<PAGE> 1
ANNUAL REPORT
DECEMBER 31, 1998
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT TWO
[TRAVELERS LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PAGE> 2
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT TWO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments in eligible funds at market value:
Capital Appreciation Fund, 1,225 shares (cost $72,886).......... $ 89,136
Money Market Portfolio, 39,530 shares (cost $39,530)............ 39,530
The Travelers Series Trust, 13,105 shares (cost $166,659)....... 170,644
Travelers Series Fund Inc., 9,626 shares (cost $177,689)........ 183,309
--------------
Total Investments (cost $456,764)............................. $ 482,619
Receivables:
Dividends....................................................... 3,451
--------------
Total Assets.................................................. 486,070
--------------
LIABILITIES:
Payables:
Insurance charges............................................... 94
Administrative fees............................................. 42
--------------
Total Liabilities............................................. 136
--------------
NET ASSETS.......................................................... $ 485,934
==============
</TABLE>
See Notes to Financial Statements
-1-
<PAGE> 3
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT TWO
STATEMENT OF OPERATIONS
FOR THE PERIOD MAY 27, 1998 (DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................ $ 15,132
EXPENSES:
Insurance charges........................................ $ 2,165
Administrative fees...................................... 959
-------------
Total expenses.......................................... 3,124
--------------
Net investment income................................. 12,008
--------------
REALIZED GAIN (LOSS) AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold.......................... 427,781
Cost of investments sold................................ 428,107
--------------
Net realized gain (loss).............................. (326)
Unrealized gain (loss) on investments:
Unrealized gain at December 31, 1998.................... 25,855
--------------
Net realized gain (loss) and unrealized gain (loss).. 25,529
--------------
Net increase in net assets resulting from operations..... $ 37,537
==============
</TABLE>
See Notes to Financial Statements
-2-
<PAGE> 4
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT TWO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD MAY 27, 1998 (DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
OPERATIONS:
Net investment income........................................ $ 12,008
Net realized gain (loss) from investment transactions........ (326)
Unrealized gain (loss) on investments........................ 25,855
--------------
Net increase in net assets resulting from operations....... 37,537
--------------
UNIT TRANSACTIONS:
Participant premium payments
(applicable to 457,581 units).............................. 458,390
Participant transfers from other Travelers accounts
(applicable to 417,156 units).............................. 417,222
Contract surrenders
(applicable to 7,658 units)................................ (7,641)
Participant transfers to other Travelers accounts
(applicable to 417,548 units).............................. (419,574)
--------------
Net increase in net assets resulting from unit transactions.. 448,397
--------------
Net increase in net assets................................. 485,934
NET ASSETS:
Beginning of period.......................................... -
--------------
End of period................................................ $ 485,934
==============
</TABLE>
See Notes to Financial Statements
-3-
<PAGE> 5
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Variable Life Insurance Separate Account Two ("Separate
Account Two") is a separate account of The Travelers Life and Annuity
Company ("Travelers Life"), a wholly owned subsidiary of The Travelers
Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of
Citigroup Inc. (formerly Travelers Group Inc.), and is available for funding
certain variable life insurance contracts issued by Travelers Life. Separate
Account Two is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust.
Participant premium payments applied to Separate Account Two are invested in
one or more eligible funds in accordance with the selection made by the
owner. As of December 31, 1998, the eligible funds available under Separate
Account Two were: Capital Appreciation Fund; Money Market Portfolio; Zero
Coupon Bond Fund Portfolio Series 2000, Zero Coupon Bond Fund Portfolio
Series 2005, Equity Income Portfolio, Large Cap Portfolio, Travelers Quality
Bond Portfolio, Lazard International Stock Portfolio, MFS Emerging Growth
Portfolio, Federated High Yield Portfolio, Federated Stock Portfolio and
Disciplined Mid Cap Stock Portfolio of The Travelers Series Trust; Alliance
Growth Portfolio, MFS Total Return Portfolio and Putnam Diversified Income
Portfolio of Travelers Series Fund Inc.; (all of which are managed by
affiliates of The Travelers). All of the funds are Massachusetts business
trusts, except for Travelers Series Fund Inc. which is incorporated under
Maryland law. Not all funds may be available in all states or to all contract
owners.
The following is a summary of significant accounting policies consistently
followed by Separate Account Two in the preparation of its financial
statements.
SECURITY VALUATION. Investments are valued daily at the net asset values per
share of the underlying funds.
SECURITY TRANSACTIONS. Security transactions are accounted for on the trade
date. Dividend income is recorded on the ex-dividend date.
FEDERAL INCOME TAXES. The operations of Separate Account Two form a part of
the total operations of Travelers Life and are not taxed separately.
Travelers Life is taxed as a life insurance company under the Internal
Revenue Code of 1986, as amended (the "Code"). Under existing federal income
tax law, no taxes are payable on the investment income of Separate Account
Two. Separate Account Two is not taxed as a "regulated investment company"
under Subchapter M of the Code.
OTHER. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
-4-
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS - CONTINUED
2. INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments were
$884,871 and $427,781, respectively, for the period ended December 31, 1998.
Realized gains and losses from investment transactions are reported on an
identified cost basis. The cost of investments in eligible funds was $456,764
at December 31, 1998. Gross unrealized appreciation for all investments at
December 31, 1998 was $26,343. Gross unrealized depreciation for all
investments at December 31, 1998 was $488.
3. CONTRACT CHARGES
Insurance charges are paid for the mortality and expense risks assumed by
Travelers Life. These charges are equivalent to 0.90% of the average net
assets of Separate Account Two on an annual basis. For any contract year that
follows a contract year in which the participant's average net fund growth
rate (as described in the prospectus) is 6.5% or greater, these charges will
be reduced to 0.75%. As of December 31, 1998 all contract owners had
insurance charges of 0.90%.
Administrative fees are paid for administrative expenses incurred by
Travelers Life. This charge is equivalent to 0.40% of the average net assets
of Separate Account Two on an annual basis.
Travelers Life receives contingent surrender charges on full or partial
contract surrenders. Such charges are computed by applying various
percentages to premiums and/or stated contract amounts (as described in the
prospectus). Travelers Life received no contingent surrender charges for the
period May 27, 1998 (date operations commenced) to December 31, 1998.
-5-
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. NET CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------
UNIT NET
UNITS VALUE ASSETS
----- ----- ------
<S> <C> <C> <C>
Capital Appreciation Fund................... 70,706 $ 1.260 $ 89,111
Money Market Portfolio...................... 38,834 1.020 39,601
The Travelers Series Trust
Equity Income Portfolio................. 77,444 1.024 79,319
Federated High Yield Portfolio.......... 6,538 0.981 6,417
Federated Stock Portfolio............... 4,118 1.099 4,527
Lazard International Stock Portfolio.... 3,257 0.982 3,199
MFS Emerging Growth Portfolio........... 6,281 1.277 8,022
Disciplined Mid Cap Stock Portfolio..... 2,241 1.268 2,841
Travelers Quality Bond Portfolio........ 66,624 1.045 69,639
Travelers Series Fund Inc.
Alliance Growth Portfolio............... 64,526 1.113 71,824
MFS Total Return Portfolio.............. 94,284 1.031 97,203
Putnam Diversified Income Portfolio..... 14,678 0.970 14,231
--------------
Net Contract Owners' Equity................. $ 485,934
==============
</TABLE>
-6-
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. STATEMENT OF INVESTMENTS
<TABLE>
<S> <C> <C>
INVESTMENT OPTIONS NO. OF MARKET
SHARES VALUE
---------------- ---------------
CAPITAL APPRECIATION FUND (18.5%)
Total (Cost $72,886) 1,225 $ 89,136
---------------- ---------------
MONEY MARKET PORTFOLIO (8.2%)
Total (Cost $39,530) 39,530 39,530
---------------- ---------------
THE TRAVELERS SERIES TRUST (35.3%)
Equity Income Portfolio (Cost $77,223) 5,149 79,342
Federated High Yield Portfolio (Cost $6,358) 541 6,012
Federated Stock Portfolio (Cost $4,077) 279 4,376
Lazard International Stock Portfolio (Cost $2,838) 246 3,167
MFS Emerging Growth Portfolio (Cost $7,232) 476 8,024
Disciplined Mid Cap Stock Portfolio (Cost $2,321) 198 2,841
Travelers Quality Bond Portfolio (Cost $66,610) 6,216 66,882
---------------- ---------------
Total (Cost $166,659) 13,105 170,644
---------------- ---------------
TRAVELERS SERIES FUND INC. (38.0%)
Alliance Growth Portfolio (Cost $67,215) 2,731 71,844
MFS Total Return Portfolio (Cost $96,097) 5,709 97,230
Putnam Diversified Income Portfolio (Cost $14,377) 1,186 14,235
---------------- ---------------
Total (Cost $177,689) 9,626 183,309
---------------- ---------------
TOTAL INVESTMENT OPTIONS (100%)
(COST $456,764) $ 482,619
===============
</TABLE>
-7-
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF SEPARATE ACCOUNT ONE OPERATIONS AND CHANGES IN NET ASSETS
FOR THE PERIOD MAY 27, 1998 (DATE OPERATIONS COMMENCED) TO DECEMBER 31,
1998
<TABLE>
<CAPTION>
CAPITAL
APPRECIATION MONEY MARKET EQUITY INCOME
FUND PORTFOLIO PORTFOLIO
---------------- ---------------- ----------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................................ $ 1,762 $ 2,704 $ 765
---------------- ---------------- ----------------
EXPENSES:
Insurance charges.................................... 314 495 315
Administrative fees.................................. 139 219 140
---------------- ---------------- ----------------
Net investment income (loss)..................... 1,309 1,990 310
---------------- ---------------- ----------------
REALIZED GAIN (LOSS) AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold..................... 1,513 420,005 1,496
Cost of investments sold........................... 1,496 420,005 1,562
---------------- ---------------- ----------------
Net realized gain (loss)......................... 17 - (66)
---------------- ---------------- ----------------
Unrealized gain (loss) on investments:
End of period...................................... 16,250 - 2,119
---------------- ---------------- ----------------
Net increase (decrease) in net assets
resulting from operations........................ 17,576 1,990 2,363
---------------- ---------------- ----------------
UNIT TRANSACTIONS:
Participant premium payments......................... - 458,390 -
Participant transfers from other Travelers accounts.. 72,640 755 78,037
Contract surrenders.................................. (1,105) (1,960) (1,081)
Participant transfers to other Travelers accounts.... - (419,574) -
---------------- ---------------- ----------------
Net increase (decrease) in net assets
resulting from unit transactions................. 71,535 37,611 76,956
---------------- ---------------- ----------------
Net increase (decrease) in net assets............ 89,111 39,601 79,319
NET ASSETS:
Beginning of period................................ - - -
---------------- ---------------- ----------------
End of period...................................... $ 89,111 $ 39,601 $ 79,319
================ ================ ================
<CAPTION>
FEDERATED HIGH FEDERATED STOCK
YIELD PORTFOLIO PORTFOLIO
---------------- ----------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends............................................ $ 407 $ 152
---------------- ----------------
EXPENSES:
Insurance charges.................................... 19 8
Administrative fees.................................. 9 4
---------------- ----------------
Net investment income (loss)..................... 379 140
---------------- ----------------
REALIZED GAIN (LOSS) AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold..................... 74 16
Cost of investments sold........................... 77 15
---------------- ----------------
Net realized gain (loss)......................... (3) 1
---------------- ----------------
Unrealized gain (loss) on investments:
End of period...................................... (346) 299
---------------- ----------------
Net increase (decrease) in net assets
resulting from operations........................ 30 440
---------------- ----------------
UNIT TRANSACTIONS:
Participant premium payments......................... - -
Participant transfers from other Travelers accounts.. 6,438 4,104
Contract surrenders.................................. (51) (17)
Participant transfers to other Travelers accounts.... - -
---------------- ----------------
Net increase (decrease) in net assets
resulting from unit transactions................. 6,387 4,087
---------------- ----------------
Net increase (decrease) in net assets............ 6,417 4,527
NET ASSETS:
Beginning of period................................ - -
---------------- ----------------
End of period...................................... $ 6,417 $ 4,527
================ ================
</TABLE>
-8-
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
LAZARD DISCIPLINED MID TRAVELERS
INTERNATIONAL MFS EMERGING CAP STOCK QUALITY BOND
STOCK PORTFOLIO GROWTH PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C>
$ 33 $ - $ - $ 2,954
- ------------------ ------------------ ------------------ ------------------
6 6 5 306
2 2 2 136
- ------------------ ------------------ ------------------ ------------------
25 (8) (7) 2,512
- ------------------ ------------------ ------------------ ------------------
10 14 9 1,481
11 12 8 1,445
- ------------------ ------------------ ------------------ ------------------
(1) 2 1 36
- ------------------ ------------------ ------------------ ------------------
329 792 520 272
- ------------------ ------------------ ------------------ ------------------
353 786 514 2,820
- ------------------ ------------------ ------------------ ------------------
- - - -
2,858 7,252 2,336 67,882
(12) (16) (9) (1,063)
- - - -
- ------------------ ------------------ ------------------ ------------------
2,846 7,236 2,327 66,819
- ------------------ ------------------ ------------------ ------------------
3,199 8,022 2,841 69,639
- - - -
- ------------------ ------------------ ------------------ ------------------
$ 3,199 $ 8,022 $ 2,841 $ 69,639
================== ================== ================== ==================
<CAPTION>
PUTNAM
ALLIANCE GROWTH MFS TOTAL DIVERSIFIED
PORTFOLIO RETURN PORTFOLIO INCOME PORTFOLIO COMBINED
- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C>
$ 3,626 $ 2,729 $ - $ 15,132
- ------------------ ------------------ ------------------ ------------------
282 366 43 2,165
125 162 19 959
- ------------------ ------------------ ------------------ ------------------
3,219 2,201 (62) 12,008
- ------------------ ------------------ ------------------ ------------------
1,322 1,706 135 427,781
1,443 1,893 140 428,107
- ------------------ ------------------ ------------------ ------------------
(121) (187) (5) (326)
- ------------------ ------------------ ------------------ ------------------
4,629 1,133 (142) 25,855
- ------------------ ------------------ ------------------ ------------------
7,727 3,147 (209) 37,537
- ------------------ ------------------ ------------------ ------------------
- - - 458,390
65,086 95,280 14,554 417,222
(989) (1,224) (114) (7,641)
- - - (419,574)
- ------------------ ------------------ ------------------ ------------------
64,097 94,056 14,440 448,397
- ------------------ ------------------ ------------------ ------------------
71,824 97,203 14,231 485,934
- - - -
- ------------------ ------------------ ------------------ ------------------
$ 71,824 $ 97,203 $ 14,231 $ 485,934
================== ================== ================== ==================
</TABLE>
-9-
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS - CONTINUED
7. SCHEDULE OF UNITS FOR SEPARATE ACCOUNT TWO
FOR THE PERIOD MAY 27, 1998 (DATE OPERATIONS COMMENCED) TO DECEMBER 31,
1998
<TABLE>
<CAPTION>
CAPITAL
APPRECIATION MONEY MARKET EQUITY INCOME
FUND PORTFOLIO PORTFOLIO
----------------- ----------------- -----------------
<S> <C> <C> <C>
Units beginning of period.................. - - -
Units purchased and transferred from
other Travelers accounts................ 71,764 458,332 78,572
Units redeemed and transferred to
other Travelers accounts................ (1,058) (419,498) (1,128)
----------------- ----------------- -----------------
Units end of period........................ 70,706 38,834 77,444
================= ================= =================
<CAPTION>
LAZARD
FEDERATED HIGH FEDERATED INTERNATIONAL
YIELD PORTFOLIO STOCK PORTFOLIO STOCK PORTFOLIO
----------------- ----------------- -----------------
<S> <C> <C> <C>
Units beginning of period.................. - - -
Units purchased and transferred from
other Travelers accounts................ 6,591 4,134 3,270
Units redeemed and transferred to
other Travelers accounts................ (53) (16) (13)
----------------- ----------------- -----------------
Units end of period........................ 6,538 4,118 3,257
================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
MFS EMERGING DISCIPLINED MID TRAVELERS
GROWTH CAP STOCK QUALITY BOND
PORTFOLIO PORTFOLIO PORTFOLIO
----------------- ----------------- -----------------
<S> <C> <C> <C>
Units beginning of period.................. - - -
Units purchased and transferred from
other Travelers accounts................ 6,295 2,249 67,662
Units redeemed and transferred to
other Travelers accounts................ (14) (8) (1,038)
----------------- ----------------- -----------------
Units end of period........................ 6,281 2,241 66,624
================= ================= =================
<CAPTION>
PUTNAM
DIVERSIFIED ALLIANCE
INCOME MFS TOTAL GROWTH
PORTFOLIO RETURN PORTFOLIO PORTFOLIO
----------------- ----------------- -----------------
<S> <C> <C> <C>
Units beginning of period.................. - - -
Units purchased and transferred from
other Travelers accounts................ 14,797 95,525 65,546
Units redeemed and transferred to
other Travelers accounts................ (119) (1,241) (1,020)
----------------- ----------------- -----------------
Units end of period........................ 14,678 94,284 64,526
================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
COMBINED
-----------------
<S> <C>
Units beginning of period.................. -
Units purchased and transferred from
other Travelers accounts................ 874,737
Units redeemed and transferred to
other Travelers accounts................ (425,206)
-----------------
Units end of period........................ 449,531
=================
</TABLE>
-10-
<PAGE> 12
INDEPENDENT AUDITORS' REPORT
To the Owners of Variable Life Contracts of The Travelers Variable Life
Insurance Separate Account Two:
We have audited the accompanying statement of assets and liabilities of The
Travelers Variable Life Insurance Separate Account Two as of December 31, 1998,
and the related statement of operations and changes in net assets for the period
May 27, 1998 (date operations commenced) to December 31, 1998. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of shares owned as of December 31, 1998, by correspondence with the
underlying funds. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Travelers Variable Life
Insurance Separate Account Two as of December 31, 1998, the results of its
operations and the changes in its net assets for the period May 27, 1998 (date
operations commenced) to December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Hartford, Connecticut
February 17, 1999
-11-
<PAGE> 13
Independent Auditors
KPMG LLP
Hartford, Connecticut
This report is prepared for the general information of contract owners and is
not an offer of shares of The Travelers Variable Life Insurance Separate Account
Two or Separate Account Two's underlying funds. It should not be used in
connection with any offer except in conjunction with the Prospectus for The
Travelers Variable Life Insurance Separate Account Two product(s) offered by The
Travelers Life and Annuity Company and the Prospectuses for the underlying
funds, which collectively contain all pertinent information, including the
applicable sales commissions.
Sep Acct II (Annual) (12-98) Printed in U.S.A.
