56,032 $19,611 $36,421
================================================================ =============== ================ ==============
1996
Unrealized gain (loss) on investment securities:
Unrealized holding gains (losses) arising during year $(11,881) $4,158 $(7,723)
Less: reclassification adjustment for losses realized
in net income (9,613) (3,364) (6,249)
---------------------------------------------------------------- --------------- ---------------- --------------
Other changes in equity from non-owner sources $(2,268) $794 $(1,474)
================================================================ =============== ================ ==============
</TABLE>
4. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures, 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 that it would cost the Company
to replace such contracts. Financial futures contracts and purchased listed
option contracts have little credit risk since organized exchanges are the
counterparties.
F-13
<PAGE> 34
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 and equity prices 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 and equity prices, the Company
enters long or short positions in financial futures contracts which offset
changes in the fair value of investments and liabilities resulting from
changes in market interest rates or equity prices until an investment is
purchased, a product is sold or a liability is settled.
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, 1998 and 1997, the Company held financial futures contracts
with notional amounts of $41.5 million and $156.3 million, respectively. At
December 31, 1998 and 1997, the Company's futures contracts had no fair
value because these contracts are marked to market and settled in cash
daily.
The Company enters into interest rate swaps in connection with other
financial instruments to provide greater risk diversification and better
match an asset with a corresponding liability. Under interest rate swaps,
the Company agrees with other parties to exchange, at specific intervals,
the difference between fixed-rate and floating-rate interest amounts
calculated by reference to a notional principal amount. Generally, no cash
is exchanged at the outset of the contract and no principal payments are
made by either party. A single net payment is usually made by one
counterparty at each due date. Swaps are not exchange traded and are
subject to the risk of default by the counterparty.
As of December 31, 1998 and 1997, the Company held interest rate swap
contracts with notional amounts of $165.3 million and $17.3 million,
respectively. The fair value of these financial instruments was $3.4
million (gain position) and $.7 million (loss position) at December 31,
1998 and was $.7 million (loss position) at December 31, 1997. The fair
values were determined using the discounted cash flow method.
The off-balance sheet risks of forward contracts were not significant at
December 31, 1998 and 1997.
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, 1998 and 1997.
F-14
<PAGE> 35
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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, 1998, investments in fixed maturities had a carrying value
and a fair value of $1.8 billion, compared with a carrying value and a fair
value of $1.7 billion at December 31, 1997. See Notes 1 and 11.
At December 31, 1998, mortgage loans had a carrying value of $174.6 million
and a fair value of $185.7 million and in 1997 had a carrying value of
$160.2 million and a fair value of $172.6 million. In estimating fair
value, the Company used interest rates reflecting the current real estate
financing market.
The carrying values of $36.5 million and $54.4 million of financial
instruments classified as other assets approximated their fair values at
December 31, 1998 and 1997, respectively. The carrying values of $98.4
million and $70.5 million of financial instruments classified as other
liabilities also approximated their fair values at December 31, 1998 and
1997, respectively. Fair value is determined using various methods,
including discounted cash flows, as appropriate for the various financial
instruments.
At December 31, 1998, contractholder funds with defined maturities had a
carrying value of $725.6 million and a fair value of $698.1 million,
compared with a carrying value of $694.9 million and a fair value of $695.9
million at December 31, 1997. 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 $483.0 million and a fair value of $442.5 million at December 31, 1998,
compared with a carrying value of $98.5 million and a fair value of $93.9
million at December 31, 1997. These contracts generally are valued at
surrender value.
The carrying values of short-term securities and policy loans approximated
their fair values.
5. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
See Note 4.
Litigation
The Company is a defendant in various litigation matters in the normal
course of business. Although there can be no assurances, as of December 31,
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.
F-15
<PAGE> 36
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
6. STRUCTURED SETTLEMENT CONTRACTS
The Company has structured settlement contracts that provide guarantees for
the contractholders independent of the investment performance of the assets
held in the related separate account. The assets held in the separate
account are owned by the Company and contractholders do not share in their
investment performance.
The Company maintains assets sufficient to fund the guaranteed benefits
attributable to the liabilities. Assets held in the separate account cannot
be used to satisfy any other obligations of the Company.
The Company reports the related assets and liabilities in investments,
future policy benefit reserves and contractholder funds.
These contracts were purchased by the insurance subsidiaries of Travelers
Property Casualty Corp. (TAP), an affiliate of the Company, in connection
with the settlement of certain of their policyholder obligations. Effective
April 1, 1998, all new contracts have been written by TIC.
7. BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by Citigroup. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by The Travelers Insurance Group Inc. (TIGI), TIC's direct
parent. The Company's share of net expense for the qualified pension and
other postretirement benefit plans was not significant for 1998, 1997 and
1996.
401(k) Savings Plan
Substantially all of the Company's employees are eligible to participate in
a 401(k) savings plan sponsored by Citigroup. 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 1998, 1997 and 1996.
F-16
<PAGE> 37
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
8. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and
expenses, for certain subsidiaries and affiliates of TIGI, including the
Company, are handled by two companies. TIC handles banking functions for
the life and annuity operations of Travelers Life & Annuity and some of its
non-insurance affiliates. The Travelers Indemnity Company handles banking
functions for the property-casualty operations, including most of its
property-casualty insurance and non-insurance affiliates. Settlements
between companies are made at least monthly. TIC provides various employee
benefit coverages to 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
provided by affiliated companies. Charges for these services are shared by
the companies on cost allocation methods based generally on estimated usage
by department.
TIC maintains a short-term investment pool in which the Company
participates. The position of each company participating in the pool is
calculated and adjusted daily. At December 31, 1998 and 1997, the pool
totaled approximately $2.3 billion and $2.6 billion, respectively. The
Company's share of the pool amounted to $93.1 million and $145.5 million at
December 31, 1998 and 1997, respectively, and is included in short-term
securities in the balance sheet.
The Company's TTM Modified Guaranteed Annuity Contracts are subject to a
limited guarantee agreement by TIC in a principal amount of up to $450
million. TIC's obligation is to pay in full to any owner or beneficiary of
the TTM Modified Guaranteed Annuity Contracts principal and interest as and
when due under the annuity contract to the extent that the Company fails to
make such payment. In addition, TIC guarantees that the Company will
maintain a minimum statutory capital and surplus level.
The Company sold structured settlement annuities to the insurance
affiliates of Travelers Property Casualty (TAP). Premiums and deposits were
$8.9 million, $70.6 million and $36.9 million for 1998, 1997 and 1996,
respectively. The reduction in premiums and deposits from 1997 to 1998 was
a result of a decision to use TIC as the primary issuer of structured
settlement annuities and the Company as the assignment company. Policy
reserves and contractholder fund liabilities associated with these
structured settlements were $808.7 and $842.3 million at December 31, 1998
and 1997, respectively.
The Company began marketing variable annuity products through its
affiliate, Salomon Smith Barney Inc. (SSB) in 1995. Premiums and deposits
related to these products were $932.1 million, $615.6 million and $300.0
million in 1998, 1997 and 1996, respectively. In 1996, the Company began
marketing various life products through SSB as well. Premiums related to
such products were $42.1 million, $25.1 million and $20.5 million in 1998,
1997 and 1996, respectively.
During 1998, the Company began marketing deferred annuity products through
its affiliate Primerica Financial Services (Primerica). Deposits received
were $216 million.
The Company participates in a stock option plan sponsored by Citigroup that
provides for the granting of stock options in Citigroup common stock to
officers and key employees. To further encourage employee stock ownership,
during 1997 the Company's ultimate parent introduced the WealthBuilder
stock option program. Under this program, all employees meeting certain
requirements are granted Citigroup stock options.
F-17
<PAGE> 38
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Most leasing functions for TIGI and its subsidiaries are handled by TAP.
Rent expense related to these leases are shared by the companies on a cost
allocation method based generally on estimated usage by department. The
Company's rent expense was insignificant in 1998, 1997 and 1996.
At December 31, 1998 and 1997, the Company had investments in Tribeca
Investments, L.L.C., an affiliate of the Company in the amounts of $18.3
million and $16.5 million, included in other invested assets.
9. FEDERAL INCOME TAXES ($ in thousands)
EFFECTIVE TAX RATE
<TABLE>
<CAPTION>
--------------------------------------------------------- ----------------- ---------------- -----------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
--------------------------------------------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
Income Before Federal Income Taxes $88,185 $109,575 $39,582
Statutory Tax Rate 35% 35% 35%
--------------------------------------------------------- ----------------- ---------------- -----------------
Expected Federal Income Taxes 30,865 38,351 13,854
Tax Effect of:
Non-taxable investment income (20) (24) (15)
Other, net (145) (124) (48)
--------------------------------------------------------- ----------------- ---------------- -----------------
Federal Income Taxes $30,700 $38,203 $13,791
========================================================= ================= ================ =================
Effective Tax Rate 35% 35% 35%
--------------------------------------------------------- ----------------- ---------------- -----------------
COMPOSITION OF FEDERAL INCOME TAXES 1998 1998 1996
---- ---- ----
Current:
United States $18,794 $33,805 $29,435
Foreign 123 54 21
--------------------------------------------------------- ----------------- ---------------- -----------------
Total 18,917 33,859 29,456
--------------------------------------------------------- ----------------- ---------------- -----------------
Deferred:
United States 11,783 4,344 (15,665)
--------------------------------------------------------- ----------------- ---------------- -----------------
Federal Income Taxes $30,700 $38,203 $13,791
========================================================= ================= ================ =================
</TABLE>
F-18
<PAGE> 39
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax assets at December 31, 1998 and 1997 were comprised of
the tax effects of temporary differences related to the following assets
and liabilities:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997
---- ----
--------------------------------------------------------------------- ---------------- --------------
<S> <C> <C>
Deferred Tax Assets:
Benefit, reinsurance and other reserves $121,150 $100,969
Other 2,810 2,571
--------------------------------------------------------------------- ---------------- --------------
Total 123,960 103,540
--------------------------------------------------------------------- ---------------- --------------
Deferred Tax Liabilities:
Investments, net 56,103 42,933
Deferred acquisition costs and value of insurance in force 51,993 23,650
Other 1,399 1,226
--------------------------------------------------------------------- ---------------- --------------
Total 109,495 67,809
--------------------------------------------------------------------- ---------------- --------------
Net Deferred Tax Asset Before Valuation Allowance 14,465 35,731
Valuation Allowance for Deferred Tax Assets (2,070) (2,070)
--------------------------------------------------------------------- ---------------- --------------
Net Deferred Tax Asset After Valuation Allowance $12,395 $33,661
--------------------------------------------------------------------- ---------------- --------------
</TABLE>
TIC and its life insurance subsidiaries, including the Company, has filed,
and will file, a consolidated federal income tax return. Federal income
taxes are allocated to each member on a separate return basis adjusted for
credits and other amounts required by the consolidation process. Any
resulting liability has been, and will be, paid currently to TIC. Any
credits for losses have been, and will be, paid by TIC to the extent that
such credits are for tax benefits that have been utilized in the
consolidated federal income tax return.
The $2.1 million valuation allowance is sufficient to cover any capital
losses on investments that may exceed the capital gains able to be
generated in the life insurance group's consolidated federal income tax
return based upon management's best estimate of the character of the
reversing temporary differences. Reversal of the valuation allowance is
contingent upon the recognition of future capital gains or a change in
circumstances that causes the recognition of the benefits to become more
likely than not. There was no change in the valuation allowance during
1998. The initial recognition of any benefit provided by the reversal of
the valuation allowance will be recognized by reducing goodwill.
F-19
<PAGE> 40
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
In management's judgment, the $12.4 million "net deferred tax asset after
valuation allowance" as of December 31, 1998, is fully recoverable against
expected future years' taxable ordinary income and capital gains. At
December 31, 1998, the Company has no ordinary or capital loss
carryforwards.
The policyholders surplus account, which arose under prior tax law, is
generally that portion of the gain from operations that has not been
subjected to tax, plus certain deductions. The balance of this account is
approximately $2 million. Income taxes are not provided for on this amount
because under current U.S. tax rules such taxes will become payable only to
the extent such amounts are distributed as a dividend to exceed limits
prescribed by federal law. Distributions are not contemplated from this
account. At current rates the maximum amount of such tax would be
approximately $700 thousand.
10. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
-------------------------------------------------------------- --------------- --------------- --------------
FOR THE YEAR ENDED DECEMBER 31,
($ in thousands) 1998 1997 1996
-------------------------------------------------------------- --------------- --------------- --------------
<S> <C> <C> <C>
GROSS INVESTMENT INCOME
Fixed maturities $130,825 $120,900 $113,296
Joint venture and partnership income 22,107 32,336 19,775
Mortgage loans 15,969 14,905 18,278
Other 3,322 2,284 4,113
-------------------------------------------------------------- --------------- --------------- --------------
172,223 170,425 155,462
-------------------------------------------------------------- --------------- --------------- --------------
Investment expenses 1,220 1,772 4,136
-------------------------------------------------------------- --------------- --------------- --------------
Net investment income $171,003 $168,653 $151,326
-------------------------------------------------------------- --------------- --------------- --------------
</TABLE>
11. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------- --------------- --------------- ---------------
FOR THE YEAR ENDED DECEMBER 31,
($ in thousands) 1998 1997 1996
---------------------------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
REALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $15,620 $29,236 $(11,491)
Equity securities 1,819 8,385 4,613
Mortgage loans 623 (8) 1,979
Real estate held for sale - 2,164 (73)
Other 431 5,094 (4,641)
---------------------------------------------------------------- --------------- --------------- ---------------
Total Realized Investment Gains (Losses) $18,493 $44,871 $(9,613)
---------------------------------------------------------------- --------------- --------------- ---------------
</TABLE>
F-20
<PAGE> 41
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Changes in net unrealized investment gains (losses) that are included as
accumulated other changes in equity from non-owner sources in shareholder's
equity were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------- --------------- --------------- ---------------
FOR THE YEAR ENDED DECEMBER 31,
($ in thousands) 1998 1997 1996
---------------------------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
UNREALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $24,336 $34,451 $(23,953)
Equity securities (338) (2,394) (746)
Other 3,098 23,975 22,431
---------------------------------------------------------------- --------------- --------------- ---------------
Total Unrealized Investment Gains (Losses) 27,096 56,032 (2,268)
Related taxes 9,484 19,611 (794)
---------------------------------------------------------------- --------------- --------------- ---------------
Change in unrealized investment gains (losses) 17,612 36,421 (1,474)
Balance beginning of year 70,277 33,856 35,330
---------------------------------------------------------------- --------------- --------------- ---------------
Balance End of Year $87,889 $70,277 $33,856
---------------------------------------------------------------- --------------- --------------- ---------------
</TABLE>
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale
were $1.1 billion, $.9 billion and $1.0 billion in 1998, 1997 and 1996,
respectively. Gross gains of $32.6 million, $38.1 million and $8.4 million
and gross losses of $17.0 million, $8.9 million and $19.9 million in 1998,
1997 and 1996, 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 $427.0
million and $485.3 million at December 31, 1998 and 1997, respectively.
F-21
<PAGE> 42
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair values of investments in fixed maturities were
as follows:
<TABLE>
<CAPTION>
------------------------------------------------- ---------------- --------------- ---------------- ---------------
DECEMBER 31, 1998 GROSS GROSS
($ in thousands) AMORTIZED COST UNREALIZED UNREALIZED FAIR
GAINS LOSSES VALUE
------------------------------------------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $220,105 $ 11,571 $(193) $231,483
U.S. Treasury securities and obligations
of U.S. Government and government agencies
and authorities 289,376 53,782 (274) 342,884
Obligations of states and political
subdivisions 28,749 994 (17) 29,726
Debt securities issued by foreign
governments 40,786 2,966 (375) 43,377
All other corporate bonds 1,124,298 75,870 (13,000) 1,187,168
Redeemable preferred stock 4,033 119 (109) 4,043
------------------------------------------------- ---------------- --------------- ---------------- ---------------
Total Available For Sale $1,707,347 $145,302 $(13,968) $1,838,681
------------------------------------------------- ---------------- --------------- ---------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 GROSS GROSS
($ in thousands) AMORTIZED COST UNREALIZED UNREALIZED FAIR
GAINS LOSSES VALUE
------------------------------------------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $144,921 $ 8,254 $(223) $152,952
U.S. Treasury securities and obligations
of U.S. Government and government agencies
and authorities 248,081 34,111 (123) 282,069
Obligations of states and political
subdivisions 14,560 392 (2) 14,950
Debt securities issued by foreign
governments 85,367 6,194 (228) 91,333
All other corporate bonds 1,077,211 59,972 (1,387) 1,135,796
Redeemable preferred stock 981 48 (9) 1,020
------------------------------------------------- ---------------- --------------- ---------------- ---------------
Total Available For Sale $1,571,121 $108,971 $(1,972) $1,678,120
------------------------------------------------- ---------------- --------------- ---------------- ---------------
</TABLE>
The amortized cost and fair value of fixed maturities available for sale at
December 31, 1998, by contractual maturity, are shown below. Actual
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
F-22
<PAGE> 43
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
----------------------------------------------------- ------------------ ------------------
($ in thousands) AMORTIZED FAIR
COST VALUE
----------------------------------------------------- ------------------ ------------------
<S> <C> <C>
MATURITY:
Due in one year or less $ 21,149 $ 21,655
Due after 1 year through 5 years 249,251 256,032
Due after 5 years through 10 years 356,358 379,061
Due after 10 years 860,484 950,450
----------------------------------------------------- ------------------ ------------------
1,487,242 1,607,198
----------------------------------------------------- ------------------ ------------------
Mortgage-backed securities 220,105 231,483
----------------------------------------------------- ------------------ ------------------
Total Maturity $1,707,347 $1,838,681
----------------------------------------------------- ------------------ ------------------
</TABLE>
The Company makes significant 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, 1998 and 1997, the Company held CMOs with a market value of
$181.6 million and $122.8 million, respectively. The Company's CMO holdings
were 62.9% and 97.5% collateralized by GNMA, FNMA or FHLMC securities at
December 31, 1998 and 1997, respectively.
Equity Securities
The cost and market values of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
--------------------------------------------- ----------- ---------------------- ---------------------- -----------
EQUITY SECURITIES: GROSS UNREALIZED GROSS UNREALIZED FAIR VALUE
($ in thousands) COST GAINS LOSSES
--------------------------------------------- ----------- ---------------------- ---------------------- -----------
<S> <C> <C> <C>
DECEMBER 31, 1998
Common stocks $ 5,185 $889 $(292) $5,782
Non-redeemable preferred stocks 20,641 707 (445) 20,903
--------------------------------------------- ----------- ---------------------- ---------------------- -----------
Total Equity Securities $25,826 $1,596 $(737) $26,685
--------------------------------------------- ----------- ---------------------- ---------------------- -----------
DECEMBER 31, 1997
Common stocks $3,318 $ 583 $(70) $3,831
Non-redeemable preferred stocks 11,774 931 (247) 12,458
--------------------------------------------- ----------- ---------------------- ---------------------- -----------
Total Equity Securities $15,092 $1,514 $(317) $16,289
--------------------------------------------- ----------- ---------------------- ---------------------- -----------
</TABLE>
F-23
<PAGE> 44
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Proceeds from sales of equity securities were $6.0 million, $12.4 million
and $12.8 million in 1998, 1997 and 1996, respectively. Gross gains of $2.6
million, $8.6 million and $4.7 million and gross losses of $815 thousand,
$172 thousand and $155 thousand in 1998, 1997 and 1996, respectively were
realized on those sales.
Mortgage Loans
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure and loans modified at interest rates below market.
At December 31, 1998 and 1997, the Company's mortgage loan portfolios
consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------- ------------- --------------
($ in thousands) 1998 1997
- ----------------------------------------------------- ------------- --------------
<S> <C> <C>
Current Mortgage Loans $170,635 $160,247
Underperforming Mortgage Loans 3,930 -
- ----------------------------------------------------- ------------- --------------
Total 174,565 160,247
- ----------------------------------------------------- ------------- --------------
</TABLE>
Aggregate annual maturities on mortgage loans at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------- -------
($ in thousands)
<S> <C>
Past Maturity $ 129
1999 11,649
2000 11,309
2001 8,697
2002 16,272
2003 4,998
Thereafter 121,511
- ----------------------------------------------------- -------
Total 174,565
===================================================== =======
</TABLE>
Joint Venture
In October 1997, TIC 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. TIC 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. The Company's investment in the joint venture,
which is included in other invested assets, totaled $62.4 million and $54.8
million at December 31, 1998 and 1997, respectively.
F-24
<PAGE> 45
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Concentrations
The Company's significant individual investment concentrations included
$53.3 million and $32.7 million in Bellsouth Corp. at December 31, 1998 and
1997, respectively. In addition, there was an investment of $50.8 million
in the State of Israel in 1997.
The Company participates in a short-term investment pool maintained by an
affiliate. See Note 8.
Included in fixed maturities are below investment grade assets totaling
$102.4 million and $76.7 million at December 31, 1998 and 1997,
respectively. The Company defines its below investment grade assets as
those securities rated "Ba1" or below by external rating agencies, or the
equivalent by internal analysts when a public rating does not exist. Such
assets include publicly traded below investment grade bonds and certain
other privately issued bonds that are classified as below investment grade
bonds.
The Company's three largest industry concentrations of investments,
primarily fixed maturities, were as follows:
<TABLE>
<CAPTION>
-------------------------------------------- ----------- -----------
($ in thousands) 1998 1997
-------------------------------------------- ----------- -----------
<S> <C> <C>
Banking $160,713 $130,966
Transportation 155,116 138,903
Electric utilities 109,027 106,724
-------------------------------------------- ----------- -----------
</TABLE>
Below investment grade assets included in the preceding table were not
significant.
Concentrations of mortgage loans by property type at December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
-------------------------------------------- ----------- -----------
($ in thousands) 1998 1997
-------------------------------------------- ----------- -----------
<S> <C> <C>
Agricultural $78,579 $62,463
Office 51,813 47,453
-------------------------------------------- ----------- -----------
</TABLE>
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
There were no investments included in the balance sheets that were
non-income producing for the preceding 12 months.
F-25
<PAGE> 46
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Restructured Investments
Mortgage loan and debt securities which were restructured at below market
terms at December 31, 1998 and 1997 were insignificant. The new terms of
restructured investments 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 assets was
insignificant. Interest on these assets, included in net investment income,
was insignificant.
12. LIFE AND ANNUITY DEPOSIT FUNDS AND RESERVES
At December 31, 1998, the Company had $1.9 billion of life and annuity
deposit funds and reserves. Of that total, $1.5 billion were not subject to
discretionary withdrawal based on contract terms. The remaining $.4 billion
were life and annuity products that were subject to discretionary
withdrawal by the contractholders. Included in the amount that is subject
to discretionary withdrawal were $.2 billion of liabilities that are
surrenderable with market value adjustments. An additional $.2 billion of
life insurance and individual annuity liabilities are subject to
discretionary withdrawals with an average surrender charge of 4.6%. The
life insurance risks would have to be underwritten again if transferred to
another carrier, which is considered a significant deterrent for long-term
policyholders. Insurance liabilities that are surrendered or withdrawn from
the Company are reduced by outstanding policy loans and related accrued
interest prior to payout.
13. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES
The following table reconciles net income to net cash provided by (used in)
operating activities:
<TABLE>
<CAPTION>
------------------------------------------------------------------ ------------- ------------- -------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
($ in thousands)
------------------------------------------------------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Net Income From Continuing Operations $57,485 $71,372 $ 25,791
Adjustments to reconcile net income to cash provided by
operating activities:
Realized (gains) losses (18,493) (44,871) 9,613
Deferred federal income taxes 11,783 4,344 (15,665)
Amortization of deferred policy acquisition costs and
value of insurance in force 17,031 6,036 3,286
Additions to deferred policy acquisition costs (120,278) (56,975) (20,753)
Investment income accrued (3,821) 908 1,308
Premium balances receivable (6,786) (3,450) (3,561)
Insurance reserves and accrued expenses (8,431) 3,981 (16,459)
Other (3,881) 26,673 (13,419)
------------------------------------------------------------------ ------------- ------------- -------------
Net cash provided by (used in) operations $(75,391) $8,018 $(29,859)
------------------------------------------------------------------ ------------- ------------- -------------
</TABLE>
14. NON-CASH INVESTING AND FINANCING ACTIVITIES
There were no significant non-cash investing and financing activities for
1998, 1997 and 1996.
F-26
<PAGE> 47
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
RULE 484 UNDERTAKING
Sections 33-770 et seq, inclusive of the Connecticut General Statutes ("C.G.S.")
regarding indemnification of directors and officers of Connecticut corporations
provides in general that Connecticut corporations shall indemnify their
officers, directors and certain other defined individuals against judgments,
fines, penalties, amounts paid in settlement and reasonable expenses actually
incurred in connection with proceedings against the corporation. The
corporation's obligation to provide such indemnification generally does not
apply unless (1) the individual is wholly successful on the merits in the
defense of any such proceeding; or (2) a determination is made (by persons
specified in the statute) that the individual acted in good faith and in the
best interests of the corporation and in all other cases, his conduct was at
least not opposed to the best interests of the corporation, and in a criminal
case he had no reasonable cause to believe his conduct was unlawful; or (3) the
court, upon application by the individual, determines in view of all of the
circumstances that such person is fairly and reasonably entitled to be
indemnified, and then for such amount as the court shall determine. With respect
to proceedings brought by or in the right of the corporation, the statute
provides that the corporation shall indemnify its officers, directors and
certain other defined individuals, against reasonable expenses actually incurred
by them in connection with such proceedings, subject to certain limitations.
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.
<PAGE> 48
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:
- - The facing sheet.
- - The Prospectus, as incorporated herein by reference.
- - The undertaking to file reports.
- - The signatures.
ATTACHMENTS:
A. Consent of Katherine M. Sullivan, General Counsel, to the filing of her
opinion as an exhibit to this Registration Statement and to the
reference to her opinion under the caption "Legal Proceedings and
Opinion" in the Prospectus. (See Exhibit 11 below.)
B. Consent and Actuarial Opinion pertaining to the illustrations contained
in the Prospectus.
C. Consent of KPMG LLP, Independent Certified Public Accountants.
D. Powers of Attorney. (See Exhibit 12 below.)
EXHIBITS:
1. Resolution of the Board of Directors of The Travelers Life and Annuity
Company authorizing the establishment of the Registrant. (Incorporated
herein by reference to Exhibit 1 to Registration Statement on Form S-6
filed November 2, 1995.)
2. Not applicable.
3(a). Distribution and Principal Underwriting Agreement among the Registrant,
The Travelers Life and Annuity Company and CFBDS, Inc.) (Incorporated
herein by reference to Exhibit 3(a) to the Registration Statement on
Form N-4, File No. 333-60215, filed November 9, 1998.)
3(b). Specimen Form of Selling Agreement. (Incorporated herein by reference
to Exhibit 3(b) to the Registration Statement on Form N-4, File No.
333-60215, filed November 9, 1998.)
3(c). Agents Agreement, including schedule of sales commissions.
4. None
5. Form of Variable Life Insurance Policy. (Incorporated herein by
reference to Exhibit 5 to Post-Effective Amendment No. 3 to the
Registration Statement on Form S-6, File No. 333-69773, filed December
28, 1998.)
<PAGE> 49
6(a). Charter of The Travelers Life and Annuity Company, as amended on April
10, 1990. (Incorporated herein by reference to Exhibit 6(a) to the
Registration Statement on Form N-4, File No. 333-40191, filed November
13, 1997.)
6(b). By-Laws of The Travelers Life and Annuity Company, as amended on
October 20, 1994. (Incorporated herein by reference to Exhibit 6(b) to
the Registration Statement on Form N-4, File No. 333-40191, filed
November 13, 1997.)
7. None
8. None
9. None
10. Application for Variable Life Insurance Policy. To be filed by
amendment.
11. Opinion of Counsel regarding the legality of securities being
registered. (Incorporated herein by reference to Exhibit 11 to
Post-Effective Amendment No. 3 to the Registration Statement on Form
S-6, File No. 333-69771, filed December 28, 1998.)
12(a). Powers of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as
signatory for Michael A. Carpenter, Jay S. Benet, George C. Kokulis,
Robert I. Lipp, Ian R. Stuart, Katherine M. Sullivan and Marc P. Weill.
(Incorporated herein by reference to Exhibits 12 and 12(b) to the
Registration Statement and Post-Effective Amendment No. 1 on Form S-6
filed November 2, 1995 and April 25, 1997.)
12(b). Power of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as
signatory for J. Eric Daniels. (Incorporated herein by reference to
Exhibit 12(b) to Post-Effective Amendment No. 3 to the Registration
Statement on Form S-6, File No. 333-69771, filed December 28, 1998.)
12(e). Power of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as
signatory for Jay S. Benet.)
<PAGE> 50
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant, The
Travelers Fund UL II 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, state of Connecticut, on the 12th day
of April 1999.
THE TRAVELERS FUND UL II FOR VARIABLE LIFE INSURANCE
(Registrant)
THE TRAVELERS LIFE AND ANNUITY COMPANY
(Depositor)
By: *JAY S. BENET
--------------------------------------------------
Jay S. Benet
Senior Vice President, Chief Financial Officer
Chief Accounting Officer and Controller
The Travelers Life and Annuity Company
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 12th day of April 1999.
<TABLE>
<CAPTION>
<S> <C>
*MICHAEL A. CARPENTER Director, Chairman of the Board, President
- ----------------------------- and Chief Executive Officer
(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
- -----------------------------
(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
- -----------------------------
(Marc P. Weill)
*By: ERNEST J. WRIGHT
----------------
Ernest J. Wright,
Attorney-in-Fact
</TABLE>
