<PAGE> 1
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1996
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER , 1996
THE TRAVELERS INSURANCE COMPANY
PROSPECTUS:
THE TRAVELERS SEPARATE ACCOUNT QP FOR VARIABLE ANNUITIES
The group variable annuity contracts (the "Contracts") described in this
prospectus are designed to fund plans ("Plans") established under certain
sections of the Internal Revenue Code of 1986 (the "Code").
The Contracts are designed for use in conjunction with qualified pension and
profit-sharing plans, tax deferred annuity plans (for public school teachers and
employees of certain other tax exempt and qualifying employers), and deferred
compensation plans for state and local governments. These Plans also allow for
Third Party Administrator involvement. Amounts held under the Plans may be
entitled to tax-deferred treatment under certain sections of the Code.
The Funding Options available under the Contracts are listed below. They may not
all be available under an employer's plan or in all states. This prospectus is
not valid without the current prospectuses for these Funding Options. A Fixed
Account Option is also available and is described in a separate propectus.
Unless specified otherwise, this prospectus refers to the Funding Options.
<TABLE>
<S> <C>
Managed Assets Trust Variable Insurance Products Fund II
High Yield Bond Trust Fidelity's Asset Manager Portfolio
Capital Appreciation Fund American Odyssey Funds, Inc.
Dreyfus Stock Index Fund, Inc. American Odyssey Core Equity Fund
Travelers Series Trust American Odyssey Emerging Opportunities Fund
U.S. Government Securities Portfolio American Odyssey International Equity Fund
Utilities Portfolio American Odyssey Long-Term Bond Fund
Social Awareness Stock Portfolio American Odyssey Intermediate-Term Bond Fund
Templeton Variable Products Series Fund American Odyssey Short-Term Bond Fund
Templeton Bond Fund The Travelers Series Fund, Inc.
Templeton Stock Fund Smith Barney Income and Growth Portfolio
Templeton Asset Allocation Fund Alliance Growth Portfolio
Variable Insurance Products Fund Smith Barney International Equity Portfolio
Fidelity's High Income Portfolio Putnam Diversified Income Portfolio
Fidelity's Growth Portfolio Smith Barney High Income Portfolio
Fidelity's Equity Income Portfolio MFS Total Return Portfolio
Smith Barney Money Market Portfolio
</TABLE>
This prospectus sets forth the information concerning the Separate Account that
investors ought to know before investing. Additional information about the
Separate Account has been filed with the Securities and Exchange Commission and
is available without charge upon request. To obtain the Statement of Additional
Information ("SAI") send a written request to The Travelers Insurance Company,
Attn: Annuity Services, One Tower Square, Hartford, CT 06183-5030. The Table of
Contents for the SAI dated September , 1996 may be found on page 33 of this
prospectus. The SAI is incorporated by reference to this prospectus. For more
information about the Contract, contact your registered representative, or write
to us at the above address.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THE SMITH BARNEY MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR
THE FUNDING OPTIONS. THE PROSPECTUSES FOR THE SEPARATE ACCOUNT AND THE FUNDING
OPTIONS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
VARIABLE ANNUITY CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY ANY BANK, NOR ARE THEY FEDERALLY INSURED OR OTHERWISE PROTECTED BY
THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY; THEY ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTMENT.
PROSPECTUS DATED: SEPTEMBER 3, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
GLOSSARY OF SPECIAL TERMS.............................................................. 4
SUMMARY................................................................................ 6
FEE TABLE.............................................................................. 8
INTRODUCTION........................................................................... 13
THE CONTRACTS.......................................................................... 13
General.............................................................................. 13
Allocated Contracts.................................................................. 13
Unallocated Contracts................................................................ 13
Right to Return...................................................................... 13
OPERATION OF THE CONTRACT.............................................................. 14
Crediting Purchase Payments.......................................................... 14
Transfers of Cash Value Between Funding Options...................................... 14
Dollar Cost Averaging................................................................ 14
Asset Allocation Advice.............................................................. 14
Transfers from Funding Options to Contracts Not Issued by Us......................... 15
Transfers to or from Other Contracts Issued by Us.................................... 15
Transfers from Contracts Not Issued by Us............................................ 15
Contract and Participant's Individual Account Termination............................ 15
Account Value........................................................................ 16
Accumulation Unit Value.............................................................. 16
PAYMENT OF BENEFITS.................................................................... 16
Death Benefits under an Allocated Contract........................................... 16
Election of Settlement Options....................................................... 17
Minimum Amounts...................................................................... 17
Misstatement......................................................................... 17
Retired Life Certificate............................................................. 17
Allocation of Cash Value During the Annuity Period................................... 18
Annuity Options...................................................................... 18
Variable Annuity..................................................................... 18
Amount of First Payment........................................................... 18
Annuity Unit Value................................................................ 18
Initial Payment and Number of Annuity Units....................................... 19
Amount of Subsequent Payments..................................................... 19
Fixed Annuity........................................................................ 19
CHARGES UNDER THE CONTRACT............................................................. 19
Sales Loads.......................................................................... 19
Free Withdrawal Allowance......................................................... 20
Mortality and Expense Risk Charge.................................................... 20
Funding Option Charges............................................................... 21
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
Administrative Charges............................................................... 21
Semiannual Policy Fee............................................................. 21
Administrative Expense............................................................ 21
Premium Tax Deductions............................................................... 21
TPA Administrative Charges........................................................... 22
THE COMPANY, THE SEPARATE ACCOUNT AND THE FUNDING OPTIONS.............................. 22
The Company.......................................................................... 22
The Separate Account................................................................. 22
The Funding Options.................................................................. 23
Investment Advisers............................................................... 26
FEDERAL TAX CONSIDERATIONS............................................................. 27
General.............................................................................. 27
Ownership of the Investments......................................................... 27
Section 403(b) Plans and Arrangements................................................ 28
Qualified Pension and Profit-Sharing Plans........................................... 28
Section 457 Plans.................................................................... 29
The Employee Retirement Income Security Act of 1974.................................. 29
Federal Income Tax Withholding....................................................... 29
Tax Advice........................................................................... 30
MISCELLANEOUS.......................................................................... 31
Voting Rights........................................................................ 31
Distribution of the Contracts........................................................ 31
Postponement of Payment (Emergency Procedure)........................................ 32
Contract Modification................................................................ 32
Legal Proceedings.................................................................... 32
APPENDIX A: TABLE OF CONTENTS TO STATEMENT OF ADDITIONAL INFORMATION................... 33
</TABLE>
3
<PAGE> 4
GLOSSARY OF SPECIAL TERMS
- --------------------------------------------------------------------------------
ACCUMULATION PERIOD: The period before the commencement of Annuity payments.
ACCUMULATION UNIT: An accounting unit of measure used to calculate values before
Annuity payments begin.
ANNUITANT: A Person on whose life the Annuity payments are to be made under a
Contract.
ANNUITY: Payment of income for a stated period or amount.
ANNUITY COMMENCEMENT DATE: The date on which Annuity payments are to begin.
ANNUITY PERIOD: The period following the commencement of Annuity payments.
BENEFICIARY(IES): The person(s) or trustee designated to receive contract values
in the event of the Participant's or Annuitant's death.
CASH SURRENDER VALUE: The Cash Value less any amounts deducted upon surrender
and any applicable premium tax.
CASH VALUE: The value of the Accumulation Units in Your Account or a
Participant's Individual Account less any reductions for administrative charges.
Sometimes referred to as "Account Value."
CODE: The Internal Revenue Code of 1986, as amended.
COMMISSION: Securities and Exchange Commission.
COMPANY (WE, US, OUR): The Travelers Insurance Company.
COMPETING FUND: Any investment option under the Plan, which in our opinion,
consists primarily of fixed income securities and/or money market instruments.
CONTRACT DATE: The date on which the Contract becomes effective, as shown on the
Contract.
CONTRACT OWNER (YOU, YOUR): The employer or entity owning the Contract.
CONTRACT YEAR: The twelve month period commencing with the Contract Date or with
any anniversary thereof.
DUE PROOF OF DEATH: (i) a copy of a certified death certificate; (ii) a copy of
a certified decree of a court of competent jurisdiction as to the finding of
death; (iii) a written statement by a medical doctor who attended the deceased;
or (iv) any other proof satisfactory to us.
EXCESS PLAN CONTRIBUTIONS: Plan contributions including excess deferrals, excess
contributions, excess aggregate contributions, excess annual additions, and
excess nondeductible contributions that require correction by the Qualified
Plan.
FIXED ANNUITY: An Annuity with payments which remain fixed as to dollar amount
throughout the payment period and which do not vary with the investment
experience of a Separate Account.
FUNDING OPTIONS: The variable investment options to which Purchase Payments
under the Contract may be allocated.
GENERAL ACCOUNT: The Company's General Account in which amounts are held if
directed to the Fixed Account during the Accumulation Period and in which
reserves are maintained for Fixed Annuities during the Annuity Period.
HOME OFFICE: The Travelers Insurance Company, One Tower Square, Hartford, CT
06183
PARTICIPANT: An eligible person who is a member in the Qualified Plan.
PARTICIPANT'S INDIVIDUAL ACCOUNT: An account to which Accumulation Units are
credited to a Participant or Beneficiary under the Contract.
4
<PAGE> 5
PURCHASE PAYMENTS: Payments made to the Contract.
QUALIFIED PLAN: An employer's voluntary retirement plan which qualifies for
special tax treatment under a particular section of the Internal Revenue Code.
SEPARATE ACCOUNT: The Travelers Separate Account QP for Variable Annuities.
THIRD PARTY ADMINISTRATOR ("TPA"): An entity which has contracted with the
Contract Owner to provide administrative and/or distribution services for the
Plan.
VALUATION DATE: A day on which the New York Stock Exchange is open for business.
The value of the Separate Account is determined at the close of the New York
Stock Exchange on such days.
VALUATION PERIOD: The period between the end of one Valuation Date and the end
of the next Valuation Date.
VARIABLE ANNUITY: An Annuity providing for payments varying in amount in
accordance with the investment experience of the assets held in the underlying
securities of the Separate Account.
WRITTEN REQUEST: A written form satisfactory to us and received at the Home
Office.
YOUR ACCOUNT: Accumulation Units credited to you under this Contract.
5
<PAGE> 6
SUMMARY
- --------------------------------------------------------------------------------
CONTRACTS OFFERED
The Contracts are designed for use in conjunction with qualified pension or
profit-sharing plans, tax deferred annuity plans (for public school teachers and
employees and employees of certain other tax exempt and qualifying employers)
and deferred compensation plans for state and local governments. The minimum
Purchase Payment allowed is an average of $1,000 annually, per Participant's
Individual Account or $10,000 annually per Contract.
Because of the size of these Contracts, the possible involvement of TPAs, the
allocated or unallocated nature of the Contract and a competitive bidding
process which may include negotiation, many of the charges imposed in the
Contract are likely to vary from one Contract to the next. The Contract design
allows the Company maximum flexibility, within the limitations imposed by law,
to "custom design" a charge structure which is likely to be acceptable to a
particular prospective Contract Owner.
RIGHT TO RETURN
For Contracts in used with deferred compensation plans, tax-deferred annuity
plans, and combined qualified plan/deferred annuity plans, you may return the
Contract and receive a full refund of the Cash Value (including charges) within
ten days after the Contract is delivered to you, unless state law requires a
longer period. (See "Right to Return," page 13.)
ASSET ALLOCATION
Some Contract Owners and/or Participants may elect to enter into an asset
allocation investment advisory agreement which is fully described, including
associated fees, in a separate disclosure statement. (See "Asset Allocation
Advice" on page 14.)
DEATH BENEFITS
A death benefit is provided in the event of death of the Participant under a
Participant's Individual Account prior to the earlier of the Participant's 75th
birthday or the Annuity Commencement Date. (See "Death Benefits under an
Allocated Contract" on page 16.)
ANNUITY OPTIONS
The Contract Owner selects an Annuity Commencement Date and an Annuity Option
for a Participant as provided by the Plan. The Contract contains six optional
annuity forms, which may be selected on either a fixed or variable annuity
basis, or a combination thereof. (See "Payment of Benefits" on page 16.)
CHARGES AND FEES
Maximum levels for sales-related expenses, mortality and expense risk charges
and administrative expense charges are set forth in this prospectus. These
charges, as well as allocation and transfer fees are subject to negotiation or a
competitive bidding process, or both, with the prospective Contract Owner prior
to the issuance of a Contract.
The Company will charge a surrender charge or a contingent deferred sales
charge, as negotiated. The maximum contingent deferred sales charge is 5.0% of
each Purchase Payment for a period of five years from the date the Purchase
Payment was made. The maximum surrender charge is 5% of the amount surrendered
in the first two Contract Years, up to 4% in years three and four; up to 3% in
years five and six; up to 2% in years seven and eight and 0% beginning in the
ninth year. Any applicable sales charge will not exceed 8.5% of the aggregate
amount of the Purchase Payments made.
6
<PAGE> 7
The Company will make a daily charge against the value of the Contract held in
the Separate Account for the Mortality and Expense Risk Charge. The maximum rate
is 1.20% annually. (See "Mortality and Expense Risk Charge" on page 20.)
The Company may also charge a fee of .10% for administrative expenses under the
Contract as well as a Semiannual Policy Fee (for allocated Contracts) of $15.
Deductions for the payment of any premium taxes that may be levied against the
Contract will be made as appropriate. (See "Charges Under the Contract" on page
19.)
7
<PAGE> 8
FEE TABLE
- --------------------------------------------------------------------------------
The purpose of this Fee Table is to assist Contract Owners in understanding the
various maximum costs and expenses that Contract Owners or Participants will
bear, directly or indirectly, under the Contract. The information listed
reflects expenses of the Separate Account as well as of the Funding Options. For
additional information regarding the charges and deductions assessed under the
Contract, including possible waivers or reductions of these expenses, see
"Charges Under the Contract," page 19. Expenses shown do not include premium
taxes, which may be applicable.
MAXIMUM CONTRACT OWNER TRANSACTION CHARGES
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
YEARS SINCE
PURCHASE PAYMENT
CONTINGENT DEFERRED SALES CHARGE MADE PERCENTAGE
----------------------------------------------------------------------------------
<S> <C> <C>
As a percentage of purchase payments 0-5 5%
6+ 0%
OR
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
SURRENDER CHARGE CONTRACT YEAR PERCENTAGE
----------------------------------------------------------------------------------
<S> <C> <C>
As a percentage of amount surrendered 1-2 5%
3-4 6%
5-6 3%
7-8 2%
9+ 0%
</TABLE>
MAXIMUM CONTRACT ADMINISTRATIVE CHARGE: ALLOCATED CONTRACTS ONLY
<TABLE>
<S> <C>
Semiannual Contract Administrative Charge $ 15
AND/OR
Funding Option Administrative Charge .10%
(As a percentage of amounts allocated to the variable funding
options under allocated contracts)
</TABLE>
MAXIMUM SEPARATE ACCOUNT ANNUAL EXPENSES
<TABLE>
<S> <C>
Mortality and Expense Risk Fees 1.20%
</TABLE>
(As a percentage of average daily net assets of the Separate Account)
8
<PAGE> 9
FUNDING OPTION EXPENSES
(as a percentage of average net assets of the Funding Option)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
TOTAL
MANAGEMENT FUNDING OPTION
FEE EXPENSES
OTHER
EXPENSES
(AFTER REIMBURSEMENT)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Appreciation Fund 0.75% 0.10% 0.85%
High Yield Bond Trust 0.50% 0.75%(1) 1.25%
Managed Assets Trust 0.50% 0.08% 0.58%
U.S. Government Securities Portfolio 0.32% 0.24% 0.56%
Social Awareness Stock Portfolio 0.65% 0.60%(1) 1.25%
Utilities Portfolio 0.65% 0.60%(1) 1.25%
Templeton Bond Fund 0.50% 0.28% 0.78%
Templeton Stock Fund 0.47% 0.19% 0.66%
Templeton Asset Allocation Fund 0.48% 0.18% 0.66%
Fidelity's High Income Portfolio 0.60% 0.11%(2) 0.71%
Fidelity's Equity-Income Portfolio 0.51% 0.10%(2) 0.61%
Fidelity's Growth Portfolio 0.61% 0.09%(2) 0.70%
Fidelity's Asset Manager Portfolio 0.71% 0.08%(2) 0.79%
Dreyfus Stock Index Fund 0.25% 0.14%(3) 0.39%
American Odyssey International Equity Fund 0.68% 0.30%(4) 0.98%
American Odyssey Emerging Opportunities Fund 0.63% 0.14%(4) 0.77%
American Odyssey Core Equity Fund 0.59% 0.11%(4) 0.70%
American Odyssey Long-Term Bond Fund 0.50% 0.16%(4) 0.66%
American Odyssey Intermediate-Term Bond Fund 0.50% 0.18%(4) 0.68%
American Odyssey Short-Term Bond Fund 0.50% 0.25%(4) 0.75%
Smith Barney Income and Growth Portfolio 0.65% 0.08%(5) 0.73%
Alliance Growth Portfolio 0.80% 0.10%(5) 0.90%
Smith Barney International Equity Portfolio 0.90% 0.54%(6) 1.44%
Putnam Diversified Income Portfolio 0.75% 0.22%(5) 0.97%
Smith Barney Money Market Portfolio 0.60% 0.05%(5) 0.65%
Smith Barney High Income Portfolio 0.60% 0.10%(5) 0.70%
MFS Total Return Portfolio 0.80% 0.15%(5) 0.95%
</TABLE>
(1) Other Expenses take into account the current expense reimbursement
arrangement with the Company. The Company has agreed to reimburse each Fund
for the amount by which its aggregate expenses (including the management
fee, but excluding brokerage commissions, interest charges and taxes)
exceeds 1.25%. (This agreement may be terminated by either party upon 60
days' notice.) Without such arrangement, Other Expenses would have been
0.78%, 1.10% and 0.62% for High Yield Bond Trust, Social Awareness Stock
Portfolio, and Utilities Portfolio, respectively.
(2) No reimbursement arrangement affected the Equity-Income Portfolio and the
Growth Portfolio. A portion of the brokerage commissions the Fund paid was
used to reduce its expenses. Such reduction may be determined at any time
subject to Board approval. Without this reduction, Total Underlying Fund
Expenses would have been: High Income Portfolio, 0.71% (there were brokerage
commisssions paid, but it did not affect the ratio) and Asset Manager
Portfolio, 0.81%.
(3) The administrator and investment adviser have agreed to reimburse the Fund
for expenses in excess of 0.40%. This agreement is subject to termination by
the Board upon 180 days' notice. The Management Fee and Other Expenses
before reimbursement were 0.17% and 0.25%, respectively. The Management Fee
prior to November 13, 1995 was .15%. On that date, a new Management
Agreement became effective with a Management Fee of 0.245%.
(4) Total Underlying Fund Expenses do not take into account the expense
limitations agreed to by the Manager. The Manager anticipates that as of May
1996, it will no longer waive the fees or reimburse the expenses for the
International Equity Fund, the Emerging Opportunities Fund, the
9
<PAGE> 10
Core Equity Fund, the Long-Term Bond Fund, and the Intermediate-Term Bond
Fund. Total Underlying Fund Expenses, which reflect the repayment to the
Manager of prior fees waived and expenses reimbursed, were 1.08%, 0.77%,
0.70%, 0.70%, and 0.75% respectively.
The Manager has agreed to continue, at least until May 1, 1997, to waive fees
or reimburse expenses to the extent the Short-Term Bond Fund's total expense
ratio exceeds 0.75%. Thereafter, the Fund is required to reimburse the Manager
for any fees waived or expenses it reimbursed provided that this reimbursement
by the Fund does not cause the total expense ratio to exceed the expense
limitations above. Without these expense limitations and/or Manager
reimbursements, Other Expenses of the Short-Term Bond Fund would have been
0.26%. Such limitations and agreements are determined annually.
(5) Total Underlying Fund Expenses are as of October 31, 1995, (the Fund's
fiscal year end) taking into account the current expense limitations agreed
to by the Manager. The Manager waived all of its fees for the period and
reimbursed the Portfolios for their expenses. If such fees were not waived
and expenses were not reimbursed, Total Underlying Fund Expenses would have
been as follows: Smith Barney Income and Growth, 0.94%; Alliance Growth
Portfolio, 0.97%; Putnam Diversified Income Portfolio, 1.31%; Smith Barney
Money Market Portfolio, 0.94%; Smith Barney High Income Portfolio, 1.07%;
and MFS Total Return Portfolio, 1.06%. Such agreements may be terminated
subject to approval by the Board.
(6) During the fiscal year ended October 31, 1995, the Smith Barney
International Equity Portfolio earned credits from the Custodian which
reduced the service fees incurred. When these credits are taken into
consideration, Total Underlying Fund Expenses for these Portfolios is 1.21%.
10
<PAGE> 11
EXAMPLE WITH DEFERRED SALES CHARGES (PERCENTAGE OF PURCHASE PAYMENT)*
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<TABLE>
<CAPTION>
A $1,000 investment would be subject If the Contract is NOT surrendered at
to the following expenses, assuming the end of the period shown, a
a 5% annual return on assets, if the $1,000 investment would be subject
Contract is surrendered at the end to the following expenses, assuming
of the period shown**: a 5% annual return:
- --------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Appreciation Fund $ 73 $ 120 $ 170 $257 $ 23 $ 70 $ 120 $257
High Yield Bond Trust 77 132 190 297 27 82 140 297
Managed Assets Trust 70 112 156 230 20 62 106 230
U.S. Government Securities Portfolio 70 111 155 227 20 61 105 227
Social Awareness Stock Portfolio 77 132 190 297 27 82 140 297
Utilities Portfolio 77 132 190 297 27 82 140 297
Templeton Bond Fund 72 118 166 250 22 68 116 250
Templeton Stock Fund 71 114 160 238 21 64 110 238
Templeton Asset Allocation Fund 71 114 160 238 21 64 110 238
Fidelity's High Income Portfolio 71 116 163 243 21 66 113 243
Fidelity's Equity-Income Portfolio 70 113 158 233 20 63 108 233
Fidelity's Growth Portfolio 71 115 162 242 21 65 112 242
Fidelity's Asset Manager Portfolio 72 118 167 251 22 68 117 251
Dreyfus Stock Index Fund 68 106 146 209 18 56 96 209
American Odyssey Funds(1):
International Equity Fund 74 124 177 271 24 74 127 271
Emerging Opportunities Fund 72 118 166 249 22 68 116 249
Core Equity Fund 71 115 162 242 21 65 112 242
Long-Term Bond Fund 71 114 160 238 21 64 110 238
Intermediate-Term Bond Fund 71 115 161 240 21 65 111 240
Short-Term Bond Fund 72 117 165 247 22 67 115 247
American Odyssey Funds(2):
International Equity Fund 86 161 237 388 36 111 187 388
Emerging Opportunities Fund 84 155 227 369 34 105 177 369
Core Equity Fund 84 153 224 363 34 103 174 363
Long-Term Bond Fund 83 152 222 359 33 102 172 359
Intermediate-Term Bond Fund 83 152 223 361 33 102 173 361
Short-Term Bond Fund 84 154 226 368 34 104 176 368
Smith Barney Income and Growth Portfolio 72 116 164 245 22 66 114 245
Alliance Growth Portfolio 73 122 173 263 23 72 123 263
Smith Barney International Equity Portfolio 79 138 199 316 29 88 149 316
Putnam Diversified Income Portfolio 74 124 176 270 24 74 126 270
Smith Barney Money Market Portfolio 71 114 160 237 21 64 110 237
Smith Barney High Income Portfolio 71 115 162 242 21 65 112 242
MFS Total Return Portfolio 74 123 175 268 24 73 125 268
</TABLE>
- ---------------
* The Example reflects the $15 Semiannual Contract Fee as an annual charge of
0.09% of assets.
** The applicable sales charge may be waived upon annuitization. (See "Charges
Under the Contract," page 19.)
(1) Reflects expenses that would be incurred for those who DO NOT participate
in the CHART Asset Allocation program.
(2) Reflects expenses that would be incurred for those who DO participate in
the CHART Asset Allocation program.
11
<PAGE> 12
EXAMPLE WITH SURRENDER CHARGES (PERCENTAGE OF AMOUNT SURRENDERED)*
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<TABLE>
<CAPTION>
A $1,000 investment would be subject If the Contract is NOT surrendered at
to the following expenses, assuming the end of the period shown, a
a 5% annual return on assets, if the $1,000 investment would be subject
Contract is surrendered at the end to the following expenses, assuming
of the period shown**: a 5% annual return:
- --------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Appreciation Fund $ 74 $ 113 $ 154 $257 $ 23 $ 70 $ 120 $257
High Yield Bond Trust 78 125 174 297 27 82 140 297
Managed Assets Trust 72 106 141 230 20 62 106 230
U.S. Government Securities Portfolio 71 105 140 227 20 61 105 227
Social Awareness Stock Portfolio 78 125 174 297 27 82 140 297
Utilities Portfolio 78 125 174 297 27 82 140 297
Templeton Bond Fund 73 111 151 250 22 68 116 250
Templeton Stock Fund 72 108 145 238 21 64 110 238
Templeton Asset Allocation Fund 72 108 145 238 21 64 110 238
Fidelity's High Income Portfolio 73 109 147 243 21 66 113 243
Fidelity's Equity-Income Portfolio 72 106 143 233 20 63 108 233
Fidelity's Growth Portfolio 73 109 147 242 21 65 112 242
Fidelity's Asset Manager Portfolio 74 112 151 251 22 68 117 251
Dreyfus Stock Index Fund 70 100 132 209 18 56 96 209
American Odyssey Funds(1):
International Equity Fund 75 117 161 271 24 74 127 271
Emerging Opportunities Fund 73 111 150 249 22 68 116 249
Core Equity Fund 73 109 147 242 21 65 112 242
Long-Term Bond Fund 72 108 145 238 21 64 110 238
Intermediate-Term Bond Fund 72 108 146 240 21 65 111 240
Short-Term Bond Fund 73 111 149 247 22 67 115 247
American Odyssey Funds(2):
International Equity Fund 87 153 219 388 36 111 187 388
Emerging Opportunities Fund 85 147 210 369 34 105 177 369
Core Equity Fund 85 145 207 363 34 103 174 363
Long-Term Bond Fund 84 144 205 359 33 102 172 359
Intermediate-Term Bond Fund 84 144 206 361 33 102 173 361
Short-Term Bond Fund 85 146 209 368 34 104 176 368
Smith Barney Income and Growth Portfolio 73 110 148 245 22 66 114 245
Alliance Growth Portfolio 75 115 157 263 23 72 123 263
Smith Barney International Equity Portfolio 80 130 183 316 29 88 149 316
Putnam Diversified Income Portfolio 75 117 160 270 24 74 126 270
Smith Barney Money Market Portfolio 72 108 145 237 21 64 110 237
Smith Barney High Income Portfolio 73 109 147 242 21 65 112 242
MFS Total Return Portfolio 75 116 159 268 24 73 125 268
</TABLE>
- ---------------
* The Example reflects the $15 Semiannual Contract Fee as an annual charge of
0.09% of assets.
** The applicable sales charge may be waived upon annuitization. (See "Charges
Under the Contract," page 19.)
(1) Reflects expenses that would be incurred for those who DO NOT participate
in the CHART Asset Allocation program.
(2) Reflects expenses that would be incurred for those who DO participate in
the CHART Asset Allocation program.
12
<PAGE> 13
INTRODUCTION
- --------------------------------------------------------------------------------
This prospectus has been designed to provide all the necessary information to
make a decision on purchasing Contracts issued in conjunction with qualified
pension and profit-sharing plans, tax deferred annuity plans (for public school
teachers and employees and employees of certain other tax exempt and qualifying
employers) and deferred compensation plans for state and local governments. This
prospectus describes only the elements of the variable Contracts. Please read
the Glossary of Special Terms prior to reading this prospectus to become
familiar with the terms being used.
THE CONTRACTS
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GENERAL
The Contracts, issued on a group basis, are designed for use only with plans
which qualify for special tax treatment under the Internal Revenue Code, such as
tax deferred annuity plans for public school teachers and employees and
employees of certain other tax-exempt organizations; pension and profit-sharing
plans; and deferred compensation plans for state and local governments.
Purchase Payments may be allocated to your choice of one or more Funding
Options. Purchase Payments (net of any premium taxes due) are applied to
purchase Separate Account Accumulation Units of the appropriate Funding Option.
The Accumulation Unit value will be determined as of the end of the Valuation
Period during which the payments were received. The value of your investment
during the Accumulation Period will vary in accordance with the net income and
performance of each Funding Option's individual investments. While you will not
receive any distributions from the Funding Options, any such distributions would
be reflected in the value of that Funding Option's corresponding Accumulation
Unit. During the Variable Annuity payout period, both your Annuity payments and
reserve values will vary in accordance with these factors.
The Contracts may be issued on either an allocated or an unallocated basis. Both
the allocated and unallocated contracts provide for fixed (General Account) and
variable (Separate Account) accumulations and annuity payouts.
ALLOCATED CONTRACTS
A group allocated Contract will cover all present and future Participants under
the Contract. A Participant under an allocated Contract may receive a
certificate which evidences participation in the Contract.
UNALLOCATED CONTRACTS
We offer an unallocated annuity Contract, designed for use with certain
Qualified Plans where the employer has secured the services of a TPA.
The Contracts will be issued to an employer or the trustee(s) or custodian of an
employer's Qualified Plan. All Purchase Payments are held under the Contract, as
directed by the Contract Owner. There are no individual allocations under the
unallocated Contracts for individual participants in the Qualified Plan.
RIGHT TO RETURN
For Contracts in use with deferred compensation plans, tax-deferred annuity
plans, and combined qualified plans/tax deferred annuity plans, you may return
the Contract for a full refund of the Cash Value (including charges) within ten
days after you receive it (the "free-look period"). Where state law requires a
longer free look period, or the return of Purchase Payments, the Company will
comply. The Contract Owner bears the investment risk during the free-look
period;
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therefore, the Cash Value returned may be greater or less than your Purchase
Payment. All Cash Values will be determined as of the next valuation following
the Company's receipt of your written request for refund.
OPERATION OF THE CONTRACT
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CREDITING PURCHASE PAYMENTS
The Purchase Payments to Your Account or to a Participant's Individual Account
under a Contract are applied to purchase Accumulation Units of the selected
Funding Options. With respect to an initial Purchase Payment, the Purchase
Payment is credited to the applicable account within two business days of our
receipt of a properly completed application or purchase order form and the
initial Purchase Payment. If an application or any other information provided is
incomplete when received, the Purchase Payment will be credited to the
applicable account within five business days. If an initial Purchase Payment is
not credited within five business days, it will be immediately returned unless
you have been informed of the delay and request that the Purchase Payment not be
returned.
Any subsequent payment is credited as of the Valuation Period in which it is
received. For subsequent Purchase Payments, the number of Accumulation Units
credited is determined by dividing the Purchase Payment by the appropriate
Accumulation Unit value next computed following receipt of the payment at our
Home Office.
TRANSFERS OF CASH VALUE BETWEEN FUNDING OPTIONS
You may transfer Cash Values from one or more Funding Options to other Funding
Options, subject to the terms and conditions of the Contract (and your Plan). If
authorized by the Contract Owner, Participants under allocated Contracts may
transfer all or any of their Cash Value from one Funding Option to another up to
30 days before the due date of the first Annuity Payment.
DOLLAR COST AVERAGING (AUTOMATED TRANSFERS)
Dollar cost averaging permits the Contract Owner or Participant to transfer a
fixed dollar amount to other Funding Options on a monthly or quarterly basis so
that more Accumulation Units are purchased if the value per unit is low and less
Accumulation Units are purchased if the value per unit is high. Therefore, a
lower-than-average value per unit may be achieved over the long run.
You may elect automated transfers through written request or other method
acceptable to the Company. Certain minimums apply to amounts transferred and/or
to enroll in the program.
You may start or stop participation in the Dollar Cost Averaging program at any
time, but you must give the Company at least 30 days' notice to change any
automated transfer instructions that are currently in place. Automated transfers
are subject to all of the other provisions and terms of the Contract, including
provisions relating to the transfer of money between funding options. The
Company reserves the right to suspend or modify transfer privileges at any time
and to assess a processing fee for this service.
Before transferring any part of the Cash Value, Contract Owners should consider
the risks involved in switching between investments available under this
Contract. Dollar cost averaging requires regular investments regardless of
fluctuating price levels, and does not guarantee profits or prevent losses in a
declining market. Potential investors should consider their financial ability to
continue purchases through periods of low price levels.
ASSET ALLOCATION ADVICE
Owners may elect to enter into a separate advisory agreement with Copeland
Financial Services, inc. ("Copeland"), an affiliate of the Company. Copeland
provides asset allocation advice under
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its CHART program, which is fully described in a separate disclosure statement.
Under the CHART Program, Purchase Payments and Cash Values are allocated among
the specified asset allocation funds. Copeland's charge for this advisory
service is equal to a maximum of 1.50% of the assets subject to the CHART
Program. The CHART Program fee will be paid by quarterly withdrawals from the
Cash Values allocated to the asset allocation funds. The fee is in addition to
the Contract charges described in "Charges Under the Contract." The Company will
not treat these withdrawals as taxable distributions. The CHART Program may not
be available in all marketing programs through which this Contract is sold.
TRANSFERS FROM FUNDING OPTIONS TO CONTRACTS NOT ISSUED BY US
You may transfer all or any part of Your Account's Cash Surrender Value from any
Funding Option to any contract not issued by us. Such transfers may be subject
to a sales charge, as described in the Contract. If authorized by the Contract
Owner, a Participant may transfer all or any part of the Individual Account's
Cash Surrender Value from one Funding Option to any contract not issued by us.
TRANSFERS TO OR FROM OTHER CONTRACTS ISSUED BY US
Under specific conditions, we may allow you to transfer to this Contract funds
held by you in another group annuity contract issued by us or to transfer
amounts from this Contract to another Contract issued by us without applying a
sales charge to the funds being transferred. Once the transfer is complete and
we have established an account for you at your direction, a new sales charge may
apply, as described in the new Contract.
TRANSFERS FROM CONTRACTS NOT ISSUED BY US
Under specific conditions, when authorized by state insurance law, we may credit
a Plan up to 4% of the amount transferred to us from another group annuity not
issued by us as reimbursement to the Plan for any exit penalty assessed by the
other issuer. We will recover this credit through reduced compensation paid to
the servicing agent or broker.
CONTRACT AND PARTICIPANT'S INDIVIDUAL ACCOUNT TERMINATION
Under the allocated Contracts, if the Cash Value in a Participant's Individual
Account is less than the termination amount as stated in your Contract, we
reserve the right to terminate that Account and move the Cash Value of that
Participant's Individual Account to Your Account.
Any Cash Value to which a terminating Participant is not entitled under the Plan
will be moved to Your Account at your direction.
You may discontinue this Contract by Written Request at any time for any reason.
We reserve the right to discontinue this Contract if:
a) the Cash Value of the Contract is less than the termination amount; or
b) We determine within our sole discretion and judgment that the Plan or
administration of the Plan is not in conformity with applicable law; or
c) We receive notice that is satisfactory to us of plan termination.
If we discontinue this Contract or we receive your Written Request to
discontinue the Contract, we will, in our sole discretion and judgment:
a) accept no further payments for this Contract; and
b) pay you the Cash Surrender Value of the Funding Options within 7 days of
the date of our written notice to you, or distribute the Cash Surrender
Value of each Participant's Individual Account as described in the
Settlement Provisions section at your direction; and
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c) pay you the Cash Surrender Value of the Fixed Account, if applicable, as
described in the Fixed Account Appendix.
If the Contract is discontinued, we will distribute the Cash Surrender Value to
you no later than 7 days following our mailing the written notice of
discontinuance to you at the most current address available on our records.
Discontinuance of the Contract will not affect payments we are making under
Annuity options which began before the date of discontinuance.
ACCOUNT VALUE
During the Accumulation Period, the Account Value can be determined by
multiplying the total number of Funding Option Accumulation Units credited to
that account by the current Accumulation Unit value for the appropriate Funding
Option and adding the sums for each Funding Option. There is no assurance that
the value in any of the Funding Options will equal or exceed the Purchase
Payments made to such Funding Options.
ACCUMULATION UNIT VALUE
The Accumulation Unit value for each Funding Option will vary to reflect the
investment experience of the applicable Funding Option and will be determined on
each by multiplying the Accumulation Unit value of the particular Funding Option
on the preceding Valuation Date by a net investment factor for that Funding
Option for the Valuation Period then ended. The value of the Accumulation Unit
for each Funding Option was initially established at $1.00 on the date that
Purchase Payments were first allocated to that Funding Option. The net
investment factor is described in the Statement of Additional Information.
You should refer to the Funding Option prospectuses which accompany this
prospectus for a description of how the net assets of each Funding Option are
valued since this valuation has a direct bearing on the Accumulation Unit value
of the Funding Option and therefore the Contract and Account values.
PAYMENT OF BENEFITS
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DEATH BENEFITS UNDER AN ALLOCATED CONTRACT
The allocated Contract provides that, in the event the Participant dies before
the selected Annuity Commencement Date or the Participant's age 75 (whichever
occurs first), the death benefit payable will be the greater of (a) the Cash
Value of the Participant's Individual Account or (b) the total Purchase Payments
under that Participant's Individual Account, less any applicable premium tax and
prior surrenders not previously deducted as of the date we receive Due Proof of
Death.
If the Participant dies on or after age 75 and before the Annuity Commencement
Date, we will pay the Beneficiary the Cash Value of the Participant's Individual
Account, less any applicable Premium Tax as of the date we receive Due Proof of
Death.
We must be notified of a Participant's death no later than six months after the
Participant's date of death in order for the Beneficiary to receive the death
proceeds as described. If notification is received more than six months after
the Participant's death, the Beneficiary shall receive the Cash Value of the
Participant's Individual Account as of the date we receive Due Proof of Death.
The death benefit may be taken by the beneficiary in one of three ways: 1) in a
single sum, in which case payment will be made within seven days of our receipt
of Due Proof of Death, unless subject to postponement as explained below; 2)
applied to a nonlifetime Annuity option, in which case the proceeds must be
distributed within 5 years of the Participant's date of death, or 3) applied to
a lifetime Annuity.
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An election to receive death benefits under a form of Annuity must be made
within one year after the death. The election must be made by written notice to
us at our Home Office. The beneficiary may choose to have Annuity payments made
on a variable basis, fixed basis, or a combination of the two.
No election to provide Annuity payments will become operative unless the amount
placed under the Annuity Option is at least $2,000. The manner in which the
Annuity payments are determined and in which they may vary from month to month
are the same as applicable to a Participant's Individual Account after
retirement.
There is no Death Benefit under unallocated Contracts.
ELECTION OF SETTLEMENT OPTIONS
Any amount distributed from the Contract may be applied to any one of the
Annuity options described below.
Election of any of these options must be made by Written Request to our Home
Office at least 30 days prior to the date such election is to become effective.
The form of such Annuity option shall be determined by the Contract Owner. The
following information must be provided with any such request:
a) the Participant's name, address, date of birth, social security number;
b) the amount to be distributed
c) the Annuity option which is to be purchased;
d) the date the Annuity option payments are to begin;
e) if the form of the Annuity provides a death benefit in the event of the
Participant's death, the name, relationship and address of the
beneficiary as designated by you; and
f) any other data that we may require.
The beneficiary, as specified in item (e) above, may be changed by you or the
Annuitant as long as we are notified by Written Request while the Annuitant is
alive and before payments have begun. If the beneficiary designation is
irrevocable, such designation cannot be changed or revoked without the consent
of the beneficiary. After we receive the Written Request and the written consent
of the beneficiary (if required), the new beneficiary designation will take
effect as of the date the notice is signed. We have no further responsibility
for any payment we made before the Written Request.
MINIMUM AMOUNTS
The minimum amount that can be placed under an Annuity option is $2,000 unless
we consent to a lesser amount. If any periodic payments due are less than $100,
we reserve the right to make payments at less frequent intervals.
MISSTATEMENT
If an Annuitant's sex or age was misstated, all benefits of this Contract are
what the Cash Values would have purchased on the date of issue at the correct
sex and age.
RETIRED LIFE CERTIFICATE
We will issue to each person to whom annuity benefits are being paid under this
Contract a certificate setting forth a statement in substance of the benefits to
which such person is entitled under this Contract.
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ALLOCATION OF CASH SURRENDER VALUE DURING THE ANNUITY PERIOD
At the time an Annuity Option is elected, you also may elect to have the
Participant's Cash Surrender Value applied to provide a Variable Annuity, a
Fixed Annuity, or a combination of both.
If no election is made to the contrary, the Cash Surrender Value will provide an
Annuity which varies with the investment experience of the corresponding Funding
Option(s) at the time of election. You or the Participant, if you so authorize,
may elect to transfer Cash Value from one Funding Option to another, as
described in the provision "Transfers of Cash Value Between Funding Options," in
order to reallocate the basis on which Annuity payments will be determined. Once
Annuity payments have begun, no further transfers are allowed.
ANNUITY OPTIONS
OPTION 1 -- LIFE ANNUITY/NO REFUND. A Life Annuity is an Annuity payable during
the lifetime of the Annuitant and terminating with the last monthly payment
preceding the death of the Annuitant.
OPTION 2 -- LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS ASSURED. An
Annuity payable monthly during the lifetime of an Annuitant with the provision
that if, at the death of the Annuitant, payments have been made for less than
120,180 or 240 months, as elected, then we will continue to make payments to the
designated beneficiary during the remainder of the period.
OPTION 3 -- JOINT AND LAST SURVIVOR LIFE ANNUITY. Monthly Annuity payments
based upon the joint lifetime of two persons selected: payments made first to
the Annuitant, and upon his/her death, paid to the survivor. No more payments
will be made after the death of the survivor.
OPTION 4 -- JOINT AND LAST SURVIVOR ANNUITY -- ANNUITY REDUCED ON DEATH OF
PRIMARY PAYEE. Monthly Annuity payments to the Annuitant during the joint
lifetime of the two persons selected. One of the two persons will be designated
as the primary payee. The other will be designated as the secondary payee. On
the death of the secondary payee, if survived by the primary payee, we will
continue to make monthly Annuity payments to the primary payee in the same
amount that would have been payable during the joint lifetime of the two
persons.
On the death of the primary payee, if survived by the secondary payee, we will
continue to make monthly Annuity payments to the secondary payee in an amount
equal to 50% of the payments which would have been made during the lifetime of
the primary payee. No further payments will be made following the death of the
survivor.
OPTION 5 -- FIXED PAYMENTS FOR A FIXED PERIOD OF 120, 180, OR 240 MONTHS. We
will make monthly payments for the period selected. If at the death of the
Annuitant, payments have been made for less than 120, 180, or 240 months, as
elected, we will continue to make payments to the designated beneficiary during
the remainder of the period.
OPTION 6 -- OTHER ANNUITY OPTIONS. We will make other arrangements for Annuity
payments as may be mutually agreed upon by you and us.
VARIABLE ANNUITY
AMOUNT OF FIRST PAYMENT. The Life Annuity Tables are used to determine the
first monthly Annuity payment. They show the dollar amount of the basic first
monthly Annuity payment which can be purchased with each $1,000 applied. The
amount applied to an Annuity will be the Cash Surrender Value of a Participant's
Individual Account as of 14 days before the date Annuity payments start. We
reserve the right to require satisfactory proof of the age of any persons on
whose life Annuity payments are based before making the first payment under any
of these options.
ANNUITY UNIT VALUE. The initial value of an Annuity Unit of each Funding Option
was set at $1.00. On any Valuation Date, the Annuity Unit Value for a Funding
Option equals the Annuity Unit Value on the immediately preceding Valuation
Date, multiplied by the net investment factor for
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that Funding Option for the Valuation Period just ended, divided by the Assumed
Daily Net Investment Factor. The Assumed Daily Net Investment Factor is given in
the Contract.
The value of an Annuity Unit as of any date other than a Valuation Date will be
equal to its value as of the succeeding Valuation Date.
INITIAL PAYMENT AND NUMBER OF ANNUITY UNITS. We determine the number of Annuity
Units credited to the Annuitant's Individual Account in each Funding Option by
dividing the basic first monthly Annuity payment attributable to that Funding
Option by the Funding Option's Annuity Unit Value as of 14 days before the due
date of the first Annuity payment.
AMOUNT OF SUBSEQUENT PAYMENTS. The dollar amount of any subsequent payments
made to an Annuitant after the first payment date may change from month to month
based on the net investment results of the Funding Option(s). The total amount
of each Annuity payment will be equal to the sum of the payments in each Funding
Option allocated to that Annuitant's Individual Account.
The amount of the payments made to an Annuitant is determined by multiplying,
for each Funding Option, the number of Annuity Units credited to that Annuitant
by the Annuity Unit Value of the Funding Option as of the date 14 days prior to
the date on which payment is due and by adding the sums.
FIXED ANNUITY
A Fixed Annuity provides for payments which do not vary during the Annuity
Period. The minimum guaranteed amount of the Fixed Annuity payments will be
calculated as described under "Variable Annuity: Determination of First Annuity
Payment" except that the Cash Surrender Value will be determined as of the day
annuity payments commence. If it would produce a larger payment, the Fixed
Annuity Payments will be determined using the Life Annuity Tables in effect on
the Maturity Date.
CHARGES UNDER THE CONTRACT
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SALES CHARGES
Purchase Payments made under the Contract pursuant to the terms of the contracts
are not subject to a front-end sales load. However, upon redemption, the Company
will charge a surrender charge or a contingent deferred sales charge, as
negotiated. Any sales charge, penalty tax and withholding will be deducted from
either the amount surrendered or from the remaining Contract balance, as
requested by the Contract Owner or Participant. The maximum contingent deferred
sales charge is 5% of each Purchase Payment for a period of five years from the
date the Purchase Payment was made. The maximum surrender charge is 5% of the
amount surrendered in the first two Contract Years, up to 4% in years three and
four; up to 3% in years five and six, up to 2% in years seven and eight and 0%
beginning in the ninth year. Any applicable sales charge will not exceed 8.5% of
the aggregate amount of the Purchase Payments made.
For deferred sales charge options, surrenders will be taken from Purchase
Payments in the order they were received by us and then on any earnings.
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The sales charges can be changed if the Company anticipates it will incur
decreased sales-related expenses due to the nature of the Plan to which the
Contract is issued or the involvement of TPAs. When considering a change in the
sales charges, the Company will take into account:
(a) The expected level of initial agent or the Company involvement during
the establishment and maintenance of the Contract including the amount
of enrollment activity required, and the amount of service required by
the Contract Owner in support of the Plan, and
(b) Contract Owner, agent or TPA involvement in conducting ongoing
enrollment of subsequently eligible Participants, and
(c) The expected level of commission the Company may pay to the agent or
TPA for distribution expenses, and
(d) Any other factors which the Company anticipates will increase or
decrease the sales-related expenses associated with the sale of the
Contract in connection with the Plan.
The surrender charge will not be assessed for withdrawals made under the
following circumstances: retirement, separation from service, loans (if
available in your Plan), hardship (as defined by the Code), death, disability as
defined in Code section 72(m)(7), return of Excess Plan Contributions, minimum
required distributions at age 70 1/2, transfers to an Employer Stock Fund,
certain Plan expenses as mutually agreed upon and annuitization under this
Contract or another contract issued by us.
For unallocated Contracts, we make the deductions described above pursuant to
the terms of the various agreements among the custodian, the principal
underwriter, and us. Contract distribution expenses may exceed the deduction for
sales expenses described above. To the extent that they do, they will be borne
by the Company.
FREE WITHDRAWAL ALLOWANCE. For Contracts in use with deferred compensation
plans, the tax deferred annuity plans and combined qualified plans/tax-deferred
annuity plans, there is a 10% free withdrawal allowance available each year
after the first Contract Year. The available withdrawal amount will be
calculated as of the first Valuation Date of any given Contract Year. The free
withdrawal allowance applies to partial surrenders of any amount and to full
surrenders, except those full surrenders transferred directly to annuity
contracts issued by other financial institutions.
MORTALITY AND EXPENSE RISK CHARGE
A mortality and expense risk charge is deducted on each Valuation Date from
amounts held in the Separate Account. This charge is equivalent, on an annual
basis, to a maximum of 1.20% of the amounts allocated to each Funding Option.
The mortality risk portion compensates the Company for guaranteeing to provide
Annuity Payments according to the terms of the Contract regardless of how long
the Annuitant lives and for guaranteeing to provide the death benefit if a
Participant dies prior to the Annuity Commencement Date. The expense risk charge
compensates the Company for the risk that the charges under the Contract, which
cannot be increased during the duration of the Contract, will be insufficient to
cover actual costs.
If the amount deducted for mortality and expense risks is not sufficient to
cover the mortality costs and expense shortfalls, the loss is borne by the
Company. If the deduction is more than sufficient, the excess will be a profit
to the Company. The Company expects to make a profit from the mortality and
expense risk charge.
In determining the level of the mortality and expense risk charge, the Company
will consider the size of the Plan, the number of employees, Plan Participants,
the demographics of the Participants, which may reduce mortality and expenses of
the Plan, and any other factors which the Company considers relevant.
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Although variable Annuity payments made under the Contracts will vary in
accordance with the investment performance of each Funding Option's investment
portfolio, payments will not be affected by (a) the Company's actual mortality
experience among Annuitants after retirement or (b) the Company's actual
expenses, if greater than the deductions provided for in the Contracts because
of the expense and mortality undertakings by the Company.
FUNDING OPTION CHARGES
There are certain deductions from and expenses paid out of the assets of each
Funding Option. These are described in the applicable prospectus for each
Funding Option.
ADMINISTRATIVE CHARGES
The following administrative charges apply only to allocated Contracts. One
charge or the other, or both may apply as described in your Contract.
SEMIANNUAL POLICY FEE. A semiannual policy fee of up to $15 may be deducted from
the value of each Participant's Individual Account. Any such deduction will be
made pro rata from each of the Funding Options, at the end of each 6-month
period. This fee is assessed only during the Accumulation Period.
ADMINISTRATIVE EXPENSE. This charge is deducted on each Valuation Date from the
variable Funding Options in order to compensate the Company for certain
administrative and operating expenses of the Funding Options. The charge is
equivalent, on an annual basis, to a maximum of 0.10% of the daily net asset
value of each Funding Options. There is no necessary relationship between the
amount of the administrative charge imposed on a given contract and the amount
of expenses that may be attributable to the contract. This charge is assessed
during the Accumulation and Annuity Periods from each Participant's Individual
Account.
Neither the semiannual policy fee nor the administrative expense charge can be
increased. The charges are set at a level which does not exceed the average
expected cost of the administrative services to be provided while the Contract
is in force, and the Company does not expect to profit from these charges.
As discussed below, the level of the semiannual policy fee and of the
administrative expense charge is subject to negotiation. In determining the
level of the semiannual fee and the administrative expense charge, we consider
certain factors including, but not limited to, the following:
(a) The size and characteristics of the Contract and the group to which it
is issued including: the annual amount of Purchase Payments per
Participant, the expected turnover of employees, whether the Contract
Owner will remit Purchase Payment allocations electronically, and any
other factors pertaining to the characteristics of the group or the
Plan which may enable the Company to reduce the expense of
administration.
(b) Determination of the Company's anticipated expenses in administering
the Contract, such as: billing for Purchase Payments, producing
periodic reports, providing for the direct payment of Contract charges
rather than having them deducted from Contract values, and any other
factors pertaining to the level and expense of administrative services
which will be provided under the Contract.
(c) TPA and/or agent involvement.
PREMIUM TAX DEDUCTIONS
Certain states or municipalities impose a premium tax, ranging up to 5.0%. A
premium tax is made, if applicable, on purchase payments or contract values. On
any Contract subject to a premium tax, the tax will be deducted, as provided
under applicable law, either from Purchase Payments when
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received or from the amount applied to effect an Annuity at the time Annuity
payments commence. However, we reserve the right to deduct from the Contract the
state or municipality premium tax upon our determination of when such tax is
due.
TPA ADMINISTRATIVE CHARGES
The Company may be directed by the Contract Owner to deduct charges from
Purchase Payments or account values for payment to the Contract Owner and/or the
TPA. These charges are not levied by the Contract. Such charges may include
maintenance fees and transaction fees.
THE COMPANY, THE SEPARATE ACCOUNT
AND THE FUNDING OPTIONS
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THE COMPANY
The Travelers Insurance Company is a stock insurance company chartered in 1864
in Connecticut and continuously engaged in the insurance business since that
time. It is licensed to conduct life insurance business in all states of the
United States, the District of Columbia, Puerto Rico, Guam, the U.S. and British
Virgin Islands and the Bahamas. The Company is an indirect wholly owned
subsidiary of Travelers Group Inc., a financial services holding company. The
Company's Home Office is located at One Tower Square, Hartford, Connecticut
06183.
THE SEPARATE ACCOUNT
The Separate Account was established on December 26, 1995, in accordance with
authorization by the Board of Directors of the Company. It is the Separate
Account in which the Company sets aside and invests the assets attributable to
the Contracts sold under this prospectus. The Separate Account is registered as
a unit investment trust under the Investment Company Act of 1940. This
registration does not, however, involve Securities and Exchange Commission
supervision of the management or the investment practices or policies of the
Separate Account or the Company.
Under Connecticut law, the assets of the Separate Account attributable to the
Contracts offered under this prospectus are held for the benefit of the owners
of, and the persons entitled to payments under, those Contracts. The assets in
the Separate Account are not chargeable with liabilities arising out of any
other business the Company may conduct. Therefore, you will not be affected by
the rate of return of the Company's General Account, nor by the investment
performance of any of the Company's other separate accounts.
The Company does not guarantee the investment results of the Separate Account or
the Funding Options. There is no assurance that the Account Value on the Annuity
Commencement Date or the aggregate amount of the Variable Annuity payments will
equal the sum of Purchase Payments made under the Contract. Since each Funding
Option has different investment objectives, each is subject to different risks.
These risks are more fully described in the prospectuses for the Funding Options
which must accompany this prospectus. Additional copies of the prospectuses may
be requested from your sales representative or from the Home Office.
The Company reserves the right, subject to compliance with the law, to
substitute the shares of any other registered investment company for the shares
of any Funding Option held by the Separate Account. Substitution may occur if
shares of the Funding Option(s) become unavailable or due to changes in
applicable law or interpretations of law. Current law requires approval of the
Securities and Exchange Commission and notification to you of any such
substitution. The Company also reserves the right, subject to compliance with
the law to offer additional Funding Options.
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THE FUNDING OPTIONS:
MANAGED ASSETS TRUST. The objective of the Managed Assets Trust is high
total investment return through a fully managed investment policy. Assets
of the Managed Assets Trust will be invested in a portfolio of equity, debt
and convertible securities.
HIGH YIELD BOND TRUST.* The objective of the High Yield Bond Trust is
generous income. The assets of the High Yield Bond Trust will be invested
in bonds which, as a class, sell at discounts from par value and are
typically high risk securities. Please read carefully the complete risk
disclosure in the Trust's prospectus before investing.
CAPITAL APPRECIATION FUND. The objective of the Capital Appreciation Fund
is growth of capital through the use of common stocks. Income is not an
objective. The Fund invests principally in common stocks of small to large
companies which are expected to experience wide fluctuations in price in
both rising and declining markets.
DREYFUS STOCK INDEX FUND. The objective of the Dreyfus Stock Index Fund is
to provide investment results that correspond to the price and yield
performance of publicly traded common stocks in the aggregate, as
represented by the Standard & Poor's 500 Composite Stock Price Index.
AMERICAN ODYSSEY FUNDS, INC.
AMERICAN ODYSSEY CORE EQUITY FUND. The objective of the Core Equity Fund
is to seek maximum long-term total return by investing primarily in common
stocks of well-established companies.
AMERICAN ODYSSEY EMERGING OPPORTUNITIES FUND. The objective of the
Emerging Opportunities Fund is to seek maximum long-term total return by
investing primarily in common stocks of small, rapidly growing companies.
AMERICAN ODYSSEY INTERNATIONAL EQUITY FUND. The objective of the
International Equity Fund is to seek maximum long-term total return by
investing primarily in common stocks of established non-U.S. companies.
AMERICAN ODYSSEY LONG-TERM BOND FUND.* The objective of the Long-Term Bond
Fund is to seek maximum long-term total return by investing primarily in
long-term corporate debt securities, U.S. government securities,
mortgage-related securities, and asset-backed securities, as well as money
market instruments.
AMERICAN ODYSSEY INTERMEDIATE-TERM BOND FUND.* The objective of the
Intermediate-Term Bond Fund is to seek maximum long-term total return by
investing primarily in intermediate-term corporate debt securities, U.S.
government securities, mortgage-related securities and asset-backed
securities, as well as money market instruments.
AMERICAN ODYSSEY SHORT-TERM BOND FUND.* The objective of the Short-Term
Bond Fund is to seek maximum long-term total return by investing primarily
in investment- grade, short-term debt securities.
TRAVELERS SERIES TRUST
U.S. GOVERNMENT SECURITIES PORTFOLIO.* The objective of the U.S.
Government Securities Portfolio is the selection of investments from the
point of view of an investor concerned primarily with highest credit
quality, current income and total return. The assets of the U.S. Government
Securities Portfolio will be invested in direct obligations of the United
States, its agencies and instrumentalities.
SOCIAL AWARENESS STOCK PORTFOLIO. The investment objective of the Social
Awareness Stock Portfolio is long-term capital appreciation and retention
of net investment income. The Portfolio seeks to fulfill this objective by
selecting investments, primarily common stocks,
23
<PAGE> 24
which meet the social criteria established for the Portfolio. Social criteria
currently excludes companies that derive a significant portion of their revenues
from the production of tobacco, tobacco products, alcohol, or military defense
systems, or in the provision of military defense related services or gambling
services.
UTILITIES PORTFOLIO. The objective of the Utilities Portfolio is to
provide current income by investing in equity and debt securities of
companies in the utility industries.
TEMPLETON VARIABLE PRODUCTS SERIES
TEMPLETON BOND FUND.* The objective of the Templeton Bond Fund is high
current income through a flexible policy of investing primarily in debt
securities of companies, governments and government agencies of various
nations throughout the world.
TEMPLETON STOCK FUND. The objective of the Templeton Stock Fund is capital
growth through a policy of investing primarily in common stocks issued by
companies, large and small, in various nations throughout the world.
TEMPLETON ASSET ALLOCATION FUND.** The objective of the Templeton Asset
Allocation Fund is a high level of total return with reduced risk over the
long term through a flexible policy of investing in stocks of companies in
any nation and debt obligations of companies and governments of any nation.
Changes in the asset mix will be adjusted in an attempt to capitalize on
total return potential produced by changing economic conditions throughout
the world.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND
FIDELITY'S HIGH INCOME PORTFOLIO*. The objective of the High Income
Portfolio is to seek to obtain a high level of current income by investing
primarily in high yielding, lower-rated, fixed-income securities, while
also considering growth of capital. Since such high yielding securities may
be considered high risk, please read carefully the complete risk disclosure
in the Portfolio's prospectus before investing.
FIDELITY'S GROWTH PORTFOLIO. The objective of the Growth Portfolio is to
seek capital appreciation. The Portfolio normally purchases common stocks
of well-known, established companies, and small emerging growth companies,
although its investments are not restricted to any one type of security.
Capital appreciation may also be found in other types of securities,
including bonds and preferred stocks.
FIDELITY'S EQUITY-INCOME PORTFOLIO. The objective of the Equity-Income
Portfolio is to seek reasonable income by investing primarily in
income-producing equity securities; in choosing these securities, the
portfolio manager will also consider the potential for capital
appreciation.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY'S ASSET MANAGER PORTFOLIO.** The objective of the asset manager
portfolio is to seek high total return with reduced risk over the long-term
by allocating its assets among stocks, bonds and short-term fixed-income
instruments.
THE TRAVELERS SERIES FUND, INC.
SMITH BARNEY INCOME AND GROWTH PORTFOLIO. The objective of the Income and
Growth Portfolio is current income and long-term growth of income and
capital by investing primarily, but not exclusively, in common stocks.
ALLIANCE GROWTH PORTFOLIO. The objective of the Growth Portfolio is
long-term growth of capital by investing predominantly in equity securities
of companies with a favorable outlook for earnings and whose rate of growth
is expected to exceed that of the U.S. economy over time. Current income is
only an incidental consideration.
24
<PAGE> 25
SMITH BARNEY INTERNATIONAL EQUITY PORTFOLIO. The objective of the
International Equity Portfolio is total return on assets from growth of
capital and income by investing at least 65% of its assets in a diversified
portfolio of equity securities of established non-U.S. issuers.
PUTNAM DIVERSIFIED INCOME PORTFOLIO.** The objective of the Diversified
Income Portfolio is to seek high current income consistent with
preservation of capital. The Portfolio will allocate its investments among
the U.S. Government Sector, the High Yield Sector, and the International
Sector of the fixed income securities markets. Please read carefully the
complete risk disclosure in the Portfolio's prospectus before investing.
SMITH BARNEY HIGH INCOME PORTFOLIO.* The investment objective of the High
Income Portfolio is high current income. Capital appreciation is a
secondary objective. The Portfolio will invest at least 65% of its assets
in high-yielding corporate debt obligations and preferred stock. Since such
high yielding securities may be considered high risk, please read carefully
the complete risk disclosure in the Portfolio's prospectus before
investing.
MFS TOTAL RETURN PORTFOLIO.** The Total Return Portfolio's objective is to
obtain above-average income (compared to a portfolio entirely invested in
equity securities) consistent with the prudent employment of capital.
Generally, at least 40% of the Portfolio's assets will be invested in
equity securities. Please read carefully the complete risk disclosure in
the Portfolio's prospectus before investing.
SMITH BARNEY MONEY MARKET PORTFOLIO.* The Money Market Portfolio's
objective is maximum current income and preservation of capital by
investing in high quality, short-term money market instruments. An
investment in this fund is neither insured nor guaranteed by the U.S.
Government.
* The Funding Options marked with an asterisk (*) are considered Competing
Funds, and may be subject to transfer restrictions. Those marked with two
asterisks (**) are not currently considered Competing Funds, but may be so in
the future because of an allowable change in the Funding Option's investment
strategy.
An asset allocation program is available for certain Funding Options under the
Contract. See "Asset Allocation Advice" on page 14.
Certain variable annuity separate accounts and variable life insurance separate
accounts may invest in the Funding Options simultaneously (called "mixed" and
"shared" funding). It is conceivable that in the future it may be
disadvantageous to do so. Although the Company and the Funding Options do not
currently foresee any such disadvantages either to variable annuity Contract
Owners or variable life insurance policyowners, each Funding Option's Board of
Directors intends to monitor events in order to identify any material conflicts
between such Contract Owners and policyowners and to determine what action, if
any, should be taken in response thereto. If a Board of Directors was to
conclude that separate funds should be established for variable life and
variable annuity separate accounts, the variable annuity Contract Owners would
not bear any expenses attendant to the establishment of such separate funds, but
variable annuity Contract Owners and variable life insurance policyowners would
no longer have the economies of scale resulting from a larger combined fund.
The Company reserves the right, subject to compliance with the law, to
substitute the shares of any other registered investment company for the shares
of any Funding Option held by the Separate Account. Substitution may occur if
shares of the Funding Option(s) become unavailable or due to changes in
applicable law or interpretations of law. Current law requires notification to
you of any such substitution and approval of the Securities and Exchange
Commission. The Company also reserves the right, subject to compliance with the
law, to offer additional Funding Options.
25
<PAGE> 26
INVESTMENT ADVISERS
The Funding Options receive investment management and advisory services from the
following investment professionals:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
INVESTMENT ALTERNATIVE INVESTMENT ADVISER SUB-ADVISER
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Capital Appreciation Fund Travelers Asset Management Janus Capital Corporation
International (TAMIC)
- ----------------------------------------------------------------------------------------------
High Yield Bond Trust TAMIC
- ----------------------------------------------------------------------------------------------
Managed Assets Trust TAMIC TIMCO
- ----------------------------------------------------------------------------------------------
U.S. Government Securities TAMIC
Portfolio
- ----------------------------------------------------------------------------------------------
Social Awareness Stock Smith Barney Mutual Funds
Portfolio Management, Inc. ("SBMFM")
- ----------------------------------------------------------------------------------------------
Utilities Portfolio SBMFM
- ----------------------------------------------------------------------------------------------
Templeton Stock Fund Templeton Investment Counsel,
Inc.
- ----------------------------------------------------------------------------------------------
Templeton Asset Allocation Templeton Investment Counsel,
Fund Inc.
- ----------------------------------------------------------------------------------------------
Templeton Bond Fund Templeton Global Bond Managers
- ----------------------------------------------------------------------------------------------
Fidelity's High Income Fidelity Management & Research
Portfolio Company
- ----------------------------------------------------------------------------------------------
Fidelity's Equity-Income Fidelity Management & Research
Portfolio Company
- ----------------------------------------------------------------------------------------------
Fidelity's Growth Portfolio Fidelity Management & Research
Company
- ----------------------------------------------------------------------------------------------
Fidelity's Asset Manager Fidelity Management & Research
Portfolio Company
- ----------------------------------------------------------------------------------------------
Dreyfus Stock Index Fund Wells Fargo Nikko Investment
Advisors
- ----------------------------------------------------------------------------------------------
American Odyssey American Odyssey Funds Bank of Ireland Asset
International Equity Fund Management, Inc. Management (U.S.) Limited
- ----------------------------------------------------------------------------------------------
American Odyssey Emerging American Odyssey Funds Wilke/Thompson Capital
Opportunities Fund Management, Inc. Management, Inc.
- ----------------------------------------------------------------------------------------------
American Odyssey Core Equity American Odyssey Funds Equinox Capital Management,
Fund Management, Inc. Inc.
- ----------------------------------------------------------------------------------------------
American Odyssey Long-Term American Odyssey Funds Western Asset Management
Bond Fund Management, Inc. Company and WLO Global
Management
- ----------------------------------------------------------------------------------------------
American Odyssey American Odyssey Funds TAMIC
Intermediate-Term Bond Fund Management, Inc.
- ----------------------------------------------------------------------------------------------
American Odyssey Short-Term American Odyssey Funds Smith Graham & Co. Asset
Bond Fund Management, Inc. Managers,L.P.
- ----------------------------------------------------------------------------------------------
Smith Barney Income and Travelers Investment Advisers,
Growth Portfolio Inc. ("TIA")
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
INVESTMENT ALTERNATIVE INVESTMENT ADVISER SUB-ADVISER
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Alliance Growth Portfolio TIA Alliance Capital Management
L.P
- ----------------------------------------------------------------------------------------------
Smith Barney International TIA
Equity Portfolio
- ----------------------------------------------------------------------------------------------
Putnam Diversified Income TIA Putnam Investment Management,
Portfolio Inc.
- ----------------------------------------------------------------------------------------------
Smith Barney High Income TIA
Portfolio
- ----------------------------------------------------------------------------------------------
MFS Total Return Portfolio TIA Massachusetts Financial
Services Company
- ----------------------------------------------------------------------------------------------
Smith Barney Money Market TIA
Portfolio
- ----------------------------------------------------------------------------------------------
</TABLE>
FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
GENERAL
The Company is taxed as a life insurance company under Subchapter L of the
Internal Revenue Code (the "Code"). The Separate Accounts that form the
investment alternatives described herein are treated as part of the total
operations of the Company and are not taxed separately. Investment income and
gains of a Separate Account that are credited to a variable annuity contract
incur no current federal income tax. Generally, amounts credited to a contract
are not taxable until received by the Contract Owner, participant or
beneficiary, either in the form of Annuity Payments or other distributions. Tax
consequences and limits are described further below for each annuity program.
OWNERSHIP OF THE INVESTMENTS
In certain circumstances, owners of variable annuity contracts may be considered
the owners, for federal income tax purposes, of the assets of the separate
accounts used to support their contract. In those circumstances, income and
gains from the separate account assets would be includable in the variable
contract owner's gross income. The IRS has stated in published rulings that a
variable contract owner will be considered the owner of separate account assets
if the contract owner possesses incidents of ownership in those assets, such as
the ability to exercise investment control over the assets. The Treasury has
also announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the Contract Owner), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular Sub-Accounts without being treated as owners of the
underlying assets." As of the date of this prospectus, no such guidance has been
issued.
The ownership rights under the Contract are similar to, but different in certain
respects from, those described by the IRS in rulings in which it determined that
the owners were not owners of separate account assets. For example, a Contract
Owner or Participant of this Contract has additional flexibility in allocating
payments and cash values. These differences could result in the Contract Owner
being treated as the owner of the assets of Fund QP. In addition, the Company
does not know what standard will be set forth in the regulations or rulings
which the Treasury is expected to issue, nor does the Company know if such
guidance will be issued. The Company therefore reserves the right to modify the
Contract as necessary to attempt to prevent the Contract Owner from being
considered the owner of a pro rata share of the assets of Fund QP.
27
<PAGE> 28
The remaining tax discussion assumes that the Contract qualifies as an annuity
contract for federal income tax purposes.
SECTION 403(B) PLANS AND ARRANGEMENTS
Purchase Payments for tax-deferred annuity contracts may be made by an employer
for employees under annuity plans adopted by public educational organizations
and certain organizations which are tax exempt under Section 501(c)(3) of the
Code. Within statutory limits, these payments are not currently includable in
the gross income of the participants. Increases in the value of the Contract
attributable to these Purchase Payments are similarly not subject to current
taxation. The income in the Contract is taxable as ordinary income whenever
distributed.
An additional tax of 10% will apply to any taxable distribution received by the
participant before the age of 59 1/2, except when due to death, disability, or
as part of a series of payments for life or life expectancy, or made after the
age of 55 with separation from service. There are other statutory exceptions.
Amounts attributable to salary reductions and income thereon may not be
withdrawn prior to attaining the age of 59 1/2, separation from service, death,
total and permanent disability, or in the case of hardship as defined by federal
tax law and regulations. Hardship withdrawals are available only to the extent
of the salary reduction contributions and not from the income attributable to
such contributions. These restrictions do not apply to assets held generally as
of December 31, 1988.
Distribution must begin by April 1st of the calendar year following the calendar
year in which the participant attains the age of 70 1/2. Certain other mandatory
distribution rules apply at the death of the participant.
Eligible rollover distributions, including most partial or full redemptions or
"term-for-years" distributions of less than 10 years, are eligible for direct
rollover to another 403(b) contract or to an Individual Retirement Arrangement
(IRA) without federal income tax withholding.
QUALIFIED PENSION AND PROFIT-SHARING PLANS
Under a qualified pension or profit-sharing trust described in Section 401(a) of
the Code and exempt from tax under Section 501(a) of the Code, Purchase Payments
made by an employer are not currently taxable to the participant and increases
in the value of a contract are not subject to taxation until received by a
Participant or beneficiary.
Distributions in the form of Annuity or Income Payments are taxable to the
Participant or beneficiary as ordinary income in the year of receipt. Any
distribution that is considered the participant's "investment in the contract"
is treated as a return of capital and is not taxable. Payments under Income
Option 3 are taxable in full. Certain lump-sum distributions described in
Section 402 of the Code may be eligible for special ten-year forward averaging
treatment for individuals born before January 1, 1936. All individuals may be
eligible for favorable five-year forward averaging of lump-sum distributions.
Certain eligible rollover distributions including most partial and full
surrenders or term-for-years distributions of less than 10 years are eligible
for direct rollover to an eligible retirement plan or to an IRA without federal
income tax withholding.
An additional tax of 10% will apply to any taxable distribution received by the
Participant before the age of 59 1/2, except by reason of death, disability or
as part of a series of payments for life or life expectancy, or at early
retirement at or after the age of 55. There are other statutory exceptions.
Amounts attributable to salary reductions and income thereon may not be
withdrawn prior to attaining the age of 59 1/2, separation from service, death,
total and permanent disability, or in the case of hardship as defined by federal
tax law and regulations. Hardship withdrawals are available only to the extent
of the salary reduction contributions and not from the income attributable to
28
<PAGE> 29
such contributions. These restrictions do not apply to assets held generally as
of December 31, 1988.
Distribution must begin by April 1st of the calendar year following the calendar
year in which the participant attains the age of 70 1/2. Certain other mandatory
distribution rules apply at the death of the Participant.
SECTION 457 PLANS
Section 457 of the Code allows employees and independent contractors of state
and local governments and tax-exempt organizations to defer a portion of their
salaries or compensation to retirement years without paying current income tax
on either the deferrals or the earnings on the deferrals.
The Owner of contracts issued under Section 457 plans is the employer or a
contractor of the Participant and amounts may not be made available to
Participants (or beneficiaries) until separation from service, retirement or
death or an unforeseeable emergency as determined by Treasury Regulations. The
proceeds of Annuity contracts purchased by Section 457 plans are subject to the
claims of general creditors of the employer or contractor.
Distributions must begin generally by April 1st of the calendar year following
the calendar year in which the Participant attains the age of 70 1/2. Certain
other mandatory distribution rules apply upon the death of the Participant.
All distributions from plans that meet the requirements of Section 457 of the
Code are taxable as ordinary income in the year paid or made available to the
Participant or beneficiary.
THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
Under the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended,
certain special provisions may apply to the contract if the Owner of a Section
403(b) plan contract or certain other tax-benefited contracts requests that the
contract be issued to conform to ERISA or if the Company has notice that the
contract was issued pursuant to a plan that is subject to ERISA.
ERISA requires that certain Annuity Options, withdrawals or other payments and
any application for a loan secured by the contract may not be made until the
Participant has filed a Qualified Election with the plan administrator. Under
certain plans, ERISA also requires that a designation of a beneficiary other
than the Participant's spouse be invalid unless the Participant has filed a
Qualified Election.
A Qualified Election must include either the written consent of the
Participant's spouse, notarized or witnessed by an authorized plan
representative, or the Participant's certification that there is no spouse or
that the spouse cannot be located.
The Company intends to administer all contracts to which ERISA applies in a
manner consistent with the direction of the plan administrator regarding the
provisions of the plan, in accordance with applicable law. Because these
requirements differ according to the plan, a person contemplating the purchase
of an annuity contract should consider the provisions of the plan.
FEDERAL INCOME TAX WITHHOLDING
The portion of a distribution which is taxable income to the recipient will be
subject to federal income tax withholding, generally pursuant to Section 3405 of
the Code. The application of this provision is summarized below.
29
<PAGE> 30
1. ELIGIBLE ROLLOVER DISTRIBUTION FROM SECTION 403(B) PLANS OR ARRANGEMENTS
OR FROM QUALIFIED PENSION AND PROFIT-SHARING PLANS
Plan distributions that are eligible for rollover to an IRA or to
another retirement plan but are not directly rolled over are subject to
a mandatory 20% federal tax withholding. A distribution made directly to
a participant or beneficiary may avoid this result if:
(a) a periodic settlement distribution is elected based upon a life or
life expectancy calculation, or
(b) a complete term-for-years settlement distribution is elected for a
period of ten years or more, payable at least annually, or
(c) a minimum required distribution as defined under the tax law is
taken upon the attainment of the age of 70 1/2 or as otherwise
required by law.
A distribution including a rollover that is not a direct rollover will
require the 20% withholding, and a 10% additional tax penalty (for
premature withdrawal) may apply to any amount not actually rolled over
due to 20% withholding. The 20% withholding may be recovered when the
Participant or beneficiary files a personal income tax return for the
year if a rollover was completed within 60 days of receipt of the funds,
except to the extent that the Participant or spousal beneficiary is
otherwise underwithheld or short on estimated taxes for that year.
2. OTHER NON-PERIODIC DISTRIBUTIONS (FULL OR PARTIAL REDEMPTIONS)
For any payment not subject to mandatory 20% withholding as described in
1 above, the portion of a non-periodic distribution which constitutes
taxable income will be subject to federal income tax withholding, to the
extent such aggregate distributions exceed $200 for the year, unless the
recipient elects not to have taxes withheld. If an election out is not
provided, 10% of the taxable distribution will automatically be withheld
as federal income tax. Election forms will be provided at the time
distributions are requested. This form of withholding applies to all
annuity programs.
3. PERIODIC DISTRIBUTIONS (DISTRIBUTIONS PAYABLE OVER A PERIOD GREATER THAN
ONE YEAR)
The portion of a periodic distribution which constitutes taxable income
will be subject to federal income tax withholding under the wage
withholding tables as if the recipient were married claiming three
exemptions. A recipient may elect not to have income taxes withheld or
have income taxes withheld at a different rate by providing a completed
election form. Election forms will be provided at the time distributions
are requested. This form of withholding applies to all annuity programs.
As of January 1, 1996, a recipient receiving periodic payments (e.g.,
monthly or annual payments under an Annuity Option) which total $14,350
or less per year, will generally be exempt from the withholding
requirements.
Recipients who elect not to have withholding made are liable for payment of
federal income tax on the taxable portion of the distribution. All recipients
may also be subject to penalties under the estimated tax payment rules if
withholding and estimated tax payments are insufficient.
Recipients who do not provide a social security number or other taxpayer
identification number will not be permitted to elect out of withholding.
Additionally, United States citizens residing outside of the country, or U.S.
legal residents temporarily residing outside the country, are not permitted to
elect out of withholding.
TAX ADVICE
Because of the complexity of the law and the fact that the tax results will vary
according to the factual status of the individual involved, tax advice may be
needed by a person contemplating
30
<PAGE> 31
purchase of an annuity contract and by an Owner, participant or beneficiary who
may make elections under a contract. The foregoing description of the federal
income tax consequences under these contracts is not exhaustive and that special
rules are provided with respect to situations not discussed here. It should be
understood that if a tax-benefited plan loses its exempt status, employees could
lose some of the tax benefits described. For further information, a qualified
tax adviser should be consulted.
MISCELLANEOUS
- --------------------------------------------------------------------------------
VOTING RIGHTS
The Company shall notify the Contract Owner of any Funding Option shareholders'
meeting if the shares held for the Contract Owner's accounts may be voted at
such meetings. The Company shall also send proxy materials and a form of
instruction by means of which the Contract Owner can instruct the Company with
respect to the voting of the Funding Option shares held for the Contract Owner's
account. In connection with the voting of Funding Option shares held by it, the
Company shall arrange for the handling and tallying of proxies received from
Contract Owners. The Company as such, shall have no right, except as hereinafter
provided, to vote any Fund Option shares held by it thereunder which may be
registered in its name or the names of its nominees. The Company will, however,
vote the Funding Option shares held by it in accordance with the instructions
received from the Contract Owners for whose accounts the Funding Option shares
are held. If a Contract Owner desires to attend any meeting at which shares held
for the Contract Owner's benefit may be voted, the Contract Owner may request
the Company to furnish a proxy or otherwise arrange for the exercise of voting
rights with respect to the Funding Option shares held for such Contract Owner's
account. In the event that the Contract Owner gives no instructions or leaves
the manner of voting discretionary, the Company will vote such shares of the
appropriate Funding Option, including any of its own shares, in the same
proportion as shares of that Fund Option for which instructions have been
received.
A Contract Owner or Participant, as appropriate, is entitled to one full or
fractional vote for each full or fractional Accumulation or Annuity Unit owned.
The Contract Owner has voting rights throughout the life of the Contract. Vested
Participants have voting rights for as long as participation in the Contract
continues. Voting rights attach only to Separate Account interests.
During the Annuity period under a Contract the number of votes will decrease as
the assets held to fund Annuity benefits decrease.
DISTRIBUTION OF THE CONTRACTS
Tower Square Securities, Inc. ("Tower Square") serves as principal underwriter
for the securities issued with respect to the Separate Account. The Company is
the custodian of the Separate Account's assets. It is currently anticipated that
an affiliated broker-dealer may become the principal underwriter for the
Contracts during 1997.
The Contracts will be sold by salespersons of Tower Square who represent the
Company as insurance and variable annuity agents and who are registered
representatives of Tower Square or broker-dealers who have entered into
distribution agreements with Tower Square. The compensation paid to sales
representatives will not exceed 5% of payments made under the Contracts. Tower
Square is registered with the Commission under the Securities Exchange Act of
1934 as a Broker-Dealer and is a member of the National Association of
Securities Dealers, Inc. Tower Square is an indirect wholly owned subsidiary of
The Travelers.
31
<PAGE> 32
POSTPONEMENT OF PAYMENT (EMERGENCY PROCEDURE)
Payment of any benefit or values may be postponed whenever (1) the New York
Stock Exchange is closed; (2) when trading on the New York Stock Exchange is
restricted; (3) when an emergency exists as determined by the Securities and
Exchange Commission so that disposal of the securities held in the Funding
Options is not reasonably practicable or it is not reasonably practicable to
determine the value of the Funding Option's net assets; or (4) during any other
period when the Securities and Exchange Commission, by order, so permits for the
protection of security holders. Any provision of the Contract which specifies a
Valuation Date will be superseded by this Emergency Procedure.
CONTRACT MODIFICATION
The Company reserves the right to modify the Contract to keep it qualified under
all related law and regulations which are in effect during the term of this
Contract. We will obtain the approval of any regulatory authority needed for the
modifications.
LEGAL PROCEEDINGS
The Company's Counsel with respect to federal laws and regulations applicable to
the issue and sale of the Contracts and with respect to Connecticut law is
Kathleen A. McGah, Esquire, Counsel and Assistant Secretary of The Travelers
Insurance Company. She has passed on all legal matters affecting the Separate
Account. Currently, there are no material legal proceedings affecting the
Separate Account.
32
<PAGE> 33
APPENDIX A
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
The Statement of Additional Information contains more specific information and
financial statements relating to the Separate Account and the Company. A list of
the contents of the Statement of Additional Information is set forth below:
The Insurance Company
Principal Underwriter
Distribution and Management Agreement
Valuation of Assets
Independent Accountants
Financial Statements
- --------------------------------------------------------------------------------
COPIES OF THE STATEMENT OF ADDITIONAL INFORMATION DATED SEPTEMBER , 1996 (FORM
NO. L 12549S) ARE AVAILABLE WITHOUT CHARGE. TO REQUEST A COPY, PLEASE COMPLETE
THE COUPON FOUND BELOW AND MAIL IT TO: THE TRAVELERS INSURANCE COMPANY, ANNUITY
SERVICES, ONE TOWER SQUARE, HARTFORD, CONNECTICUT, 06183-9061.
Name:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
33
<PAGE> 34
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 35
STATEMENT OF ADDITIONAL INFORMATION
dated
September , 1996
for
THE TRAVELERS FUND QP FOR VARIABLE ANNUITIES
ISSUED BY
THE TRAVELERS INSURANCE COMPANY
This Statement of Additional Information ("SAI") is not a prospectus but relates
to, and should be read in conjunction with, the Group Variable Annuity Contract
Prospectus dated September , 1996. A copy of the Prospectus may be obtained by
writing to The Travelers Insurance Company, Annuity Services, One Tower Square,
Hartford, Connecticut 06183-9061, or by calling 1-860-277-0111.
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE INSURANCE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . 1
PRINCIPAL UNDERWRITER . . . . . . . . . . . . . . . . . . . . . . . . 2
DISTRIBUTION AND MANAGEMENT AGREEMENT . . . . . . . . . . . . . . . . . 2
VALUATION OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . 3
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 3
</TABLE>
<PAGE> 36
THE INSURANCE COMPANY
The Travelers Insurance Company (the "Company"), is a stock insurance
company chartered in 1864 in Connecticut and continuously engaged in the
insurance business since that time. It is licensed to conduct life insurance
business in all states of the United States, the District of Columbia, Puerto
Rico, Guam, the U.S. and British Virgin Islands and the Bahamas. The Company is
an indirect wholly owned subsidiary of Travelers Group Inc. The Company's Home
Office is located at One Tower Square, Hartford, Connecticut 06183.
STATE REGULATION. The Company is subject to the laws of the state of Connecticut
governing insurance companies and to regulation by the Insurance Commissioner of
the state of Connecticut (the "Commissioner"). An annual statement covering the
operations of the Company for the preceding year, as well as its financial
conditions as of December 31 of such year, must be filed with the Commissioner
in a prescribed format on or before March 1 of each year. The Company's books
and assets are subject to review or examination by the Commissioner or his
agents at all times, and a full examination of its operations is conducted at
least once every four years.
The Company is also subject to the insurance laws and regulations of all
other states in which it is licensed to operate. However, the insurance
departments of each of these states generally apply the laws of the jurisdiction
of domicile in determining the field of permissible investments.
THE SEPARATE ACCOUNT. Fund QP meets the definition of a separate account under
the federal securities laws, and will comply with the provisions of the 1940
Act. Additionally, the operations of Fund QP are subject to the provisions of
Section 38a-433 of the Connecticut General Statutes which authorizes the
Commissioner to adopt regulations under it. Section 38a-433 contains no
restrictions on the investments of the Separate Account, and the Commissioner
has adopted no regulations under the Section that affect the Separate Account.
THE FIXED ACCOUNT. The Fixed Account is secured by part of the general assets of
the Company. The general assets of the Company include all assets of the Company
other than those held in Fund QP or any other separate account sponsored by the
Company or its affiliates.
The staff of the Securities and Exchange Commission does not generally review
the disclosure in the prospectus relating to the Fixed Account. Disclosure
regarding the Fixed Account and the general account may, however, be subject to
certain provisions of the federal securities laws relating to the accuracy and
completeness of statements made in the prospectus.
1
<PAGE> 37
PRINCIPAL UNDERWRITER
Tower Square Securities, Inc. ("Tower Square"), an affiliate of the
Company, serves as principal underwriter for Fund QP and the Contracts.
The offering is continuous. Tower Square is an indirect wholly owned subsidiary
of The Company and its principal executive offices are located at One Tower
Square, Hartford, Connecticut. It is anticipated that an affiliated
broker-dealer may become the principal underwriter for the Contracts in 1997.
DISTRIBUTION AND MANAGEMENT AGREEMENT
Under the terms of the Distribution and Management Agreement among Fund
QP, the Company and Tower Square, the Company provides all
administrative services and mortality and expense risk guarantees related to
variable annuity contracts sold by the Company in connection with the Fund QP.
Tower Square performs the sales functions related to the Contracts. The Company
reimburses Tower Square for commissions paid, other sales expenses and certain
overhead expenses connected with sales functions. The Company also pays all
costs (including costs associated with the preparation of sales literature);
all costs of qualifying the Fund QP and the variable annuity contract with
regulatory authorities; the costs of proxy solicitation; and all custodian,
accountant's and legal fees. The Company also provides without cost to the Fund
QP all necessary office space, facilities, and personnel to manage its affairs.
VALUATION OF ASSETS
FUNDING OPTIONS: The value of the assets of each Underlying Fund is determined
on each Valuation Date as of the close of the New York Stock Exchange. Each
security traded on a national securities exchange is valued at the last reported
sale price on the Valuation Date. If there has been no sale on that day, then
the value of the security is taken to be the mean between the reported bid and
asked prices on the Valuation Date or on the basis of quotations received from a
reputable broker or any other recognized source.
Any security not traded on a securities exchange but traded in the
over-the-counter-market and for which market quotations are readily available is
valued at the mean between the quoted bid and asked prices on the Valuation Date
or on the basis of quotations received from a reputable broker or any other
recognized source.
Securities traded on the over-the-counter-market and listed securities
with no reported sales are valued at the mean between the last reported bid and
asked prices or on the basis of quotations received from a reputable broker or
other recognized source.
2
<PAGE> 38
Short-term investments for which a quoted market price is available are
valued at market. Short-term investments maturing in more than sixty days for
which there is no reliable quoted market price are valued by "marking to market"
(computing a market value based upon quotations from dealers or issuers for
securities of a similar type, quality and maturity.) "Marking to market" takes
in account unrealized appreciation or depreciation due to changes in interest
rates or other factors which would influence the current fair values of such
securities. Short-term investments maturing in sixty days or less for which
there is no reliable quoted market price are valued at amortized cost which
approximates market.
THE CONTRACT VALUE: The value of an Accumulation Unit on any Valuation Date is
determined by multiplying the value on the immediately preceding Valuation Date
by the net investment factor for the Valuation Period just ended. The net
investment factor is used to measure the investment performance of a Funding
Option from one Valuation Period to the next. The net investment factor for a
Funding Option for any Valuation Period is equal to the sum of 1.000000 plus the
net investment rate (the gross investment rate less any applicable Funding
Option deductions during the Valuation Period relating to the Insurance Charge
and the Funding Option Administrative Charge). The gross investment rate of a
Funding Option is equal to (a - b)/c where:
(a) = investment income plus capital gains and losses (whether realized or
unrealized);
(b) = any deduction for applicable taxes (presently zero); and
(c) = the value of the assets of the Funding Option at the beginning of the
Valuation Period.
The gross investment rate may be either positive or negative. A Funding
Option's investment income includes any distribution whose ex-dividend date
occurs during the Valuation Period.
3
<PAGE> 39
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., certified public accountants, 100
Pearl Street, Hartford, Connecticut, are the independent auditors for Fund QP.
The services to be provided to Fund QP will include primarily the audit of the
Fund's financial statements.
The consolidated balance sheet of the Travelers Insurance Company and
Subsidiaries (the "Company") as of December 31, 1995 and 1994 and the
consolidated statements of operation and retained earnings and cash flows for
each of the years then ended, have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants, and
upon the authority of said firm as experts in accounting and auditing. The
report of KPMG Peat Marwick LLP covering the December 31, 1995 consolidated
financial statements of the Company refers to a change in the accounting for
investments in accordance with provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," in 1994.
The consolidated statements of operations and retained earnings and
cash flows of the Company for the year ended December 31, 1993, have
been included herein in reliance upon the report dated January 24, 1994 of
Coopers & Lybrand, L.L.P., certified public accountants, and upon the authority
of said firm as experts in accounting and auditing.
FINANCIAL STATEMENTS
Financial Statements for Fund QP are not available since the Fund had
no assets as of the effective date of this SAI. Financial statements for The
Travelers Insurance Company are included in this SAI.
4
<PAGE> 40
STATEMENT OF ADDITIONAL INFORMATION
FUND QP
Group Variable Annuity Contract
issued by
The Travelers Insurance Company
One Tower Square
Hartford, Connecticut 06183
L-12549S (September, 1996)
5
<PAGE> 41
PERFORMANCE INFORMATION
From time to time, the Company may advertise several types of
historical performance for the Funding Options of Fund QP. The Company may
advertise the "standardized average annual total returns" of the Funding Option,
calculated in a manner prescribed by the Securities and Exchange Commission, as
well as the "non-standardized total return," as described below:
STANDARDIZED METHOD. Quotations of average annual total return are
computed according to a formula in which a hypothetical initial investment of
$1,000 is applied to the Funding Option, and then related to ending redeemable
values over one-, five-, and ten-year periods, or for a period covering the time
during which the Funding Option has been in existence if less. These quotations
reflect the deduction of all recurring charges during each period (on a pro rata
basis in the case of fractional periods). The deduction for the semiannual
administrative charge is converted to a percentage of assets based on the actual
fees collected (or anticipated, in the case of a new product), divided
by the average net assets for contracts sold under the Prospectus to which this
Statement of Additional Information relates. Each quotation assumes a total
redemption at the end of each period with the assessment of any applicable
sales charge at that time.
NON-STANDARDIZED METHOD. Non-standardized "average annual total
returns" will be calculated in a similar manner based on the
performance of the Funding Options over a period of time, usually for the
calendar year-to-date, and for the past one-, three-, five- and seven-year
periods. Nonstandardized total returns will not reflect the deduction of any
applicable sales charge or the $15 semiannual contract administrative charge,
which, if reflected, would decrease the level of performance shown. The sales
charge is not reflected because the Contract is designed for long-term
investment.
6
<PAGE> 42
GENERAL. Within the guidelines prescribed by the SEC and the National
Association of Securities Dealers, Inc. ("NASD"), performance information may be
quoted numerically or may be presented in a table, graph or other illustration.
Advertisements may include data comparing performance to well-known indices of
market performance (including, but not limited to, the Dow Jones Industrial
Average, the Standard & Poor's (S&P) 500 Index and the S&P 400 Index, the Lehman
Brothers Long T-Bond Index, the Russell 1000, 2000 and 3000 Indices, the Value
Line Index, and the Morgan Stanley Capital International's EAFE Index).
Advertisements may also include published editorial comments and performance
rankings compiled by independent organizations (including, but not limited to,
Lipper Analytical Services, Inc. and Morningstar, Inc.) and publications that
monitor the performance of Fund QP and the Underlying Funds.
For Funding Options that were in existence prior to the date they
became available under Fund QP, the standardized average annual total return and
non-standardized average annual total return quotations will show the
investment performance that such Funding Options would have achieved
(reduced by the applicable charges) had they been held under the Contract for
the period quoted. The total return quotations are based upon historical
earnings and are not necessarily representative of future performance. An
Owner's Contract Value at redemption may be more or less than original cost.
Average annual total returns for each of the Funding Options computed
according to the standardized and non-standardized methods for the period ending
December 31, 1995 (beginning at inception date) are set forth in the following
table.
TOTAL RETURN CALCULATIONS
FUNDING OPTIONS OF FUND QP
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
STANDARDIZED NON-STANDARDIZED
Inception
1-yr 5-yr 10-yr 1-yr 3-yr 5-yr 7-yr Date
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Appreciation Fund
High Yield Bond Trust
Managed Assets Trust
Dreyfus Stock Index Fund
Travelers Series Trust:
U.S. Government Securities Portfolio
Social Awareness Stock Portfolio
Utilities Portfolio
Templeton Variable Products Series Fund
Templeton Bond Fund
Templeton Stock Fund
Templeton Asset Allocation Fund
Variable Insurance Products Fund
Fidelity's High Income Portfolio
Fidelity's Equity-Income Portfolio
Fidelity's Growth Portfolio
Variable Insurance Products Fund II
Fidelity's Asset Manager Portfolio
</TABLE>
7
<PAGE> 43
TOTAL RETURN CALCULATIONS
FUNDING OPTIONS OF FUND QP (Continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
STANDARDIZED NON-STANDARDIZED
Inception
1-yr 5-yr 10-yr 1-yr 3-yr 5-yr 7-yr Date
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
American Odyssey Funds:
International Equity Fund
Emerging Opportunities Fund
Core Equity Fund
Long-Term Bond Fund
Intermediate-Term Bond Fund
Short-Term Bond Fund
CHART Funds:
Smith Barney/Travelers Series Fund, Inc:
Smith Barney Income and Growth Portfolio
Alliance Growth Portfolio
Smith Barney International Equity Portfolio
Putnam Diversified Income Portfolio
Smith Barney High Income Portfolio
MFS Total Return Portfolio
Smith Barney Money Market Portfolio
</TABLE>
8
<PAGE> 44
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The financial statements of the Registrant are not provided since the
Registrant will have no assets as of the effective date of the
Registration Statement.
The consolidated financial statements of The Travelers Insurance
Company and Subsidiaries and the Reports of Independent Accountants,
are contained in the Statement of Additional Information. The
consolidated financial statements of The Travelers Insurance Company
and Subsidiaries include:
Consolidated Statement of Operations and Retained Earnings for the
years ended December 31, 1995, 1994 and 1993
Consolidated Balance Sheet as of December 31, 1995 and 1994
Consolidated Statement of Cash Flows for the years ended December
31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements.
(b) Exhibits
1. Resolution of The Travelers Insurance Company Board of Directors
authorizing the establishment of the Registrant. (Incorporated
herein by reference to Exhibit 1 to the Registration statement
on Form N-4, filed January 11, 1996.)
2. Exempt.
3(a). Form of Distribution and Management Agreement among the
Registrant, The Travelers Insurance Company and Tower Square
Securities, Inc. (Incorporated herein by reference to Exhibit
3(a) to the Registration Statement on Form N-4, filed January
11, 1996.)
3(b). Form of Selling Agreement. (Incorporated herein by reference to
Exhibit 3(b) to the Registration Statement on Form N-4, filed
January 11, 1996.)
4. Variable Annuity Contract(s). (Incorporated herein by reference
to Exhibit 4 to the Registration Statement on Form N-4, filed
August 27, 1996.)
5. None.
6(a). Charter of The Travelers Insurance Company, as amended on
October 19, 1994. (Incorporated herein by reference to Exhibit
3(a)(i) to Registration Statement on Form S-2, File No.
33-58677, filed via Edgar on April 18, 1995.)
<PAGE> 45
6(b). By-Laws of The Travelers Insurance Company, as amended on
October 20, 1994. (Incorporated herein by reference to Exhibit
3(b)(i) to the Registration Statement on Form S-2, File No.
33-58677, filed via Edgar on April 18, 1995.)
7. None.
8. None.
9. Opinion of Counsel as to the legality of securities being
registered. (Incorporated herein by reference to Exhibit 9 to
the Registration Statement on Form N-4, filed January 11, 1996.)
10(a). Consent of Coopers & Lybrand L.L.P., Certified Public
Accountants.
10(b). Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
11. Not Applicable.
12. None
13. Schedule for computation of each performance quotation.
15. Powers of Attorney authorizing Jay S. Fishman or Ernest J.
Wright as signatory for Robert I. Lipp, Michael A. Carpenter,
Charles O. Prince III, Marc P. Weill, Irwin R. Ettinger, Donald
T. DeCarlo and Christine B. Mead. (Incorporated herein by
reference to Exhibit 15 to the Registration Statement on Form
N-4, filed January 11, 1996.)
15(b). Powers of Attorney authorizing Ernest J. Wright or Kathleen A.
McGah as signatory for Michael A. Carpenter, Jay S. Benet,
George C. Kokulis, Ian R. Stuart, and Katherine M. Sullivan.
(Incorporated herein by reference to Exhibit 15(b) to the
Registration Statement on Form N-4, filed August 27, 1996.)
<PAGE> 46
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant
OWNERSHIP OF THE TRAVELERS INSURANCE COMPANY
<TABLE>
<CAPTION>
Company State of Organization Ownership Principal Business
- ------- ---------------------- --------- ------------------
<S> <C> <C> <C>
Travelers Group Inc. Delaware Publicly Held ----------------
Associated Madison Companies Inc. Delaware 100.00 ----------------
The Travelers Insurance Group, Inc. Connecticut 100.00 ----------------
The Travelers Insurance Company Connecticut 100.00 Insurance
</TABLE>
PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
THE TRAVELERS INSURANCE COMPANY
<TABLE>
<CAPTION>
% of Voting
Securities
Owned Directly
State of or Indirectly by
Organization The Travelers Inc. Principal Business
<S> <C> <C> <C>
AC Health Ventures, Inc. Delaware 100.00 Inactive
AMCO Biotech, Inc. Delaware 100.00 Inactive
Associated Madison Companies, Inc. Delaware 100.00 Holding company.
American National Life Insurance (T & C), Ltd. Turks and 100.00 Insurance
Caicos Islands
ERISA Corporation New York 100.00 Inactive
Mid-America Insurance Services, Inc. Georgia 100.00 Third party administrator
National Marketing Corporation Pennsylvania 100.00 Inactive
PFS Services, Inc. Georgia 100.00 General partner
The Travelers Insurance Group Inc. Connecticut 100.00 Holding company
Constitution Plaza, Inc. Connecticut 100.00 Real estate brokerage
KP Properties Corporation Massachusetts 100.00 Real estate
KPI 85, Inc. Massachusetts 100.00 Real estate
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
% of Voting
Securities
Owned Directly
State of or Indirectly by
Organization The Travelers Inc. Principal Business
<S> <C> <C> <C>
KRA Advisers Corporation Massachusetts 100.00 Real estate
KRP Corporation Massachusetts 100.00 Real estate
La Metropole S.A. Belgium 98.83 P-C insurance/reinsurance
Principal Financial Associates, Inc. Delaware 100.00 Inactive
Winthrop Financial Group, Inc. Delaware 100.00 Leasing company.
The Prospect Company Delaware 100.00 Investments
89th & York Avenue Corporation New York 100.00 Real estate
979 Third Avenue Corporation Delaware 100.00 Real estate
Meadow Lane, Inc. Georgia 100.00 Real estate development
Panther Valley, Inc. New Jersey 100.00 Real estate management
Prospect Management Services Company Delaware 100.00 Real estate management
The Travelers Asset Funding Corporation Connecticut 100.00 Investment adviser
Travelers Capital Funding Corporation Connecticut 100.00 Furniture/equipment
The Travelers Corporation of Bermuda Limited Bermuda 99.99 Pensions
The Travelers Insurance Company Connecticut 100.00 Insurance
The Plaza Corporation Connecticut 100.00 Holding company
Joseph A. Wynne Agency California 100.00 Inactive
The Copeland Companies New Jersey 100.00 Holding company
American Odyssey Funds Management, Inc. New Jersey 100.00 Investment advisor
American Odyssey Funds, Inc. Maryland 100.00 Investment management
Copeland Administrative Services, Inc. New Jersey 100.00 Administrative services
Copeland Associates, Inc. Delaware 100.00 Fixed/variable annuities
Copeland Associates Agency of Ohio, Inc. Ohio 99.00 Fixed/variable annuities
Copeland Associates of Alabama, Inc. Alabama 100.00 Fixed/variable annuities
Copeland Associates of Montana, Inc. Montana 100.00 Fixed/variable annuities
Copeland Benefits Management Company New Jersey 51.00 Investment marketing
Copeland Equities, Inc. New Jersey 100.00 Fixed/variable annuities
H.C. Copeland Associates, Inc. of Massachusetts Massachusetts 100.00 Fixed annuities
Copeland Financial Services, Inc. New Jersey 100.00 Investment advisory
services.
Copeland Healthcare Services, Inc. New Jersey 100.00 Life insurance marketing
</TABLE>
2
<PAGE> 48
<TABLE>
<CAPTION>
% of Voting
Securities
Owned Directly
State of or Indirectly by
Organization The Travelers Inc. Principal Business
<S> <C> <C> <C>
H.C. Copeland and Associates, Inc. of Texas Texas 100.00 Fixed/variable annuities
Tower Square Securities, Inc. Connecticut 100.00 Broker dealer
Travelers/Net Plus Insurance Agency, Inc. Massachusetts 100.00
Travelers/Net Plus, Inc. Connecticut 100.00
The Travelers Life and Annuity Company Connecticut 100.00 Life insurance
Three Parkway Inc. - I Pennsylvania 100.00 Investment real estate
Three Parkway Inc. - II Pennsylvania 100.00 Investment real estate
Three Parkway Inc. - III Pennsylvania 100.00 Investment real estate
Travelers Insurance Holdings Inc. Georgia 100.00 Holding company
AC RE, Ltd. Bermuda 100.00 Reinsurance
American Financial Life Insurance Company Texas 100.00 Insurance
Primerica Life Insurance Company Massachusetts 100.00 Life insurance
National Benefit Life Insurance Company New York 100.00 Insurance
Primerica Financial Services (Canada) Ltd. Canada 100.00 Holding company
PFSL Investments Canada Ltd. Canada 100.00 Mutual fund dealer
Primerica Financial Services Ltd. Canada 82.82 General agent
Primerica Life Insurance Company of Canada Canada 100.00 Life insurance
The Travelers Insurance Corporation Proprietary Limited Australia 100.00 Inactive
Travelers Asset Management International Corporation New York 100.00 Investment adviser
Travelers Canada Corporation Canada 100.00 Inactive
Travelers Mortgage Securities Corporation Delaware 100.00 Collateralized obligations
Travelers of Ireland Limited Ireland 99.90 Data processing
Travelers/Aetna Property Casualty Corp. Delaware 100.00 Holding company
The Aetna Casualty and Surety Company Connecticut 100.00 Insurance company
AE Development Group, Inc. Connecticut 100.00
Aetna Casualty & Surety Company of Canada Canada 100.00
Aetna Casualty and Surety Company of America Connecticut 100.00 Insurance company
Aetna Casualty and Surety Company of Illinois Illinois 100.00 Insurance company
Aetna Commercial Insurance Company Connecticut 100.00 Insurance company
Aetna Financial Futures, Inc. Connecticut 100.00
</TABLE>
3
<PAGE> 49
Independent Auditors' Report
The Board of Directors and Shareholder of
The Travelers Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheet of The Travelers
Insurance Company and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations and retained earnings and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Travelers
Insurance Company and Subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in note 3 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in 1994.
/s/KPMG Peat Marwick LLP
------------------------
Hartford, Connecticut
January 16, 1996
14
<PAGE> 50
Report of Independent Accountants
To the Board of Directors and Shareholder of
The Travelers Insurance Company and Subsidiaries:
We have audited the consolidated statements of operations and retained earnings
and cash flows of The Travelers Insurance Company and Subsidiaries for the year
ended December 31, 1993. These consolidated financial statements are the
responsibility of Company management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of The Travelers Insurance Company and Subsidiaries for the year
ended December 31, 1993 in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
Hartford, Connecticut
January 24, 1994
15
<PAGE> 51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1995 1994 | 1993
- ---------------------------------------------------------------------------------------------|-------
<S> <C> <C> | <C>
REVENUES |
Premiums $1,496 $1,492 | $ 330
Net investment income 1,824 1,702 | 1,730
Realized investment gains (losses) 106 13 | (39)
Other 221 199 | 153
- ---------------------------------------------------------------------------------------------|-------
3,647 3,406 | 2,174
- ---------------------------------------------------------------------------------------------|-------
|
BENEFITS AND EXPENSES |
Current and future insurance benefits 1,185 1,216 | 792
Interest credited to contractholders 967 961 | 1,200
Amortization of deferred acquisition costs and |
value of insurance in force 290 281 | 56
Other operating expenses 368 351 | 211
- ---------------------------------------------------------------------------------------------|-------
2,810 2,809 | 2,259
- ---------------------------------------------------------------------------------------------|-------
|
Income (loss) from continuing operations before |
federal income taxes 837 597 | (85)
- ---------------------------------------------------------------------------------------------|-------
|
Federal income taxes: |
Current 233 (96) | (58)
Deferred 57 307 | (48)
- ---------------------------------------------------------------------------------------------|-------
290 211 | (106)
- ---------------------------------------------------------------------------------------------|-------
|
Income from continuing operations 547 386 | 21
|
Discontinued operations, net of income taxes |
Income from operations (net of taxes of $18, $83 and $48) 72 150 | 120
Gain on disposition (net of taxes of $68, $18 and $0) 131 9 | -
- ---------------------------------------------------------------------------------------------|-------
Income from discontinued operations 203 159 | 120
- ---------------------------------------------------------------------------------------------|-------
|
Net income 750 545 | 141
Retained earnings beginning of year 1,562 1,017 | 888
Dividend to parent - - | (14)
Preference stock tax benefit allocated by parent - - | 2
- ---------------------------------------------------------------------------------------------|-------
Retained earnings end of year $2,312 $1,562 | $1,017
- -----------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(at December 31, in millions) 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at market (cost, $18,187; $18,579) $18,842 $17,260
Equity securities, at market (cost, $182; $173) 224 169
Mortgage loans 3,626 4,938
Real estate held for sale, net of accumulated depreciation of $9; $9 293 383
Policy loans 1,888 1,581
Short-term securities 1,554 2,279
Other investments 874 885
- -------------------------------------------------------------------------------------------------------------
Total investments 27,301 27,495
- -------------------------------------------------------------------------------------------------------------
Cash 73 102
Investment income accrued 338 362
Premium balances receivable 107 215
Reinsurance recoverables 4,107 2,915
Deferred acquisition costs and value of insurance in force 1,962 1,939
Deferred federal income taxes - 950
Separate and variable accounts 6,949 5,160
Other assets 1,464 1,397
- -------------------------------------------------------------------------------------------------------------
Total assets $42,301 $40,535
- -------------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $14,525 $16,354
Future policy benefits 11,783 11,480
Policy and contract claims 571 1,222
Separate and variable accounts 6,916 5,128
Short-term debt 73 74
Deferred federal income taxes 32 -
Other liabilities 2,173 1,923
- -------------------------------------------------------------------------------------------------------------
Total liabilities 36,073 36,181
- -------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million
shares authorized, issued and outstanding 100 100
Additional paid-in capital 3,134 3,452
Retained earnings 2,312 1,562
Unrealized investment gains (losses), net of taxes 682 (760)
- -------------------------------------------------------------------------------------------------------------
Total shareholder's equity 6,228 4,354
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $42,301 $40,535
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 53
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1995 1994 | 1993
- -------------------------------------------------------------------------------------------------|----------
<S> <C> <C> | <C>
CASH FLOWS FROM OPERATING ACTIVITIES |
Premiums collected $ 1,346 $ 1,394 | $ 551
Net investment income received 1,855 1,719 | 1,638
Other revenues received 90 (2) | 2
Benefits and claims paid (846) (1,115) | (960)
Interest credited to contractholders (960) (868) | (1,097)
Operating expenses paid (615) (536) | (231)
Income taxes (paid) refunded (63) (27) | 25
Trading account investments, (purchases) sales, net - - | (1,585)
Other (137) (81) | 308
- -------------------------------------------------------------------------------------------------|----------
Net cash provided by (used in) operating activities 670 484 | (1,349)
Net cash provided by (used in) discontinued operations (596) 233 | (23)
- -------------------------------------------------------------------------------------------------|-----------
Net cash provided by (used in) operations 74 717 | (1,372)
- -------------------------------------------------------------------------------------------------|-----------
CASH FLOWS FROM INVESTING ACTIVITIES |
Investment repayments |
Fixed maturities 1,974 2,528 | 2,369
Mortgage loans 680 1,266 | 1,103
Proceeds from investments sold |
Fixed maturities 6,773 1,316 | 99
Equity securities 379 357 | 75
Mortgage loans 704 546 | 290
Real estate held for sale 253 728 | 949
Investments in |
Fixed maturities (10,748) (4,594) | (2,968)
Equity securities (305) (340) | (51)
Mortgage loans (144) (102) | (246)
Policy loans, net (325) (193) | (2)
Short-term securities, (purchases) sales, net 291 (367) | 850
Other investments, (purchases) sales, net (267) (299) | 41
Securities transactions in course of settlement 258 24 | (7)
Net cash provided by (used in) investing activities of |
discontinued operations 1,425 (261) | 113
- -------------------------------------------------------------------------------------------------|----------
Net cash provided by investing activities 948 609 | 2,615
- -------------------------------------------------------------------------------------------------|----------
CASH FLOWS FROM FINANCING ACTIVITIES |
Issuance (redemption) of short-term debt, net (1) 73 | -
Contractholder fund deposits 2,705 1,951 | 2,884
Contractholder fund withdrawals (3,755) (3,357) | (4,264)
Dividends to parent company - - | (14)
Return of capital to parent company - (23) | -
Net cash provided by financing activities |
of discontinued operations - 84 | 121
Other - (2) | 6
- -------------------------------------------------------------------------------------------------|----------
Net cash used in financing activities (1,051) (1,274) | (1,267)
- -------------------------------------------------------------------------------------------------|----------
Net increase (decrease) in cash $ (29) $ 52 | $ (24)
- ------------------------------------------------------------------------------------------------------------
Cash at December 31 $ 73 $ 102 $ 50
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 54
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Travelers Insurance Company is a wholly owned subsidiary of The
Travelers Insurance Group Inc. (TIGI), which is an indirect, wholly owned
subsidiary of Travelers Group Inc. (Travelers).
The Travelers Insurance Company and its subsidiaries (the Company)
principally operates through one major business segment: Life and
Annuity, which offers individual life, long-term care, annuities and
investment products to individuals and small businesses, and investment
products to employer-sponsored retirement and savings plans. The
Company's Corporate and Other Operations segment manages the investment
portfolio of the Company.
Individual products are primarily marketed through independent agents and
through two of the Company's affiliates, The Copeland Companies and the
financial consultants of Smith Barney, Inc. (Smith Barney). Group pension
products and annuities are marketed by the Company's salaried staff
directly to plan sponsors and are also placed through independent
consultants and investment advisers.
The Company sold group life and health insurance through its Managed Care
and Employee Benefits Operations (MCEBO) through 1994. See note 4.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the
accompanying financial statements follow.
Basis of presentation
The consolidated financial statements include the accounts of the
Company and its insurance and noninsurance subsidiaries. Significant
intercompany transactions have been eliminated.
In December 1992, Primerica Corporation (Primerica) acquired
approximately 27% of the common stock of the Company's then parent, The
Travelers Corporation (the 27% Acquisition). The 27% Acquisition was
accounted for as a purchase. Effective December 31, 1993, Primerica
acquired the approximately 73% of The Travelers Corporation common stock
which it did not already own, and The Travelers Corporation was merged
into Primerica, which was renamed Travelers Group Inc. This was effected
through the exchange of .80423 shares of Travelers common stock for each
share of The Travelers Corporation common stock (the Merger). All
subsidiaries of The Travelers Corporation were contributed to TIGI. In
conjunction with the Merger, Travelers contributed Travelers Insurance
Holdings Inc. (formerly Primerica Insurance Holdings, Inc.) and its
subsidiaries (TIHI) to TIGI, which in turn contributed TIHI to the
Company.
TIHI is an intermediate holding company whose primary subsidiaries are
Primerica Life Insurance Company and its subsidiary National Benefit
Life Insurance Company, which primarily offers individual life
insurance. Through September 1995 it also sold specialty accident and
health insurance through its subsidiary Transport Life Insurance Company
(see note 4).
19
<PAGE> 55
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
The consolidated financial statements and the accompanying notes reflect
the historical operations of the Company for the year ended December 31,
1993. The results of operations of TIHI and its subsidiaries are not
included in the 1993 financial statements.
The 27% Acquisition and the Merger were accounted for as a "step
acquisition", and the purchase accounting adjustments were "pushed down"
as of December 31, 1993 to the subsidiaries of TIGI, including the
Company, and reflect adjustments of assets and liabilities of the Company
(except TIHI) to their fair values determined at each acquisition date
(i.e., 27% of values at December 31, 1992 as carried forward and 73% of
the values at December 31, 1993). These assets and liabilities were
recorded at December 31, 1993 based upon management's then best estimate
of their fair values at the respective dates. Evaluation and appraisal of
assets and liabilities, including investments, the value of insurance in
force, other insurance assets and liabilities and related deferred
federal income taxes was completed during 1994. The excess of the 27%
share of assigned value of identifiable net assets over cost at December
31, 1992, which was allocated to the Company through "pushdown"
accounting, was approximately $56 million and is being amortized over ten
years on a straight-line basis. The excess of the purchase price of the
common stock over the fair value of the 73% of net assets acquired at
December 31, 1993, which was allocated to the Company through "pushdown"
accounting, was approximately $340 million and is being amortized over 40
years on a straight-line basis.
The consolidated statements of operations and retained earnings and of
cash flows and the related accompanying notes for the years ended
December 31, 1995 and 1994, which are presented on a purchase accounting
basis, are separated from the corresponding 1993 information, which is
presented on a historical accounting basis, to indicate the difference in
valuation bases.
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.
As more fully described in note 4, all of the operations comprising MCEBO
are presented as a discontinued operation and, accordingly, prior year
amounts have been restated.
Certain prior year amounts have been reclassified to conform with the
1995 presentation.
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities are valued based upon quoted market prices, or if quoted
market prices are not available, discounted expected cash flows using
market rates commensurate with the credit quality and maturity of the
investment. 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.
20
<PAGE> 56
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Equity securities, which include common and nonredeemable preferred
stocks, are available for sale and carried at fair value based primarily
on quoted market prices. Changes in fair values of equity securities are
charged or credited directly to shareholder's equity, net of income
taxes.
Mortgage loans are carried at amortized cost. 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. Impaired loans were insignificant at December 31, 1995.
Real estate held for sale is carried at the lower of cost or fair value
less estimated costs to sell. Fair value was established at time of
foreclosure by appraisers, either internal or external, using discounted
cash flow analyses and other acceptable techniques. Thereafter, an
allowance for losses on real estate held for sale is established if the
carrying value of the property exceeds its current fair value less
estimated costs to sell. There was no such allowance at December 31,
1995.
Accrual of income is suspended on fixed maturities or mortgage loans that
are in default, or on which it is likely that future payments will not be
made as scheduled. Interest income on investments in default is
recognized only as payment is received.
Gains or losses arising from futures contracts used to hedge investments
are treated as basis adjustments and are recognized in income over the
life of the hedged investments.
Gains and losses arising from forward contracts used to hedge foreign
investments in the Company's U.S. portfolios are a component of realized
investment gains and losses. Gains and losses arising from forward
contracts used to hedge investments in Canadian operations are reflected
directly in shareholder's equity, net of income taxes.
Interest rate swaps are used to manage interest rate risk in the
investment portfolio and are marked to market with unrealized gains and
losses recorded as a component of shareholder's equity, net of income
taxes. Rate differentials on interest rate swap agreements are accrued
between settlement dates and are recognized as an adjustment to interest
income from the related investment.
Investment Gains and Losses
Realized investment gains and losses are included as a component of
pretax revenues based upon specific identification of the investments
sold on the trade date and, prior to the Merger, included adjustments to
investment valuation reserves. These adjustments reflected changes
considered to be other than temporary in the net realizable value of
investments. Also included are gains and losses arising from the
remeasurement of the local currency value of foreign investments to U.S.
dollars, the functional currency of the Company. The foreign exchange
effects of Canadian operations are included in unrealized gains and
losses.
21
<PAGE> 57
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Policy Loans
Policy loans are carried at the amount of the unpaid balances that are
not in excess of the net cash surrender values of the related insurance
policies. The carrying value of policy loans, which have no defined
maturities, is considered to be fair value.
Deferred Acquisition Costs and Value of Insurance in Force
Costs of acquiring individual life insurance, annuities and health
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 and guaranteed
renewable health contracts, including long-term care, are amortized over
the period of anticipated premiums; universal life in relation to
estimated gross profits; and annuity contracts employing a level yield
method. For life insurance, a 10- to 25-year amortization period is
used; for guaranteed renewable health, a 10- to 20-year period, and a
10- to 15-year period is employed for annuities. Deferred acquisition
costs are reviewed periodically for recoverability to determine if any
adjustment is required.
The value of insurance in force represents the actuarially determined
present value of anticipated profits to be realized from life insurance,
annuities and health contracts at the date of the Merger using the same
assumptions that were used for computing related liabilities where
appropriate. The value of insurance in force was the actuarially
determined present value of the projected future profits discounted at
interest rates ranging from 14% to 18% for the business acquired. The
value of the business in force is amortized over the contract period
using current interest crediting rates to accrete interest and using
amortization methods based on the specified products. Traditional life
insurance and guaranteed renewable health policies are amortized over
the period of anticipated premiums; universal life is amortized in
relation to estimated gross profits; and annuity contracts are amortized
employing a level yield method. The value of insurance in force is
reviewed periodically for recoverability to determine if any adjustment
is required.
Separate and Variable Accounts
Separate and variable accounts primarily represent funds for which
investment income and investment gains and losses accrue directly to,
and investment risk is borne by, the contractholders. Each account has
specific investment objectives. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company. The assets of these accounts are carried at
market value. Certain other separate accounts provide guaranteed levels
of return or benefits and the assets of these accounts are carried at
amortized cost. Amounts assessed to the contractholders for management
services are included in revenues. Deposits, net investment income and
realized investment gains and losses for these accounts are excluded
from revenues, and related liability increases are excluded from
benefits and expenses.
22
<PAGE> 58
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Goodwill
The excess of the 27% share of assigned value of identifiable assets
over cost at December 31, 1992 allocated to the Company as a result of
the 27% Acquisition amounted to approximately $56 million and is being
amortized over 10 years on a straight-line basis. Goodwill resulting
from the excess of the purchase price over the fair value of the 73% of
net assets acquired related to the Merger amounted to approximately $340
million at December 31, 1993 and is being amortized over 40 years on a
straight-line basis. TIHI has goodwill of $239 million.
Contractholder Funds
Contractholder funds represent receipts from the issuance of universal
life, pension investment and certain individual annuity contracts. Such
receipts are considered deposits on investment contracts that do not
have substantial mortality or morbidity risk. Account balances are also
increased by interest credited and reduced by withdrawals, mortality
charges and administrative expenses charged to the contractholders.
Calculations of contractholder account balances for investment contracts
reflect lapse, withdrawal and interest rate assumptions based on
contract provisions, the Company's experience and industry standards.
Interest rates credited to contractholder funds range from 3.8% to 8.6%.
Contractholder funds also include other funds that policyholders leave
on deposit with the Company.
Future Policy Benefits
Benefit reserves represent liabilities for future insurance policy
benefits. Benefit reserves for life insurance, annuities, and accident
and health policies have been computed based upon mortality, morbidity,
persistency and interest assumptions applicable to these coverages,
which range from 2.5% to 10.0%, including adverse deviation. These
assumptions consider Company experience and industry standards and may
be revised if it is determined that the future experience will differ
substantially from that previously assumed. The assumptions vary by
plan, age at issue, year of issue and duration. Appropriate recognition
has been given to experience rating and reinsurance.
Operating Lease Obligations
At December 31, 1993, operating lease obligations were recorded at the
value assigned at the acquisition dates and included in the consolidated
balance sheet as a component of other liabilities. This liability is
being amortized over the respective lease periods.
23
<PAGE> 59
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Permitted Statutory Accounting Practices
The Company, domiciled principally in Connecticut and Massachusetts,
prepares statutory financial statements in accordance with the accounting
practices prescribed or permitted by the insurance departments of those
states. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners as
well as state laws, regulations, and general administrative rules.
Permitted statutory accounting practices encompass all accounting
practices not so prescribed. The impact of any permitted accounting
practices on statutory surplus of the Company is not material.
Premiums
Premiums are recognized as revenues when due. Reserves are established
for the portion of premiums that will be earned in future periods and for
deferred profits on limited-payment policies that are being recognized in
income over the policy term.
Other Revenues
Other revenues include surrender, mortality and administrative charges
and fees as earned on investment, universal life and other insurance
contracts. Other revenues also include gains and losses on dispositions
of assets and operations other than realized investment gains and losses,
revenues of noninsurance subsidiaries, and the pretax operating results
of real estate joint ventures.
Interest Credited to Contractholders
Interest credited to contractholders represents amounts earned by
universal life, pension investment and certain individual annuity
contracts in accordance with contract provisions.
Federal Income Taxes
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income
taxes arise from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and
liabilities. The deferred federal income tax asset is recognized to the
extent that future realization of the tax benefit is more likely than
not, with a valuation allowance for the portion that is not likely to be
recognized.
24
<PAGE> 60
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Accounting Standards not yet Adopted
Statement of Financial Accounting Standards No. 121, "Accounting for
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to
be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. This statement requires the write down to
fair value when long-lived assets to be held and used are impaired. It
also requires long-lived assets to be disposed of (e.g., real estate held
for sale) to be carried at the lower of cost or fair value less cost to
sell and does not allow such assets to be depreciated. The adoption of
this statement, effective January 1, 1996, did not have a material effect
on the Company's results of operations, financial condition or liquidity.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). This statement addresses alternative
accounting treatments for stock-based compensation, such as stock options
and restricted stock. FAS 123 permits either expensing the value of
stock-based compensation over the period earned or disclosing in the
financial statement footnotes the pro forma impact to net income as if
the value of stock-based compensation awards had been expensed. The value
of awards would be measured at the grant date based upon estimated fair
value, using option pricing models. The requirements of this statement
will be effective for 1996 financial statements, although earlier
adoption is permissible if an entity elects to expense the cost of
stock-based compensation. The Company, along with affiliated companies,
participates in stock option and incentive plans sponsored by Travelers.
The Company is currently evaluating the disclosures requirements and
expense recognition alternatives addressed by this statement.
3. CHANGES IN ACCOUNTING PRINCIPLES
Accounting by Creditors for Impairment of a Loan
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan," and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures," which describe how impaired loans should be measured
when determining the amount of a loan loss accrual. These statements
amended existing guidance on the measurement of restructured loans in a
troubled debt restructuring involving a modification of terms. Their
adoption did not have a material impact on the Company's financial
condition, results of operations or liquidity.
25
<PAGE> 61
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. CHANGES IN ACCOUNTING PRINCIPLES, Continued
Accounting for Certain Debt and Equity Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (FAS 115), which addresses accounting and
reporting for investments in equity securities that have a readily
determinable fair value and for all debt securities. Investment
securities have been classified as "available for sale" and are reported
at fair value, with unrealized gains and losses, net of income taxes,
charged or credited directly to shareholder's equity. Previously,
securities classified as available for sale were carried at the lower of
aggregate cost or market value. Initial adoption of this standard
resulted in an increase of approximately $232 million (net of taxes) to
net unrealized gains which is included in shareholder's equity.
This increase included an unrealized gain of $133 million (net of income
taxes) on TIHI's investment in the common stock of Travelers. See note
15.
4. ACQUISITIONS AND DISPOSITIONS
In December 1994, the Company and its affiliates sold their group dental
insurance business to Metropolitan Life Insurance Company (MetLife) and
realized a gain on the sale of $9 million (aftertax). On January 3, 1995,
the Company and its affiliates completed the sale of their group life and
related non-medical group insurance businesses to MetLife for $350
million and realized a gain on the sale of $20 million (aftertax). In
connection with the sale, the Company ceded 100% of its risks in the
group life and related businesses to MetLife on an indemnity reinsurance
basis, effective January 1, 1995. In connection with the reinsurance
transaction, the Company transferred assets with a fair market value of
approximately $1.5 billion to MetLife, equal to the statutory reserves
and other liabilities transferred.
On January 3, 1995, the Company and MetLife and certain of their
affiliates formed The MetraHealth Companies, Inc. (MetraHealth) joint
venture by contributing their group medical businesses to MetraHealth, in
exchange for shares of common stock of MetraHealth. No gain was
recognized upon the formation of the joint venture. Upon formation of the
joint venture, the Company owned 42.6% of the outstanding capital stock
of MetraHealth, TIGI owned 7.4% and the other 50% was owned by MetLife
and its affiliates. In March 1995, MetraHealth acquired HealthSpring,
Inc. for common stock of MetraHealth, resulting in a reduction in the
ownership interests of the Company to 41.10%, TIGI to 7.15%, and MetLife
to 48.25%.
In connection with the formation of the joint venture, the transfer of
the fee-based medical business (Administrative Services Only) and other
noninsurance business to MetraHealth was completed on January 3, 1995. As
the medical insurance business of the Company came due for renewal, the
risks were transferred to MetraHealth and the related operating results
for this medical insurance business were reported by the Company in 1995
as part of discontinued operations.
26
<PAGE> 62
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. ACQUISITIONS AND DISPOSITIONS, continued
On October 2, 1995, the Company and its affiliates completed the sale of
their ownership in MetraHealth to United HealthCare Corporation. Gross
proceeds to the Company were $708 million in cash, and could increase by
up to $144 million if a contingency payment based on 1995 results is
made. The gain to the Company, not including the contingency payment,
was $111 million (aftertax) and was recognized in the fourth quarter of
1995.
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's MCEBO segment in 1994. In 1995 the Company's
results reflect the medical insurance business not yet transferred, plus
its equity interest in the earnings of MetraHealth through the date of
the sale. These operations have been accounted for as a discontinued
operation. Revenues from discontinued operations for the years ended
December 31, 1995, 1994 and 1993 amounted to $1.2 billion, $3.3 billion
and $3.3 billion, respectively. The assets and liabilities of the
discontinued operations have not been segregated in the consolidated
balance sheet as of December 31, 1995 and 1994. The assets and
liabilities of the discontinued operations consist primarily of
investments and insurance-related assets and liabilities. At December
31, 1995, these assets and liabilities each amounted to $1.8 billion. At
December 31, 1994, these assets and liabilities amounted to $3.4 billion
and $3.2 billion, respectively.
In September 1995, Travelers made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings
Inc., which at the time was a wholly owned subsidiary of Travelers and
was the indirect owner of the business of Transport Life Insurance
Company (Transport). Immediately prior to this distribution, the Company
dividended Transport, an indirect, wholly owned subsidiary of the
Company, to its parent, resulting in a reduction in additional paid-in
capital of $334 million. The results of Transport through September 1995
are included in income from continuing operations.
On December 31, 1993, in conjunction with the Merger, Travelers
contributed TIHI to TIGI, which TIGI then contributed to the Company at
a carrying value of $2.1 billion. Through its subsidiaries, TIHI
primarily offers individual life insurance and, until the dividend of
Transport, specialty accident and health insurance.
5. COMMERCIAL PAPER AND LINES OF CREDIT
The Company issues commercial paper directly to investors and had $73
million outstanding at December 31, 1995. The Company maintains unused
credit availability under bank lines of credit at least equal to the
amount of the outstanding commercial paper.
Travelers, Commercial Credit Company (CCC) (an indirect wholly owned
subsidiary of Travelers) and the Company have an agreement with a
syndicate of banks to provide $1.0 billion of revolving credit, to be
allocated to any of Travelers, CCC or the Company. The Company's
participation in this agreement is limited to $250 million. The
revolving credit facility consists of a five-year revolving credit
facility which expires in 1999. At December 31, 1995, $125 million was
allocated to the Company. Under this facility the Company is required to
maintain certain minimum equity and risk-based capital levels. At
December 31, 1995, the Company was in compliance with these provisions.
27
<PAGE> 63
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. REINSURANCE
The Company participates in reinsurance in order to limit losses,
minimize exposure to large risks, provide additional capacity for future
growth and to effect business-sharing arrangements. Reinsurance is
accomplished through various plans of reinsurance, primarily
coinsurance, modified coinsurance and yearly renewable term. The Company
remains primarily liable as the direct insurer on all risks reinsured.
It is the policy of the Company to obtain reinsurance for amounts above
certain retention limits on individual life policies which vary with age
and underwriting classification. Generally, the maximum retention on an
ordinary life risk is $1.5 million. The Company writes workers'
compensation business through its Accident Department. This business is
ceded 100% to an affiliate, The Travelers Indemnity Company.
A summary of reinsurance financial data reflected within the
consolidated statement of operations and retained earnings is presented
below (in millions):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
1995 1994 | 1993
-------------------------------------------------------------------------------|---------
<S> <C> <C> | <C>
Written Premiums: |
Direct $2,166 $2,153 | $ 854
|
Assumed from: |
Non-affiliated companies - - | 13
|
Ceded to: |
Affiliated companies (374) (358) | (480)
Non-affiliated companies (302) (306) | (57)
-------------------------------------------------------------------------------|---------
Total net written premiums $1,490 $1,489 | $ 330
===============================================================================|=========
|
Earned Premiums: |
Direct $2,067 $2,301 | $ 850
|
Assumed from: |
Non-affiliated companies - - | 13
|
|
Ceded to: |
Affiliated companies (283) (384) | (480)
Non-affiliated companies (298) (305) | (58)
-------------------------------------------------------------------------------|---------
Total net earned premiums $1,486 $1,612 | $ 325
=========================================================================================
</TABLE>
28
<PAGE> 64
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. REINSURANCE, Continued
Reinsurance recoverables at December 31 include amounts recoverable on
unpaid and paid losses and were as follows (in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1995 1994
----------------------------------------------------------------------------
<S> <C> <C>
Reinsurance Recoverables:
Life and accident and health business:
Non-affiliated companies $1,744 $ 661
Affiliated companies - 3
Property-casualty business:
Affiliated companies 2,363 2,251
----------------------------------------------------------------------------
Total Reinsurance Recoverables $4,107 $2,915
============================================================================
</TABLE>
Total reinsurance recoverable at December 31, 1995 includes $929 million
recoverable from MetLife in connection with the sale of the Company's
group life and related businesses. See note 4.
7. SHAREHOLDER'S EQUITY
Additional Paid-In Capital
The decrease of $318 million in additional paid-in capital during 1995 is
due primarily to the dividend of Transport to the Company's parent (see
note 4).
The increase of $273 million in additional paid-in capital during 1994 is
due primarily to the finalization of the evaluations and appraisals used
to assign fair values to assets and liabilities under purchase
accounting.
The increase of $1.7 billion in additional paid-in capital during 1993
arose from a contribution of $400 million from The Travelers Corporation
and the contribution of TIHI (see notes 2 and 4). This was partially
offset by the impact of the initial evaluations and appraisals used to
assign fair values to assets and liabilities under purchase accounting.
Unrealized Investment Gains (Losses)
An analysis of the change in unrealized gains and losses on investments
is shown in note 15.
Shareholder's Equity and Dividend Availability
Statutory net income, including TIHI, was $235 million and $100 million
for the years ended December 31, 1995 and 1994, respectively. Statutory
net loss, excluding TIHI, was $648 million for the year ended December
31, 1993.
Statutory capital and surplus was $3.2 billion and $2.1 billion at
December 31, 1995 and 1994, respectively.
29
<PAGE> 65
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. SHAREHOLDER'S EQUITY, Continued
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 $506 million is available in 1996 for dividend payments by the
Company without prior approval of the Connecticut Insurance Department.
Dividend payments to the Company from its insurance subsidiaries are
subject to similar restrictions and are limited to $16 million in 1996.
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments with Off-Balance Sheet Risk
The Company uses derivative financial instruments, including financial
futures, interest rate swaps and forward contracts, as a means of hedging
exposure to foreign currency and/or interest rate risk on anticipated
transactions or existing assets and liabilities. Also, in the normal
course of business, the Company has fixed and variable rate loan
commitments and unfunded commitments to partnerships. 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 consolidated 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 or cash flow associated with these instruments can be less
than these amounts. For forward contracts and interest rate swaps, credit
risk is limited to the amounts calculated to be due the Company on such
contracts. For unfunded commitments to partnerships, credit exposure is
the amount of the unfunded commitments. For fixed and variable rate loan
commitments, credit exposure is represented by the contractual amount of
these instruments.
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. Some
transactions include the use of collateral to minimize credit risk and
lower the effective cost to the borrower.
The Company uses exchange traded financial futures contracts to manage
its exposure to changes in interest rates which arises from the sale of
certain insurance and investment products. To hedge against adverse
changes in interest rates, the Company enters short positions in
financial futures contracts which offset asset price changes resulting
from changes in market interest rates until an investment is purchased.
30
<PAGE> 66
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
Continued
Futures contracts have little credit risk since organized exchanges are
the counterparties. 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, 1995, the Company's futures contracts have no
fair value because these contracts are marked to market and settled in
cash.
The Company may occasionally enter 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
specified intervals, the difference between fixed-rate and floating rate
interest amounts calculated by reference to an agreed 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. Swap agreements are
not exchange traded so they are subject to the risk of default by the
counterparty. In all cases, counterparties under these agreements are
major financial institutions with the risk of non-performance considered
remote.
The off-balance-sheet risks of interest rate swaps, financial futures
contracts, forward contracts, fixed and variable rate loan commitments
and unfunded commitments to partnerships were not significant at December
31, 1995 and 1994.
Derivative Financial Instruments without Off-Balance Sheet Risk
The Company purchased a 5-year interest rate cap, with a notional amount
of $200 million, from Travelers Group Inc. in 1995 to hedge against
losses that could result from increasing interest rates. This instrument,
which does not have off-balance sheet risk, gives the Company the right
to receive payments if interest rates exceed specific levels at specified
dates. The premium of $2 million paid for this instrument is being
amortized over its life. The interest rate cap asset is reported at fair
value which is $1 million at December 31, 1995.
Fair Value of Certain Financial Instruments
The Company uses various financial instruments in the normal course of
its business. Fair values of financial instruments which are considered
insurance contracts are not required to be disclosed and are not included
in the amounts discussed.
At December 31, 1995, investments in fixed maturities had a carrying
value and a fair value of $18.8 billion, compared with a carrying value
and a fair value of $17.3 billion at December 31, 1994. See note 15.
At December 31, 1995, mortgage loans had a carrying value of $3.6
billion, which approximated fair value, compared with a carrying value of
$4.9 billion, which approximated fair value at December 31, 1994. In
estimating fair value, the Company used interest rates reflecting the
higher returns required in the real estate financing market.
31
<PAGE> 67
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
Continued
The carrying values of $647 million and $417 million of financial
instruments classified as other assets approximated their fair values at
December 31, 1995 and 1994, respectively. The carrying values of $1.3
billion and $1.2 billion of financial instruments classified as other
liabilities also approximated their fair values at December 31, 1995 and
1994, respectively. Fair value is determined using various methods
including discounted cash flows, as appropriate for the various financial
instruments.
At December 31, 1995, contractholder funds with defined maturities had a
carrying value of $2.4 billion and a fair value of $2.5 billion, compared
with a carrying value of $4.2 billion and a fair value of $4.0 billion at
December 31, 1994. The fair value of these contracts is determined by
discounting expected cash flows at an interest rate commensurate with the
Company's credit risk and the expected timing of cash flows.
Contractholder funds without defined maturities had a carrying value of
$9.3 billion and a fair value of $9.0 billion at December 31, 1995,
compared with a carrying value of $9.1 billion and a fair value of $8.8
billion at December 31, 1994. These contracts generally are valued at
surrender value.
The assets of separate accounts providing a guaranteed return had a
carrying value and a fair value of $1.5 billion and $1.6 billion,
respectively, at December 31, 1995, compared with a carrying value and a
fair value of $1.5 billion and $1.4 billion, respectively, at December
31, 1994. The liabilities of separate accounts providing a guaranteed
return had a carrying value and a fair value of $1.5 billion and $1.4
billion, respectively, at December 31, 1995, compared with a carrying
value and a fair value of $1.5 billion and $1.3 billion, respectively, at
December 31, 1994.
The carrying values of cash, short-term securities and investment income
accrued approximated their fair values.
The carrying value of policy loans, which have no defined maturities, was
considered to be fair value.
9. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance-Sheet Risk
See note 8 for a discussion of financial instruments with
off-balance-sheet risk.
Litigation
The Company is a defendant or codefendant in various litigation matters.
Although there can be no assurances, as of December 31, 1995, 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.
32
<PAGE> 68
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. BENEFIT PLANS
Pension Plans
The Company participates in qualified and nonqualified, noncontributory
defined benefit pension plans sponsored by an affiliate covering the
majority of the Company's U.S. employees. Benefits for the qualified plan
are based on an account balance formula. Under this formula, each
employee's accrued benefit can be expressed as an account that is
credited with amounts based upon the employee's pay, length of service
and a specified interest rate, all subject to a minimum benefit level.
This plan is funded in accordance with the Employee Retirement Income
Security Act of 1974 and the Internal Revenue Code. For the nonqualified
plan, contributions are based on benefits paid.
Certain subsidiaries of TIHI participate in a noncontributory defined
benefit plan sponsored by their ultimate parent, Travelers.
The Company's share of net pension expense was not significant for 1995,
1994 and 1993.
Through plans sponsored by TIGI, the Company also provides defined
contribution pension plans for certain agents. Company contributions are
primarily a function of production. The expense for these plans was not
significant in 1995, 1994 and 1993.
Other Benefit Plans
In addition to pension benefits, the Company provides certain health care
and life insurance benefits for retired employees through a plan
sponsored by TIGI. This plan does not include employees of TIHI. Covered
employees may become eligible for these benefits if they reach retirement
age while working for the Company. These retirees may elect certain
prepaid health care benefit plans. Life insurance benefits generally are
set at a fixed amount. The cost recognized by the Company for these
benefits represents its allocated share of the total costs of the plan,
net of employee contributions. The Company's share of the total cost of
the plan for 1995, 1994 and 1993 was not significant.
The Merger resulted in a change in control of The Travelers Corporation
as defined in the applicable plans, and provisions of some employee
benefit plans secured existing compensation and benefit entitlements
earned prior to the change in control, and provided a salary and benefit
continuation floor for employees whose employment was affected. These
merger-related costs were assumed by TIGI.
Savings, Investment and Stock Ownership Plan
Under the savings, investment and stock ownership plan available to
substantially all employees of TIGI (except TIHI), the Company matches a
portion of employee contributions. Effective April 1, 1993, the match
decreased from 100% to 50% of an employee's first 5% contribution and a
variable match based on the profitability of TIGI and its subsidiaries
was added. The Company's matching obligation was not significant in 1995,
1994 and 1993.
33
<PAGE> 69
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and
expenses, for certain subsidiaries and affiliates of TIGI (excluding
TIHI) are handled by the Company. Settlements for these payments between
the Company and its affiliates are made regularly. The Company provides
various employee benefits coverages to employees of certain subsidiaries
of TIGI. The premiums for these coverages were charged in accordance with
cost allocation procedures based upon salaries or census. In addition,
investment advisory and management services, data processing services and
claims processing services are shared with affiliated companies. Charges
for these services are shared by the companies on cost allocation methods
based generally on estimated usage by department.
TIGI and its subsidiaries maintain 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, 1995 and 1994,
the pool totaled approximately $2.2 billion and $1.5 billion,
respectively. The Company's share of the pool amounted to $1.4 billion
and $1.1 billion at December 31, 1995 and 1994, respectively, and is
included in short-term securities in the consolidated balance sheet.
The Company sells structured settlement annuities to its affiliates, The
Travelers Indemnity Company and its subsidiaries. Such deposits were $38
million, $39 million and $50 million for 1995, 1994 and 1993,
respectively.
The Company markets individual annuity products through The Copeland
Companies, a subsidiary of TIGI. Deposits related to these products were
$684 million, $635 million and $581 million in 1995, 1994 and 1993,
respectively.
The Company markets variable annuity products and life and accident and
health insurance through its affiliate, Smith Barney. Premiums and
deposits related to these products were $580 million and $161 million in
1995 and 1994, respectively.
The Company leases new furniture and equipment from a noninsurance
subsidiary of TIGI. The rental expense charged to the Company for this
furniture and equipment was not significant in 1995, 1994 and 1993.
At December 31, 1995 and 1994, TIC had an investment of $24 million and
$23 million, respectively, in bonds of its affiliate, Commercial Credit
Company. This is included in fixed maturities in the consolidated balance
sheet.
TIHI had an investment of $445 million and $231 million in common stock
of Travelers at December 31, 1995 and 1994, respectively. This is carried
at fair value. At December 31, 1994, Transport had an investment of $35
million in nonredeemable preferred stock of Travelers which was carried
at fair value. TIHI had notes receivable from Travelers of $30 million at
December 31, 1994, which were carried at cost. The notes were paid during
1995. These assets are included in other investments in the consolidated
balance sheet.
34
<PAGE> 70
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. LEASES
The Company has entered into various operating and capital lease
agreements for office space and data processing and certain other
equipment. Rental expense under operating leases was $22 million, $23
million and $26 million, in 1995, 1994 and 1993, respectively. Future net
minimum rental and lease payments are estimated as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Minimum operating Sublease
(in millions) rental payments rental income
--------------------------------------------------------------------------------------
<S> <C> <C>
Year ending December 31,
1996 $103 $26
1997 88 19
1998 77 10
1999 71 6
2000 64 6
Thereafter 310 28
--------------------------------------------------------------------------------------
$713 $95
--------------------------------------------------------------------------------------
</TABLE>
The Company is reimbursed by affiliates of TIGI for utilization of space
and equipment.
35
<PAGE> 71
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
(in millions) 1995 1994 | 1993
----------------------------------------------------------------------------|---------
<S> <C> <C> | <C>
Effective tax rate |
|
Income before federal income taxes $837 $ 597 | $ (85)
Statutory tax rate 35% 35% | 35%
----------------------------------------------------------------------------|---------
|
Expected federal income taxes $293 $ 209 | $ (30)
Tax effect of: |
Nontaxable investment income (4) (4) | (1)
Adjustments to benefit and other reserves - - | (50)
Adjustment to deferred tax asset for |
enacted change in tax rates from |
34% to 35% - - | (18)
Other, net 1 6 | (7)
----------------------------------------------------------------------------|---------
Federal income taxes (benefit) $290 $ 211 | $(106)
----------------------------------------------------------------------------|---------
|
Effective tax rate 35% 35% | 125%
----------------------------------------------------------------------------|---------
|
Composition of federal income taxes |
Current: |
United States $220 $(108) | $ (61)
Foreign 13 12 | 3
----------------------------------------------------------------------------|---------
Total 233 (96) | (58)
----------------------------------------------------------------------------|---------
|
Deferred: |
United States 52 302 | (48)
Foreign 5 5 | -
----------------------------------------------------------------------------|-----------
Total 57 307 | (48)
----------------------------------------------------------------------------|-----------
Federal income taxes $290 $ 211 | $ (106)
----------------------------------------------------------------------------------------
</TABLE>
Tax benefits allocated directly to shareholder's equity for the years
ended December 31, 1995 and 1994 were $7 million and $2 million,
respectively.
36
<PAGE> 72
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES, Continued
The net deferred tax liability at December 31, 1995 and the net deferred
tax asset at December 31, 1994 were comprised of the tax effects of
temporary differences related to the following assets and liabilities:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
(in millions) 1995 1994
--------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Benefit, reinsurance and other reserves $ 447 $ 453
Contractholder funds 54 158
Investments - 690
Other employee benefits 83 87
Other 264 257
--------------------------------------------------------------------------------------------
Total 848 1,645
--------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs and value of insurance in force 538 529
Investments 152 -
Prepaid pension expense 9 5
Other 81 61
--------------------------------------------------------------------------------------------
Total 780 595
--------------------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 68 1,050
Valuation allowance for deferred tax assets (100) (100)
--------------------------------------------------------------------------------------------
Net deferred tax (liability) asset after valuation allowance $ (32) $ 950
--------------------------------------------------------------------------------------------
</TABLE>
Starting in 1994 and continuing for at least five years, the Company and
its life insurance subsidiaries will file a consolidated federal income
tax return. Federal income taxes are allocated to each member of the
consolidated return on a separate return basis adjusted for credits and
other amounts required by the consolidation process. Any resulting
liability will be paid currently to the Company. Any credits for losses
will be paid by the Company to the extent that such credits are for tax
benefits that have been utilized in the consolidated federal income tax
return.
37
<PAGE> 73
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES, Continued
A net deferred tax asset valuation allowance of $100 million has been
established to reduce the deferred tax asset on investment losses to the
amount that, based upon available evidence, is more likely than not to be
realized. Reversal of the valuation allowance is contingent upon the
recognition of future capital gains in the Company's consolidated life
insurance company federal income tax return through 1998, and the
consolidated federal income tax return of Travelers commencing in 1999,
or a change in circumstances which causes the recognition of the benefits
to become more likely than not. There was no change in the valuation
allowance during 1995. The initial recognition of any benefit produced by
the reversal of the valuation allowance will be recognized by reducing
goodwill.
At December 31, 1995, 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,
which, under provisions of the Tax Reform Act of 1984, will not increase
after 1983, is estimated to be $932 million. This amount has not been
subjected to current income taxes but, under certain conditions that
management considers to be remote, may become subject to income taxes in
future years. At current rates, the maximum amount of such tax (for which
no provision has been made in the financial statements) would be
approximately $326 million.
14. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1995 1994 | 1993
--------------------------------------------------------------------------------|-----------
<S> <C> <C> | <C>
Gross investment income |
Fixed maturities $1,191 $1,082 | $1,069
Mortgage loans 419 511 | 655
Policy loans 163 110 | 104
Real estate held for sale 111 174 | 371
Other 97 52 | 8
--------------------------------------------------------------------------------|-----------
1,981 1,929 | 2,207
--------------------------------------------------------------------------------|-----------
|
Investment expenses 157 227 | 477
--------------------------------------------------------------------------------|-----------
Net investment income $1,824 $1,702 | $1,730
--------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 74
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1995 1994 | 1993
-------------------------------------------------------------------------------|----------
<S> <C> <C> | <C>
Realized |
Fixed maturities $(43) $(3) | $ 159
Equity securities 36 18 | 12
Mortgage loans 47 - | (35)
Real estate held for sale 18 - | (212)
Other 48 (2) | 37
-------------------------------------------------------------------------------|----------
Realized investment gains (losses) $106 $13 | $ (39)
------------------------------------------------------------------------------------------
</TABLE>
Changes in net unrealized investment gains (losses) that are included as
a separate component of shareholder's equity were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1995 1994 | 1993
---------------------------------------------------------------------------------|----------
<S> <C> <C> | <C>
Unrealized |
Fixed maturities $1,974 $(1,319) | $(235)
Equity securities 46 (25) | (17)
Other 200 165 | 28
---------------------------------------------------------------------------------|----------
2,220 (1,179) | (224)
Related taxes 778 (412) | (83)
---------------------------------------------------------------------------------|----------
Change in unrealized investment gains (losses) 1,442 (767) | (141)
Contribution of TIHI - - | 5
Balance beginning of year (760) 7 | 143
--------------------------------------------------------------------------------------------
Balance end of year $ 682 $ (760) $ 7
--------------------------------------------------------------------------------------------
</TABLE>
The initial adoption of FAS 115 resulted in an increase of approximately
$232 million (net of taxes) to net unrealized gains in 1994.
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale
were $6.8 billion and $1.3 billion in 1995 and 1994, respectively. Gross
gains of $80 million and $14 million and gross losses of $124 million and
$26 million in 1995 and 1994, respectively, were realized on those sales.
Prior to December 31, 1993, fixed maturities that were intended to be
held to maturity were recorded at amortized cost and classified as held
for investment. Sales from the amortized cost portfolios have been made
periodically. Such sales were $99 million in 1993, resulting in gross
realized gains of $6 million and gross realized losses of $1 million.
39
<PAGE> 75
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Prior to December 31, 1993, the carrying values of the trading portfolio
fixed maturities were adjusted to market value as it was likely they
would be sold prior to maturity. Sales of trading portfolio fixed
maturities were $4.0 billion in 1993. Gross gains of $139 million and
gross losses of $2 million were realized on those sales.
The amortized cost and market value of investments in fixed maturities
were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
December 31, 1995
-------------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
(in millions) cost gains losses value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities -
CMOs and pass through
securities $ 4,174 $103 $15 $ 4,262
U.S. Treasury securities
and obligations of U.S.
Government and
government agencies
and authorities 1,327 116 - 1,443
Obligations of states,
municipalities and
political subdivisions 91 2 - 93
Debt securities issued by
foreign governments 311 17 - 328
All other corporate bonds 12,283 442 10 12,715
Redeemable preferred stock 1 - - 1
-------------------------------------------------------------------------------------------------
Total $18,187 $680 $25 $18,842
-------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 76
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
December 31, 1994
-------------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
(in millions) cost gains losses value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities -
CMOs and pass through
securities $ 3,779 $ 3 $ 304 $ 3,478
U.S. Treasury securities
and obligations of U.S.
Government and
government agencies
and authorities 3,080 3 306 2,777
Obligations of states,
municipalities and
political subdivisions 87 - 7 80
Debt securities issued by
foreign governments 398 - 26 372
All other corporate bonds 11,225 14 696 10,543
Redeemable preferred stock 10 - - 10
-------------------------------------------------------------------------------------------------
Total $18,579 $20 $1,339 $17,260
-------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and market value of fixed maturities at December 31,
1995, 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.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Maturity Amortized Market
(in millions) cost value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 788 $ 792
Due after 1 year through 5 years 5,053 5,156
Due after 5 years through 10 years 5,176 5,416
Due after 10 years 2,996 3,216
-----------------------------------------------------------------------------------------------
14,013 14,580
Mortgage-backed securities 4,174 4,262
-----------------------------------------------------------------------------------------------
Total $18,187 $18,842
-----------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 77
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
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,
primarily planned amortization class (PAC) tranches. Prepayment protected
tranches are preferred because they provide stable cash flows in a
variety of 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, 1995 and 1994, the Company held CMOs with a market value
of $2.3 billion and $2.2 billion, respectively. Approximately 89% of the
Company's CMO holdings are fully collateralized by GNMA, FNMA or FHLMC
securities at December 31, 1995 and 1994. In addition, the Company held
$917 million and $1.3 billion of GNMA, FNMA or FHLMC mortgage-backed
securities at December 31, 1995 and 1994, respectively. Virtually all of
these securities are rated AAA. The Company also held $1.3 billion and
$927 million of securities that are backed primarily by credit card or
car loan receivables at December 31, 1995 and 1994, respectively.
Equity Securities
The cost and market values of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
December 31, 1995
-------------------------------------------------------------------------------------------------
Gross Gross
unrealized unrealized Market
(in millions) Cost gains losses value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $138 $48 $5 $181
Nonredeemable preferred stocks 44 2 3 43
-------------------------------------------------------------------------------------------------
Total $182 $50 $8 $224
-------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
December 31, 1994
---------------------------------------------------------------------------------------------------
Gross Gross
unrealized unrealized Market
(in millions) Cost gains losses value
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $ 133 $ 19 $ 21 $ 131
Nonredeemable preferred stocks 40 - 2 38
---------------------------------------------------------------------------------------------------
Total $ 173 $ 19 $ 23 $ 169
---------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 78
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Proceeds from sales of equity securities were $379 million and $357
million in 1995 and 1994, respectively. Gross gains of $27 million and
$24 million and gross losses of $2 million and $6 million in 1995 and
1994, respectively, were realized on those sales.
Mortgage loans and real estate held for sale
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest
rates below market. The Company continues its strategy, adopted in
conjunction with the Merger, to dispose of these real estate assets and
some of the mortgage loans and to reinvest the proceeds to obtain current
market yields.
At December 31, 1995 and 1994, the Company's mortgage loan and real
estate held for sale portfolios consisted of the following (in millions):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
1995 1994
---------------------------------------------------------------------------------
<S> <C> <C>
Current mortgage loans $ 3,385 $ 4,467
Underperforming mortgage loans 241 471
---------------------------------------------------------------------------------
Total 3,626 4,938
---------------------------------------------------------------------------------
Real estate held for sale 293 383
---------------------------------------------------------------------------------
Total $ 3,919 $ 5,321
---------------------------------------------------------------------------------
</TABLE>
Aggregate annual maturities on mortgage loans at December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------
(in millions)
-------------------------------------------------------
<S> <C>
Past maturity $ 189
1996 462
1997 398
1998 589
1999 339
2000 382
Thereafter 1,267
-------------------------------------------------------
Total $ 3,626
-------------------------------------------------------
</TABLE>
43
<PAGE> 79
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Concentrations
At December 31, 1995 and 1994, the Company had no concentration of credit
risk in a single investee exceeding 10% of consolidated shareholder's
equity.
The Company participates in a short-term investment pool maintained by
TIGI and its subsidiaries. See note 11.
Included in fixed maturities are below investment grade assets totaling
$1.0 billion and $922 million at December 31, 1995 and 1994,
respectively. The Company defines its below investment grade assets as
those securities rated "Ba1" or below by external rating agencies, or the
equivalent by internal analysts when a public rating does not exist. Such
assets include publicly traded below investment grade bonds and certain
other privately issued bonds that are classified as below investment
grade loans.
The Company also had significant concentrations of investments, primarily
fixed maturities, in the following industries:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Finance $ 1,491 $ 1,241
Banking 1,226 953
Electric utilities 1,023 1,222
Oil and gas 861 859
---------------------------------------------------------------------------------------------------
</TABLE>
Below investment grade assets included in the totals above, were as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Finance $ 56 $ 75
Banking 8 21
Electric utilities 26 32
Oil and gas 66 33
---------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995 and 1994, significant concentrations of mortgage
loans were for properties located in highly populated areas in the states
listed below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
California $ 736 $ 929
New York 400 558
---------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 80
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Other mortgage loan investments are fairly evenly dispersed throughout
the United States, with no holdings in any state exceeding $332 million
and $432 million at December 31, 1995 and 1994, respectively.
Concentrations of mortgage loans by property type at December 31, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Office $ 1,513 $ 2,065
Apartment 580 1,029
Agricultural 556 540
Retail 426 606
---------------------------------------------------------------------------------------------------
</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.
Investment Valuation Reserves
There were no investment valuation reserves at December 31, 1995 and
1994. Investment valuation reserve activity during 1994 and 1993 was as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1994 | 1993
--------------------------------------------------------------------------------------|------------
<S> <C> | <C>
Beginning of year $ 67 | $ 1,417
Increase - | 195
Impairments, net of gains/recoveries - | (602)
FAS 115/Purchase accounting adjustment (67) | (943)
---------------------------------------------------------------------------------------------------
End of year $ - $ 67
---------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, investment valuation reserves were comprised of $67
million for securities. Increases in the investment valuation reserves
were reflected as realized investment losses.
45
<PAGE> 81
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Nonincome Producing
Investments included in the consolidated balance sheets that were
nonincome producing for the preceding 12 months were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans $ 65 $ 127
Real estate 18 73
Fixed maturities 4 6
---------------------------------------------------------------------------------------------------
Total $ 87 $ 206
---------------------------------------------------------------------------------------------------
</TABLE>
Restructured Investments
The Company had mortgage loans and debt securities which were
restructured at below market terms totaling approximately $67 million and
$259 million at December 31, 1995 and 1994, respectively. The new terms
typically defer a portion of contract interest payments to varying future
periods. The accrual of interest is suspended on all restructured assets,
and interest income is reported only as payment is received. Gross
interest income on restructured assets that would have been recorded in
accordance with the original terms of such loans amounted to $16 million
in 1995 and $52 million in 1994. Interest on these assets, included in
net investment income, aggregated $8 million and $17 million in 1995 and
1994, respectively.
16. LIFE AND ANNUITY DEPOSIT FUNDS AND RESERVES
At December 31, 1995, the Company had $22.4 billion of life and annuity
deposit funds and reserves. Of that total, $11.4 billion were not subject
to discretionary withdrawal based on contract terms and related market
conditions. The remaining $11.0 billion were for life and annuity
products that were subject to discretionary withdrawal by the
contractholders. Included in the amount that were subject to
discretionary withdrawal were $1.5 billion of liabilities that are
surrenderable with market value adjustments. An additional $5.8 billion
of the life insurance and individual annuity liabilities are subject to
discretionary withdrawals with an average surrender charge of 5.2%.
Another $870 million of liabilities are surrenderable at book value over
5 to 10 years. In the payout phase, these funds are credited at
significantly reduced interest rates. The remaining $2.8 billion of
liabilities are surrenderable without charge. Approximately 25% of these
liabilities relate to individual life products. These 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.
46
<PAGE> 82
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. 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, in millions) 1995 1994 | 1993
---------------------------------------------------------------------------------------|-----------
<S> <C> <C> | <C>
Net income from continuing operations $ 547 $ 386 | $ 21
Reconciling adjustments |
Realized (gains) losses (106) (13) | 39
Deferred federal income taxes 57 307 | (48)
Amortization of deferred policy acquisition |
costs and value of insurance in force 290 281 | 56
Additions to deferred policy acquisition costs (454) (435) | 51
Trading account investments, |
(purchases) sales, net - - | (1,585)
Investment income accrued (9) (47) | 3
Premium balances receivable (8) 5 | (5)
Insurance reserves and accrued expenses 291 212 | 166
Restructuring reserves - - | (79)
Other, including investment valuation reserves |
in 1993 62 (212) | 32
---------------------------------------------------------------------------------------|-----------
Net cash provided by (used in) |
operating activities 670 484 | (1,349)
Net cash provided by (used in) |
discontinued operations (596) 233 | (23)
---------------------------------------------------------------------------------------|-----------
Net cash provided by (used in) |
operations $ 74 $ 717 | $ (1,372)
---------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 83
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
18. NONCASH INVESTING AND FINANCING ACTIVITIES
Significant noncash investing and financing activities include: a) the
1995 transfer of assets with a fair market value of approximately $1.5
billion and statutory reserves and other liabilities of approximately
$1.5 billion to MetLife (see note 4); b) the 1995 dividend of Transport
Life Insurance Company to the Company's parent (see note 4); c) the
acquisition of real estate through foreclosures of mortgage loans
amounting to $97 million, $229 million and $563 million in 1995, 1994 and
1993, respectively; d) the acceptance of purchase money mortgages for
sales of real estate aggregating $27 million, $96 million and $190
million in 1995, 1994 and 1993, respectively; e) the 1994 exchange of $23
million of TIHI's investment in Travelers common stock for $35 million of
Travelers nonredeemable preferred stock; f) the 1993 contribution of TIHI
by Travelers (see note 4); g) the 1993 contribution of $400 million of
bond investments by The Travelers Corporation (see note 7); h) increases
in investment valuation reserves in 1993 for real estate held for sale
(see note 15); and i) the 1993 transfer of $352 million of mortgage loans
and bonds from the Company's general account to two separate accounts.
48
<PAGE> 84
STATEMENT OF ADDITIONAL INFORMATION
FUND QP
Group Variable Annuity Contract
issued by
The Travelers Insurance Company
One Tower Square
Hartford, Connecticut 06183
L-12549S (September, 1996)
5
