<PAGE> 1
Registration Statement No. 333-32589
811-08313
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 1
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Post-Effective Amendment No. 1
THE TRAVELERS SEPARATE ACCOUNT PF FOR VARIABLE ANNUITIES
--------------------------------------------------------
(Exact name of Registrant)
THE TRAVELERS INSURANCE COMPANY
-------------------------------
(Name of Depositor)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
----------------------------------------------
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including area code: (860) 277-0111
--------------
ERNEST J. WRIGHT
The Travelers Insurance Company
One Tower Square
Hartford, Connecticut 06183
----------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485.
- --------
X on May 1, 1998 pursuant to paragraph (b) of Rule 485.
- --------
60 days after filing pursuant to paragraph (a)(1) of Rule 485.
- --------
on pursuant to paragraph (a)(1) of Rule 485.
- -------- -----------
If appropriate, check the following box:
_____this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 2
THE TRAVELERS SEPARATE ACCOUNT PF FOR VARIABLE ANNUITIES
Cross-Reference Sheet
Form N-4
<TABLE>
<CAPTION>
Item
No. Caption in Prospectus
- --- ---------------------
<S> <C> <C>
1. Cover Page Prospectus
2. Definitions Index of Special Terms
3. Synopsis Prospectus Summary
4. Condensed Financial Information Not Applicable
5. General Description of Registrant, The Insurance Company; The Separate
Depositor, and Portfolio Companies Account and the Funding Options
6. Deductions Charges and Deductions; Distribution of
Variable Annuity Contracts
7. General Description of Variable The Annuity Contract
Annuity Contracts
8. Annuity Period The Annuity Period
9. Death Benefit Death Benefit
10. Purchases and Contract Value The Contract; Distribution of Variable Annuity Contract
11. Redemptions Surrenders and Redemptions
12. Taxes Federal Tax Considerations
13. Legal Proceedings Legal Proceedings and Opinions
14. Table of Contents of Statement Appendix C - Contents of the Statement
of Additional Information of Additional Information
Caption in Statement of Additional
Information
-----------------------------------------
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and History The Insurance Company
18. Services Principal Underwriter; Distribution and
Management Agreement
19. Purchase of Securities Being Offered Valuation of Assets
20. Underwriters Principal Underwriter
21. Calculation of Performance Data Performance Information
22. Annuity Payments Not Applicable
23. Financial Statements Financial Statements
</TABLE>
<PAGE> 3
PART A
Information Required in a Prospectus
<PAGE> 4
PRIMELITE VARIABLE ANNUITY
CONTRACT PROFILE
APRIL 30, 1998
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD
KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE FULLY
DESCRIBED IN THE FULL PROSPECTUS WHICH IS ATTACHED TO THIS PROFILE. PLEASE READ
THE PROSPECTUS CAREFULLY. THE TERMS "WE," "US," "OUR" AND THE "COMPANY" REFER TO
TRAVELERS INSURANCE COMPANY. "YOU" AND "YOUR" REFER TO THE CONTRACT OWNER.
1. THE VARIABLE ANNUITY CONTRACT. The Contract offered by Travelers Insurance
Company is a variable annuity that is intended for retirement savings or other
long-term investment purposes. The Contract provides a death benefit as well as
guaranteed income options. Under a qualified Contract, you can make one or more
payments, as you choose, on a tax-deferred basis. Under a nonqualified Contract,
you can make one or more payments with after-tax dollars. You direct your
payment(s) to one or more of the variable funding options listed in Section 4,
and/or to the Fixed Account. We guarantee money directed to the Fixed Account as
to principal and interest. The initial interest rate is guaranteed for a
one-year period. After that, interest is guaranteed each calendar quarter by the
Company. The variable funding options are designed to produce a higher rate of
return than the Fixed Account; however, this is not guaranteed. You may also
lose money in the variable funding options.
The Contract, like all deferred variable annuity contracts, has two phases: the
accumulation phase and the income phase. During the accumulation phase, under a
qualified contract, your pre-tax contributions accumulate on a tax-deferred
basis and are taxed as income when you make a withdrawal, presumably when you
are in a lower tax bracket. During the accumulation phase, under a nonqualified
contract, earnings on your after-tax contributions accumulate on a tax-deferred
basis and are taxed as income when you make a withdrawal. The income phase
occurs when you begin receiving payments from your Contract. The amount of money
you accumulate in your Contract determines the amount of income (annuity
payments) you receive during the income phase.
2. ANNUITY PAYMENTS (THE INCOME PHASE). You may chose to receive annuity
payments from the Fixed Account or the variable funding options. If you want to
receive scheduled payments from your annuity, you can choose one of the
following annuity options: Option 1 -- payments for your life (life
annuity) -- assuming that you are the annuitant; Option 2 -- payments for your
life with an added guarantee that payments will continue to your beneficiary for
a certain number of months (120, 180 or 240, as you select), if you should die
during that period; Option 3 -- Joint and Last Survivor Annuity, in which
payments are made for your life and the life of another person (usually your
spouse); Option 4 -- Joint Survivor Life Annuity -- the annuity is reduced on
death of Primary Payee. There are also two Income Options: Fixed Amount -- the
cash surrender value of your Contract will be paid to you in equal payments; or
Fixed Period -- the cash surrender value will be used to make payments for a
fixed time period. If you should die before the end of the Fixed Period, the
remaining amount will go to your beneficiary.
Once you make an election of an annuity option and begin to receive payments, it
cannot be changed. During the income phase, you have the same investment choices
you had during the accumulation phase. If amounts are directed to the variable
funding options, the dollar amount of your payments may increase or decrease.
3. PURCHASE PAYMENTS. You may purchase the Contract with an initial payment of
at least $5,000, which amount may be paid in one or more installments within the
first twelve months after the contract date. You may make additional payments of
at least $100 at any time during the accumulation phase.
<PAGE> 5
WHO SHOULD PURCHASE THIS CONTRACT? The Contract is currently available for use
in connection with (1) individual nonqualified purchases; (2) rollovers from
Individual Retirement Annuities (IRAs); and (3) rollovers from other qualified
retirement plans. Qualified contracts include contracts qualifying under Section
401(a), 403(b), or 408(b) of the Internal Revenue Code of 1986, as amended.
4. INVESTMENT OPTIONS. You can direct your money into the Fixed Account or any
or all of the following variable funding options. The funding options are
described in the accompanying fund prospectuses. Depending on market conditions,
you may make or lose money in any of these options:
<TABLE>
<S> <C>
GREENWICH STREET SERIES FUND
Appreciation Portfolio
SMITH BARNEY CONCERT ALLOCATION SERIES
Concert Select Balanced Portfolio
Concert Select Conservative Portfolio
Concert Select Growth Portfolio
Concert Select High Growth Portfolio
Concert Select Income Portfolio
TRAVELERS SERIES FUND, INC.
MFS Total Return Portfolio
Smith Barney High Income Portfolio
Smith Barney International Equity Portfolio
Smith Barney Large Cap Value Portfolio
Smith Barney Money Market Portfolio
TRAVELERS SERIES TRUST
MFS Mid Cap Growth Portfolio
MFS Research Portfolio
</TABLE>
5. EXPENSES. The Contract has insurance features and investment features, and
there are costs related to each. The Company deducts an annual administrative
charge of $30. The annual insurance charge is 1.25% of the amounts you direct to
the funding options; and a related sub-account administrative charge of .15%
annually is charged.
Each funding option has charges for management and other expenses. The charges
range from 0.65% to 1.24% annually, of the average daily net asset balance of
the funding option, depending on the funding option.
If you withdraw money, the Company may deduct a withdrawal charge (0% to 8%) of
the purchase payments from the Contract. If you withdraw all amounts under the
contract, or if you begin receiving annuity payments, the Company may be
required by your state to deduct a premium tax of 0% - 5%.
The following table is designed to help you understand the Contract charges. The
"Total Annual Insurance Charge" includes the mortality and expense risk charge
and the administrative charges. The column "Total Annual Charges" reflects the
$30 annual contract administrative charge (which is represented as .100% below),
the mortality and expense risk charge, the sub-account charge and the investment
charges for each portfolio. The columns under the heading "Examples" show how
much you would pay under the Contract for a one-year period and for a 10-year
period. As required by the SEC, the examples assume that you invested $1,000 in
a Contract that earns 5% annually and that you withdraw your money at the end of
year 1 and at the end of year 10. For year 1, the Total Annual Insurance Charges
are assessed as well as the withdrawal charges. For year 10, the example shows
the aggregate of all the annual charges assessed during that time, but no
withdrawal charge is shown. For these examples, the premium tax is assumed to be
0%. Please refer to the Fee Table contained in the prospectus for more details.
ii
<PAGE> 6
<TABLE>
<CAPTION>
TOTAL EXAMPLES: TOTAL
TOTAL ANNUAL ANNUAL EXPENSES
ANNUAL FUNDING TOTAL AT END OF:
INSURANCE OPTION ANNUAL -----------------
PORTFOLIO NAME CHARGES EXPENSES CHARGES 1 YEAR 10 YEARS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GREENWICH STREET SERIES FUND
Appreciation Portfolio............................. 1.50% 1.00% 2.50% $105 $284
SMITH BARNEY CONCERT ALLOCATION SERIES
Concert Select Balanced Portfolio.................. 1.50% 1.10% 2.60% 106 293
Concert Select Conservative Portfolio.............. 1.50% 1.06% 2.56% 106 290
Concert Select Growth Portfolio.................... 1.50% 1.15% 2.65% 107 298
Concert Select High Growth Portfolio............... 1.50% 1.24% 2.74% 108 307
Concert Select Income Portfolio.................... 1.50% 1.00% 2.50% 105 284
TRAVELERS SERIES FUND, INC.
MFS Total Return Portfolio......................... 1.50% 0.86% 2.36% 104 270
Smith Barney High Income Portfolio................. 1.50% 0.70% 2.20% 102 253
Smith Barney International Equity Portfolio........ 1.50% 1.01% 2.51% 105 285
Smith Barney Large Cap Value Portfolio............. 1.50% 0.69% 2.19% 102 253
Smith Barney Money Market Portfolio................ 1.50% 0.65% 2.15% 102 248
THE TRAVELERS SERIES TRUST
MFS Mid Cap Growth Portfolio....................... 1.50% 1.00% 2.50% 105 284
MFS Research Portfolio............................. 1.50% 1.00% 2.50% 105 284
</TABLE>
6. TAXES. The payments you make to a qualified Contract during the accumulation
phase are made with before-tax dollars. You will be taxed on your purchase
payments and on any earnings when you make a withdrawal or begin receiving
annuity payments. Under a nonqualified Contract, payments to the Contract are
made with after-tax dollars, and any earnings will accumulate tax-deferred. You
will be taxed on these earnings when they are withdrawn from the Contract.
For owners of qualified Contracts, if you reach a certain age, you may be
required by federal tax laws to begin receiving payments from your annuity or
risk paying a penalty tax. In those cases, we can calculate and pay you the
minimum required distribution amounts. If you are younger than 59 1/2 when you
take money out, you may be charged a 10% federal penalty tax on the amount
withdrawn.
7. ACCESS TO YOUR MONEY. You can take withdrawals any time during the
accumulation phase. A withdrawal charge may apply. The amount of the charge
depends on a number of factors, including the length of time since the purchase
payment was made (8% if withdrawn within one year, gradually decreasing to 0%
for payments held by the Company for 8 years or more). During the first contract
year, you may withdraw up to 15% of the initial purchase payment without a
withdrawal charge. After the first contract year, you may withdraw up to 15% of
the contract value (as of the end of the previous contract year) without a
withdrawal charge. Of course, you may also have to pay income taxes and a tax
penalty on taxable amounts you withdraw.
8. PERFORMANCE. The value of the Contract will vary depending upon the
investment performance of the funding options you choose. Past performance is
not a guarantee of future results. Performance information that predates the
separate account is considered "nonstandard" by the SEC. Such nonstandard
performance is shown in the Statement of Additional Information that you may
request free of charge.
9. DEATH BENEFIT. Assuming you are the Annuitant, if you die before you move to
the income phase, the person you have chosen as your beneficiary will receive a
death benefit. The death benefit paid depends on your age at the time of your
death. The death benefit value is calculated at the close of the business day on
which the Company's Home Office receives due proof of death and written
distribution instructions. If you die after you reach age 85, the death benefit
equals the cash value less any applicable premium tax and outstanding loans.
Please refer to the Contract prospectus for a description of the death benefit
applicable if you die before you reach age 85.
iii
<PAGE> 7
NOTE: In all cases, death benefit amounts will be reduced by premium taxes owed,
partial withdrawals not previously deducted, and any outstanding loans, (if
applicable). Certain states may have varying age requirements. The death benefit
applies upon the first death of the Owner, Joint Owner or Annuitant. Please
refer to the Contract prospectus for more details.
10. OTHER INFORMATION
RIGHT TO RETURN. If you cancel the Contract within twenty days after you
receive it, you will receive a full refund of the Contract Value (including
charges). Where state law requires a longer right to return period, or the
return of purchase payments, the Company will comply. You bear the investment
risk during the right to return period; therefore, the Contract Value returned
may be greater or less than your purchase payment. If the Contract is purchased
as an Individual Retirement Annuity, and is returned within the first seven days
after delivery, your full purchase payment will be refunded; during the
remainder of the right to return period, the Contract Value (including charges)
will be refunded. The Contract Value will be determined at the close of business
on the day we receive a written request for a refund.
TRANSFER BETWEEN FUNDING OPTIONS. You can transfer between the variable funding
options as frequently as you wish without any current tax implications.
Currently there is no charge for transfers, nor a limit to the number of
transfers allowed. The Company may charge a fee for any transfer requests, or
may limit the number of transfers allowed. The Company, at the minimum, would
always allow one transfer every six months. Please refer to Appendix A for
information regarding transfers between the Fixed Account and variable funding
options.
ADDITIONAL FEATURES. This Contract has other features you may be interested in.
These include:
DOLLAR COST AVERAGING. This is a program that allows you to invest a fixed
amount of money in funding options each month, theoretically giving you a lower
average cost per unit over time than a single one-time purchase. 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.
SYSTEMATIC WITHDRAWAL OPTION. Before the maturity date, you can arrange to have
money sent to you at set intervals throughout the year. Of course any applicable
income and penalty taxes will apply on amounts withdrawn.
AUTOMATIC REBALANCING. You may elect to have the Company periodically
reallocate the values in your contract to match your original (or your latest)
funding option allocation request.
11. INQUIRIES. If you need more information, please contact us at (888)
556-5412 or:
Travelers Insurance Company
PrimeElite Travelers Service Center
One Tower Square
Hartford, CT 06183-8036
iv
<PAGE> 8
PRIMELITE:
THE TRAVELERS SEPARATE ACCOUNT PF
FOR VARIABLE ANNUITIES
This prospectus describes PRIMELITE, a flexible premium variable annuity
contract (the "Contract") issued by The Travelers Insurance Company (the
"Company," "we" or "our"). The Contract is available in connection with certain
retirement plans that qualify for special federal income tax treatment
("qualified Contracts") as well as those that do not qualify for such treatment
("nonqualified Contracts"). PrimElite may be issued as an individual Contract or
as a group Contract. In states where only group Contracts are available, you
will be issued a certificate summarizing the provisions of the group Contract.
For convenience, this prospectus refers to both Contracts and certificates as
"Contracts."
You can choose to have your purchase payments accumulate on a fixed basis (i.e.,
a Fixed Account funded through the Company's general account) and/or a variable
basis (i.e., one or more of the sub-accounts ("funding options") of the
Travelers Separate Account PF ("Separate Account PF"). Your contract value will
vary daily to reflect the investment experience of the funding options you
select. The funding options currently available are:
<TABLE>
<S> <C>
GREENWICH STREET SERIES FUND
Appreciation Portfolio
SMITH BARNEY CONCERT ALLOCATION SERIES
Concert Select Balanced Portfolio
Concert Select Conservative Portfolio
Concert Select Growth Portfolio
Concert Select High Growth Portfolio
Concert Select Income Portfolio
TRAVELERS SERIES FUND, INC.
MFS Total Return Portfolio
Smith Barney High Income Portfolio
Smith Barney International Equity Portfolio
Smith Barney Large Cap Value Portfolio
Smith Barney Money Market Portfolio
TRAVELERS SERIES TRUST
MFS Mid Cap Growth Portfolio
MFS Research Portfolio
</TABLE>
The contracts and/or some of the funding options may not be available in all
states. THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT
PROSPECTUSES FOR THE FUNDING OPTIONS. THESE PROSPECTUSES SHOULD BE READ AND
RETAINED FOR FUTURE REFERENCE.
This prospectus provides the information that you should know before investing
in the Contract. You can receive additional information about Separate Account
PF by requesting a copy of the Statement of Additional Information ("SAI") dated
April 30, 1998. The SAI has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated by reference into this prospectus. To
request a copy, write to The Travelers Insurance Company, PrimElite Travelers
Service Center, One Tower Square, Hartford, Connecticut 06183-8036, call (888)
556-5412, or access the SEC's Web Site (http://www.sec.gov). The Table of
Contents of the SAI appears in Appendix C of this prospectus.
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.
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 APRIL 30, 1998
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEX OF SPECIAL TERMS................. 2
FEE TABLE.............................. 3
THE ANNUITY CONTRACT................... 4
Purchase Payments...................... 5
Accumulation Units..................... 5
The Funding Options.................... 5
Substitutions and Additions............ 6
CHARGES AND DEDUCTIONS................. 6
Withdrawal Charge...................... 6
Free Withdrawal Allowance.............. 7
Administrative Charges................. 7
Mortality and Expense Risk Charge...... 7
Reduction or Elimination of Contract
Charges.............................. 7
Funding Option Expenses................ 8
Premium Tax............................ 8
Changes in Taxes Based Upon Premium or
Value................................ 8
OWNERSHIP PROVISIONS................... 8
Types of Ownership..................... 8
Beneficiary............................ 8
Annuitant.............................. 9
TRANSFERS.............................. 9
Dollar Cost Averaging.................. 9
ACCESS TO YOUR MONEY................... 10
Systematic Withdrawals................. 10
Loans.................................. 11
DEATH BENEFIT.......................... 11
Death Proceeds Prior to the Maturity Date . 11
Death Proceeds After the Maturity Date . 12
THE ANNUITY PERIOD..................... 12
Maturity Date.......................... 12
Allocation of Annuity.................. 13
Variable Annuity....................... 13
Fixed Annuity.......................... 13
PAYMENT OPTIONS........................ 13
Election of Options.................... 13
Annuity Options........................ 14
Income Options......................... 14
MISCELLANEOUS CONTRACT PROVISIONS...... 15
Right to Return........................ 15
Termination............................ 15
Required Reports....................... 15
Suspension of Payments................. 15
Transfers of Contract Values to Other
Annuities............................ 16
THE SEPARATE ACCOUNT................... 16
Performance Information................ 16
FEDERAL TAX CONSIDERATIONS............. 17
General Taxation of Annuities.......... 17
Types of Contracts: Qualified or
Nonqualified......................... 17
Nonqualified Annuity Contracts......... 17
Qualified Annuity Contracts............ 18
Penalty Tax for Premature
Distributions........................ 18
Diversification Requirements for
Variable Annuities................... 18
Ownership of the Investments........... 18
Mandatory Distributions for Qualified
Plans................................ 19
OTHER INFORMATION...................... 19
The Insurance Company.................. 19
IMSA................................... 19
Year 2000 Compliance................... 19
Distribution of Variable Annuity
Contracts............................ 19
Conformity with State and Federal
Laws................................. 20
Voting Rights.......................... 20
Legal Proceedings And Opinions......... 20
APPENDIX A: The Fixed Account.......... 21
APPENDIX B: Waiver of Withdrawal Charge
for Nursing Home Confinement......... 22
APPENDIX C: Table of Contents of the
Statement of Additional
Information.......................... 23
</TABLE>
INDEX OF SPECIAL TERMS
The following terms are italicized throughout the prospectus. Refer to the page
listed for an explanation of each term.
<TABLE>
<S> <C>
Accumulation Unit...................... 5
Annuitant.............................. 9
Annuity Payments....................... 13
Annuity Unit........................... 13
Cash Surrender Value................... 10
Contract Date.......................... 4
Contract Owner (You, Your)............. 4
Contract Value......................... 4
Contract Year.......................... 4
Fixed Account.......................... 21
Funding Option(s)...................... 4
Maturity Date.......................... 4
Purchase Payment....................... 4
Written Request........................ 4
</TABLE>
2
<PAGE> 10
SEPARATE ACCOUNT PF
FEE TABLE
- --------------------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
WITHDRAWAL CHARGE (as a percentage of purchase payments
withdrawn):
</TABLE>
<TABLE>
<CAPTION>
LENGTH OF TIME FROM
PURCHASE PAYMENT
(NUMBER OF YEARS) CHARGE
<S> <C>
1 8%
2 7%
3 6%
4 5%
5 4%
6 3%
7 2%
8 1%
9 and over 0%
ANNUAL CONTRACT ADMINISTRATIVE CHARGE: $30
ANNUAL SEPARATE ACCOUNT CHARGES:
(as a percentage of the average daily net assets of the
Separate Account)
Mortality and Expense Risk Charge..................... 1.25%
Administrative Expense Charge......................... .15%
-----
Total Separate Account Charges.................... 1.40%
FUNDING OPTION EXPENSES:
(as a percentage of average daily net assets of the funding option
as of December 31, 1997, unless otherwise noted.)
</TABLE>
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
FEE EXPENSES FUNDING
(AFTER EXPENSES (AFTER EXPENSES OPTION
PORTFOLIO NAME ARE REIMBURSED) ARE REIMBURSED) EXPENSES
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GREENWICH STREET SERIES FUND
Appreciation Portfolio.............................. 0.75% 0.25% 1.00%
SMITH BARNEY CONCERT ALLOCATION SERIES
Concert Select Balanced Portfolio................... 0.35% 0.75%(1) 1.10%
Concert Select Conservative Portfolio............... 0.35% 0.71%(1) 1.06%
Concert Select Growth Portfolio..................... 0.35% 0.80%(1) 1.15%
Concert Select High Growth Portfolio................ 0.35% 0.89%(1) 1.24%
Concert Select Income Portfolio..................... 0.35% 0.65%(1) 1.00%
TRAVELERS SERIES FUND, INC.
MFS Total Return Portfolio.......................... 0.80% 0.06%(2) 0.86%
Smith Barney High Income Portfolio.................. 0.60% 0.10%(2) 0.70%
Smith Barney International Equity Portfolio......... 0.90% 0.11%(2) 1.01%
Smith Barney Large Cap Value Portfolio.............. 0.65% 0.04%(2) 0.69%
Smith Barney Money Market Portfolio................. 0.60% 0.05%(3) 0.65%
THE TRAVELERS SERIES TRUST
MFS Mid Cap Growth Portfolio........................ 0.80% 0.20%(4) 1.00%
MFS Research Portfolio.............................. 0.80% 0.20%(4) 1.00%
</TABLE>
NOTES:
The purpose of the Fee Table is to assist Contract Owners in understanding the
various costs and expenses that a Contract Owner will bear, directly or
indirectly. See "Charges and Deductions" in this prospectus for additional
information. Expenses shown do not include premium taxes, which may be
applicable. "Other Expenses" include operating costs of the fund. These expenses
are reflected in each funding option's net asset value and are not deducted from
the account value under the contract.
(1) The Concert Allocation Series Select Portfolios (a "Fund of Funds") invest
in the shares of other mutual funds. Their management fee is 0.35% and they
have no expenses. The other expenses shown are based on the expected
weighted average of underlying fund expense ratios (which include a
management fee and other expenses) as of January 31, 1998, the underlying
funds' fiscal year end. See the Fund prospectus for information regarding
the equity/fixed income (including money market) investment target and range
for each portfolio, and for the expense ratios for the underlying funds.
Such ratios range from 0.50% to 1.29%.
3
<PAGE> 11
(2) Other expenses are as of October 31, 1997 (the Fund's fiscal year end).
There were no fees waived or expenses reimbursed for these funds in 1997.
(3) Other expenses are as of October 31, 1997 and take into account the current
expense limitations agreed to by the Portfolio's investment manager (the
"Manager"). The Manager waived all of its fees for the period and reimbursed
the Portfolio for its expenses. Without such arrangements, the Total
Expenses for the Smith Barney Money Market Portfolio would have been 0.67%.
(4) Other Expenses are based on estimates for the current fiscal year and will
include fees for shareholder services, administrative fees, custodial fees ,
legal and accounting fees, printing costs and registration fees.
Additionally, these fees reflect a voluntary expense reimbursement
arrangement by Travelers to reimburse the Portfolios for the amount by which
their aggregate total operating expenses exceed 1.00%. These expenses have
been illustrated at a limit which the Portfolios' adviser believes to be in
line with the actual projected expenses of the Portfolios.
EXAMPLE*
Assuming a 5% annual return, a $1,000 investment would be subject to the
following expenses:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
IF CONTRACT IS SURRENDERED AT THE IF CONTRACT IS NOT SURRENDERED OR
END OF PERIOD SHOWN: IS ANNUITIZED AT END OF PERIOD SHOWN:
------------------------------------- -------------------------------------
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>
- -----------------------------------------------------------------------------------------------------------------------
GREENWICH STREET SERIES FUND
Appreciation Portfolio............... 105 138 173 284 25 78 133 284
SMITH BARNEY CONCERT ALLOCATION SERIES
Concert Select Balanced Portfolio.... 106 141 178 293 26 81 138 293
Concert Select Conservative
Portfolio.......................... 106 140 176 290 26 80 136 290
Concert Select Growth Portfolio...... 107 142 181 298 27 82 141 298
Concert Select High Growth
Portfolio.......................... 108 145 185 307 28 85 145 307
Concert Select Income Portfolio...... 105 138 173 284 25 78 133 284
TRAVELERS SERIES FUND, INC.
MFS Total Return Portfolio........... 104 134 166 270 24 74 126 270
Smith Barney High Income Portfolio... 102 129 158 253 22 69 118 253
Smith Barney International Equity
Portfolio.......................... 105 138 174 285 25 78 134 285
Smith Barney Large Cap Value
Portfolio.......................... 102 129 158 253 22 69 117 252
Smith Barney Money Market Portfolio.. 102 127 155 248 22 67 115 248
THE TRAVELERS SERIES TRUST
MFS Mid Cap Growth Portfolio......... 105 138 173 284 25 78 133 284
MFS Research Portfolio............... 105 138 173 284 25 78 133 284
</TABLE>
* THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE REFLECTS THE $30 ANNUAL CONTRACT ADMINISTRATIVE CHARGE AS AN ANNUAL
CHARGE OF 0.100% OF ASSETS.
THE ANNUITY CONTRACT
- --------------------------------------------------------------------------------
PrimElite is a contract between you, the contract owner, and Travelers Insurance
Company (called "us" or the "Company"). Under this contract, you make purchase
payments to us and we credit them to your Contract. The Company promises to pay
you an income, in the form of annuity payments, beginning on a future date that
you choose, the maturity date. The purchase payments accumulate tax deferred in
the funding option(s) of your choice. The contract owner assumes the risk of
gain or loss according to the performance of the funding options. The contract
value is the amount of purchase payments, plus or minus any investment
experience or interest. The contract value also reflects all surrenders made and
charges deducted. There is generally no guarantee that at the maturity date the
contract value will equal or exceed the total purchase payments made under the
Contract, except as noted under the Death Benefit provisions described in this
prospectus. The date the contract and its benefits became effective is referred
to as the contract date. Each anniversary of this contract date is called a
contract year.
Certain changes and elections must be made in writing to the Company. Where the
term "written request" is used, it means that written information must be sent
to the Company's Home Office in a form and content satisfactory to us.
4
<PAGE> 12
PURCHASE PAYMENTS
The initial purchase payment must be at least $5,000. This amount may be paid in
one or more installments within the first twelve months after the contract date.
Additional payments of at least $100 may be made under the Contract at any time.
Under certain circumstances, we may waive the minimum purchase payment
requirement. Purchase Payments over $1,000,000 may be made with our prior
consent.
We will apply the initial purchase payment within two business days after we
receive it at our Home Office in good order. Subsequent purchase payments
received in good order will be credited to a Contract within one business day.
Our business day ends when the New York Stock Exchange closes, usually 4:00 p.m.
Eastern time.
ACCUMULATION UNITS
An accumulation unit is used to calculate the value of a Contract. An
accumulation unit works like a share of a mutual fund. Each funding option has a
corresponding accumulation unit value. The accumulation units are valued each
business day and may increase or decrease from day to day. The number of
accumulation units we will credit to your Contract once we receive a purchase
payment is determined by dividing the amount directed to each funding option by
the value of the accumulation unit. We calculate the value of an accumulation
unit for each funding option each day after the New York Stock Exchange closes.
After the value is calculated, your Contract is credited. During the annuity
period (i.e., after the maturity date), you are credited with annuity units.
THE FUNDING OPTIONS
You choose which of the following funding options to have your purchase payments
allocated to. You will find detailed information about the options and their
inherent risks in the current prospectuses for the funding options which must
accompany this prospectus. Since each option has varying degrees of risk, please
read the prospectuses carefully before investing. Additional copies of the
prospectuses may be obtained by contacting your Primerica Financial Services
representative or by calling 1-888-556-5412.
The current funding options are listed below, along with their investment
advisers and any subadviser:
<TABLE>
<CAPTION>
FUNDING OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GREENWICH STREET SERIES FUND
Appreciation Portfolio Seeks long-term appreciation of capital by Mutual Management Corp. ("MMC")
investing primarily in equity securities. (formerly Smith Barney Mutual
Funds Management, Inc.)
SMITH BARNEY CONCERT ALLOCATION
SERIES INC.
Concert Select Balanced Seeks a balance of growth of capital and income by Travelers Investment Adviser
Portfolio investing in a select group of mutual funds. ("TIA")
Concert Select Conservative Seeks income and, secondarily, long-term growth of TIA
Portfolio capital by investing in a select group of mutual
funds.
Concert Select Growth Seeks long-term growth of capital by investing in TIA
Portfolio a select group of mutual funds
Concert Select High Growth Seeks capital appreciation by investing in a TIA
Portfolio select group of mutual funds.
Concert Select Income Seeks high current income by investing in a select TIA
Portfolio group of mutual funds.
TRAVELERS SERIES FUND, INC.
MFS Total Return Portfolio Seeks to obtain above-average income (compared to TIA
a portfolio entirely invested in equity Subadviser: MFS
securities) consistent with the prudent employment
of capital. Generally, at least 40% of the
Portfolio's assets will be invested in equity
securities.
Smith Barney High Income Seeks high current income. Capital appreciation is MMC
Portfolio a secondary objective. The Portfolio will invest
at least 65% of its assets in high-yielding
corporate debt obligations and preferred stock.
</TABLE>
5
<PAGE> 13
<TABLE>
<CAPTION>
FUNDING OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Smith Barney International Seeks total return on assets from growth of MMC
Equity Portfolio capital and income by investing at least 65% of
its assets in a diversified portfolio of equity
securities of established non-U.S. issuers.
Smith Barney Large Cap Seeks current income and long-term growth of MMC
Value Portfolio (formerly income and capital by investing primarily, but not
"Smith Barney Income and exclusively in common stocks.
Growth Portfolio")
Smith Barney Money Market Seeks maximum current income and preservation of MMC
Portfolio 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, and there is no assurance that a
stable $1 value per share will be maintained.
TRAVELERS SERIES TRUST
MFS Mid Cap Growth Seeks to obtain long-term growth of capital by Travelers Asset Management
Portfolio investing, under normal market conditions, at International Corporation
least 65% of its total assets in equity securities ("TAMIC")
of companies with medium market capitalization Subadviser:
which the investment adviser believes have Massachusetts Financial
above-average growth potential. Services Company ("MFS")
MFS Research Portfolio Seeks to provide long-term growth of capital and TAMIC
future income. Subadviser: MFS
</TABLE>
SUBSTITUTIONS AND ADDITIONS
If any of the funding options become unavailable for allocating purchase
payments, or if we believe that further investment in a funding option is
inappropriate for the purposes of the Contract, we may substitute another
funding option. However, we will not make any substitutions without notifying
you and obtaining any applicable state and SEC approval. From time to time we
may make new funding options available.
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
WITHDRAWAL CHARGE
No sales charges are deducted from purchase payments when they are applied under
the Contract. However, a withdrawal charge will be deducted if any or all of the
contract value is withdrawn during the first eight years following a purchase
payment. The length of time from when we receive the purchase payment to the
time of withdrawal determines the amount of the charge. The withdrawal charge
will be deducted from the total amount requested unless you instruct us to
deduct it from the remaining contract value.
The withdrawal charge is equal to a percentage of purchase payments withdrawn
from the Contract and is calculated as follows:
<TABLE>
<CAPTION>
LENGTH OF TIME FROM
PURCHASE PAYMENT WITHDRAWAL
(NUMBER OF YEARS) CHARGE
<S> <C>
1 8%
2 7%
3 6%
4 5%
5 4%
6 3%
7 2%
8 1%
9 and over 0%
</TABLE>
For purposes of the withdrawal charge calculation, withdrawals will be deemed to
be taken in the following order:
(a) from any purchase payments to which no withdrawal charge is
applicable;
(b) from any remaining free withdrawal allowance (as described below)
after reduction by the amount of (a);
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<PAGE> 14
(c) from any purchase payments to which withdrawal charges are
applicable (on a first-in, first-out basis); and, finally
(d) from any Contract earnings.
NOTE: Any free withdrawals taken will not reduce purchase payments still
subject to a withdrawal charge.
We will not deduct a withdrawal charge (1) from payments we make due to the
death of the contract owner or the death of the annuitant with no contingent
annuitant surviving; or (2) upon election of an annuity payout (based upon life
expectancy); (3) due to a minimum distribution under our minimum distribution
rules then in effect; or (4) if the contract owner is confined to an Eligible
Nursing Home as described in Appendix B.
FREE WITHDRAWAL ALLOWANCE
There is a 15% free withdrawal allowance available each year. For the first
contract year, the available amount will be calculated as a percentage of the
initial purchase payment. Beginning in the second contract year, the available
amount will be calculated as a percentage of the contract value available at the
end of the previous contract year. The free withdrawal allowance applies to any
partial withdrawals and to full withdrawals, except those transferred directly
to annuity contracts issued by other financial institutions. In Washington
state, the free withdrawal provision applies to all withdrawals.
Any withdrawal deemed to be taken from purchase payments to which no withdrawal
charge applies will reduce any free withdrawal allowance available in that
contract year. Any withdrawal deemed to be taken from the free withdrawal
allowance will not reduce the amount of purchase payments to which withdrawal
charges are applicable.
ADMINISTRATIVE CHARGES
A Contract administrative charge of $30 is deducted annually. This charge
compensates us for expenses incurred in establishing and maintaining the
Contract. The charge is deducted from the contract value on the fourth Friday of
each August by canceling accumulation units applicable to each funding option on
a pro rata basis. No contract administrative charge will be deducted from the
Fixed Account. For the first year, this charge will be prorated (i.e.
calculated) from the date of purchase. A prorated charge will also be made if
the Contract is completely withdrawn or terminated. We will not deduct a
contract administrative charge: (1) from the distribution of death proceeds; or
(2) after an annuity payout has begun.
An administrative expense charge (sometimes called "sub-account administrative
charge") is deducted on each business day from amounts allocated to the variable
funding options in order to compensate the Company for certain related
administrative and operating expenses. The charge equals, on an annual basis,
0.15% of the daily net asset value allocated to each of the variable funding
options.
MORTALITY AND EXPENSE RISK CHARGE
Each business day, the Company deducts a mortality and expense risk charge. The
deduction is reflected in our calculation of accumulation and annuity unit
values. This charge equals, on an annual basis, 1.25% of the amounts held in
each funding option. We reserve the right to lower this charge at any time. The
mortality risk portion compensates us 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 an
annuitant dies prior to the maturity date. The expense risk portion compensates
us 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.
REDUCTION OR ELIMINATION OF CONTRACT CHARGES
The withdrawal charge, the administrative charges, the mortality and expense
risk charge, and the distribution charge under the Contract may be reduced or
eliminated when certain sales or
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<PAGE> 15
administration of the Contract result in savings or reduction of administrative
or sales expenses, and/or mortality and expense risks. Any such reduction will
be based on the following: (1) the size and type of group to which sales are to
be made; (2) the total amount of purchase payments to be received; and (3) any
prior or existing relationship with the Company. There may be other
circumstances, of which we are not presently aware, which could result in fewer
sales expenses, administrative charges, or mortality and expense risk charges.
For certain trusts, the Company may change the order in which purchase payments
and earnings are withdrawn in order to determine the withdrawal charge. In no
event will reduction or elimination of the withdrawal charge or the
administrative charge be permitted where such reduction or elimination will be
unfairly discriminatory to any person.
FUNDING OPTION EXPENSES
The deductions from and expenses paid out of the assets of the various funding
options are summarized in the fee table and are described in the accompanying
prospectuses.
PREMIUM TAX
Certain state and local governments charge premium taxes ranging from 0% to 5%,
depending upon jurisdiction. The Company is responsible for paying these taxes
and will determine the method used to recover premium tax expenses incurred.
Where required, the Company will deduct any applicable premium taxes from the
contract value either upon death, surrender, annuitization, or at the time
purchase payments are made to the Contract, but no earlier than when the Company
has a tax liability under state law.
CHANGES IN TAXES BASED UPON PREMIUM OR VALUE
If there is any change in a law assessing taxes against the Company based upon
premiums, contract gains or value of the contract, we reserve the right to
charge you proportionately for this tax.
OWNERSHIP PROVISIONS
- --------------------------------------------------------------------------------
TYPES OF OWNERSHIP
Contract Owner ("you"). The Contract belongs to the contract owner named in the
Contract (on the Specifications page), or to any other person to whom the
contract is subsequently assigned. An assignment of ownership or a collateral
assignment may be made only for nonqualified contracts. You have sole power
during the annuitant's lifetime to exercise any rights and to receive all
benefits given in the contract provided you have not named an irrevocable
beneficiary and provided the Contract is not assigned.
You receive all payments while the annuitant is alive unless you direct them to
an alternate recipient. An alternate recipient does not become the contract
owner.
Joint Owner. For nonqualified contracts only, joint owners (i.e., spouses) may
be named in a written request before the contract is in effect. Joint owners may
independently exercise transfers allowed under the Contract. All other rights of
ownership must be exercised by both owners. Joint owners own equal shares of any
benefits accruing or payments made to them. All rights of a joint owner end at
death if the other joint owner survives. The entire interest of the deceased
joint owner in the Contract will pass to the surviving joint owner.
BENEFICIARY
The beneficiary is named by you in a written request. The beneficiary has the
right to receive any remaining contractual benefits upon the death of the
annuitant or the contract owner. If more than one beneficiary survives the
annuitant, they will share equally in benefits unless different shares are
8
<PAGE> 16
recorded with the Company by written request before the death of the annuitant
or contract owner.
With nonqualified contracts, as discussed under "Death Benefit," the beneficiary
named in the contract may differ from the designated beneficiary (for example,
the joint owner or a contingent annuitant). In such cases, the designated
beneficiary receives the contract benefits (rather than the beneficiary) upon
your death.
Unless an irrevocable beneficiary has been named, you have the right to change
any beneficiary by written request during the lifetime of the annuitant and
while the Contract continues.
ANNUITANT
The annuitant is designated in the Contract (on the Specifications page), and is
the individual on whose life the maturity date and the amount of the monthly
annuity payments depend. The annuitant may not be changed after the contract is
in effect.
For nonqualified Contracts only, the contract owner may also name one individual
as a contingent annuitant by written request before the Contract becomes
effective. A contingent annuitant may not be changed, deleted or added after the
Contract becomes effective. For Contracts issued in New York, a contingent
annuitant may not be named.
TRANSFERS
- --------------------------------------------------------------------------------
Up to 30 days before the maturity date, you may transfer all or part of the
contract value between funding options. There are no charges or restrictions on
the amount or frequency of transfers currently; however, we reserve the right to
charge a fee for any transfer request, and to limit the number of transfers. We
will always allow at least one transfer in any six-month period. Since different
funding options have different expenses, a transfer of contract values from one
funding option to another could result in your investment becoming subject to
higher or lower expenses. After the maturity date, you may make transfers
between funding options only with our consent. Please refer to Appendix A for
information regarding transfer between the Fixed Account and funding options.
DOLLAR COST AVERAGING
Dollar cost averaging (or "automated transfers") allows you to transfer a set
dollar amount to other funding options on a monthly or quarterly basis so that
more accumulation units are purchased in a funding option 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 cost per unit may be achieved over the long run.
You may elect automated transfers through written request or other method
acceptable to the Company. (For Contracts issued in New York, the election must
be made in writing.) You must have a minimum total contract value of $5,000 to
enroll in the Dollar Cost Averaging program. The minimum amount that may be
transferred through this program is $100.
You may establish automated transfers of contract values from the Fixed Account,
subject to certain restrictions. Automated transfers from the Fixed Account may
not deplete your Fixed Account Value in less than twelve months from your
enrollment in the Dollar Cost Averaging 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. All provisions and
terms of the Contract apply to automated transfers, including provisions
relating to the transfer of money between investment options. We reserve the
right to suspend or modify transfer privileges at any time and to assess a
processing fee for this service.
9
<PAGE> 17
ACCESS TO YOUR MONEY
- --------------------------------------------------------------------------------
Any time before the maturity date, you may redeem all or any portion of the cash
surrender value, that is, the contract value, less any withdrawal charge,
outstanding loans and any premium tax not previously deducted. You must submit a
written request specifying the fixed or variable funding option(s) from which
amounts are to be withdrawn. If no funding options are specified, the withdrawal
will be made on a pro rata basis. The cash surrender value will be determined as
of the close of business after we receive your surrender request at the Home
Office. The cash surrender value may be more or less than the purchase payments
made depending on the contract value at the time of surrender.
We may defer payment of any cash surrender value for a period of up to seven
days after the written request is received, but it is our intent to pay as soon
as possible. We cannot process requests for withdrawal that are not in good
order. We will contact you if there is a deficiency causing a delay and will
advise what is needed to act upon the withdrawal request.
SYSTEMATIC WITHDRAWALS
Beginning in the second contract year, and before the maturity date, you may
choose to withdraw a specified dollar amount (at least $100) on a monthly,
quarterly, semiannual or annual basis. Any applicable withdrawal charges (on
amounts in excess of the free withdrawal allowance) and any applicable premium
taxes will be deducted. To elect systematic withdrawals, you must have a
contract value of at least $15,000 and you must make the election on the form
provided by the Company. We will surrender accumulation units pro rata from all
funding options in which you have an interest, unless you instruct us otherwise.
You may begin or discontinue systematic withdrawals at any time by notifying us
in writing, but at least 30 days' notice must be given to change any systematic
withdrawal instructions that are currently in place.
We reserve the right to discontinue offering systematic withdrawals or to assess
a processing fee for this service upon 30 days' written notice to contract
owners (where allowed by state law).
Each systematic withdrawal is subject to federal income taxes on the taxable
portion. In addition, a 10% federal penalty tax may be assessed on systematic
withdrawals if the contract owner is under age 59 1/2. You should consult with
your tax adviser regarding the tax consequences of systematic withdrawals.
LOANS
Loans may be available under your contract. If available, all loan provisions
are described in your contract or loan agreement.
DEATH BENEFIT
- --------------------------------------------------------------------------------
Before the maturity date, a death benefit is payable to the beneficiary when
either the annuitant, the contract owner or the first of joint owners dies and
there is no contingent annuitant. The death benefit is calculated at the close
of the business day on which the Company's Home Office received due proof of
death and written instructions on the distribution of death benefit proceeds.
DEATH PROCEEDS PRIOR TO THE MATURITY DATE
WHERE ANNUITANT WAS YOUNGER THAN AGE 67 ON THE CONTRACT DATE AND DIES BEFORE AGE
85:
The death benefit payable as of the Death Report Date will be the greatest of
(1), (2) or (3) below, less any applicable premium tax and outstanding loans:
(1) the Contract Value on the Death Report Date;
(2) the total Purchase Payments made under the Contract less the total
amount of any partial surrenders; or
10
<PAGE> 18
(3) the maximum of all Step-Up Death Benefit Values (as described below)
in effect on the Death Report Date which are associated with
Contract Date anniversaries beginning with the eighth Contract Date
anniversary, and ending with the last Contract Date anniversary
occurring on or before the Annuitant's 76th birthday.
We must be notified no later than six months from the date of death in order for
Us to make payment of proceeds as described above. If notification is received
more than six months after the date of death, the Death Benefit payable will be
the Contract Value on the Death Report Date less any applicable premium tax and
outstanding loans.
WHERE ANNUITANT WAS AGE 67 THROUGH 75 ON THE CONTRACT DATE AND DIES BEFORE AGE
85:
The death benefit payable as of the Death Report Date will be the greatest of
(1), (2) or (3) below, less any applicable premium tax, and outstanding loans:
(1) the Contract Value on the Death Report Date;
(2) the total Purchase Payments made under the Contract less the total
amount of any partial surrenders; or
(3) the Step-Up Death Benefit Value (as described below) in effect on
the Death Report Date associated with the eighth Contract Date
Anniversary.
We must be notified no later than six months from the date of death in order for
Us to make payment of proceeds as described above. When permitted by state law,
if notification is received more than six months after the date of death, the
Death Benefit payable will be the Contract Value on the Death Report Date less
any applicable premium tax and outstanding loans.
WHERE ANNUITANT WAS AGE 76 OR OLDER ON THE CONTRACT DATE:
The death benefit payable as of the Death Report Date will be the Contract Value
on the Death Report Date, less any applicable premium tax and outstanding loans.
WHERE ANNUITANT DIES ON OR AFTER AGE 85:
The death benefit payable as of the Death Report Date will be the Contract Value
on the Death Report Date, less any applicable premium tax and outstanding loans.
STEP-UP DEATH BENEFIT VALUE:
A separate Step-Up Death Benefit Value will be established on the eighth
Contract Date anniversary, and on each Contract Date anniversary thereafter
which occurs on or prior to the Death Report Date and will initially equal the
Contract Value on that anniversary. After a Step-Up Death Benefit Value has been
established, it will be recalculated each time a Purchase Payment is made or a
partial surrender is taken until the Death Report Date. Step-Up Death Benefit
Values will be recalculated by increasing them by the amount of each applicable
Purchase Payment and by reducing them by a Partial Surrender Reduction (as
described below) for each applicable partial surrender. Recalculations of
Step-Up Death Benefit Values related to any Purchase Payments or any partial
surrenders will be made in the order that such Purchase Payments or partial
surrenders occur.
The Partial Surrender Reduction referenced above is equal to:
(1) the amount of a Step-Up Death Benefit Value immediately prior to the
reduction for the partial surrender, multiplied by
(2) the amount of the partial surrender divided by the Contract Value
immediately prior to the partial surrender.
PAYMENT OF PROCEEDS
The process of paying death benefit proceeds under various situations is
described below. Generally, the person(s) receiving the benefit may request that
the proceeds be paid in a lump sum, or be applied to one of the settlement
options available under the Contract.
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<PAGE> 19
DEATH OF ANNUITANT WHO IS THE CONTRACT OWNER. The Company will pay the proceeds
to any surviving joint owner, or if none, the beneficiary(ies), or if none, to
the contract owner's estate.
Under a nonqualified contract, the death benefit proceeds must be distributed to
the beneficiary within five years of the contract owner's death. Or, the
beneficiary may elect to receive payments from an annuity which begins within
one year of the contract owner's death and is payable over the life of the
beneficiary over a period not exceeding the beneficiary's life expectancy.
If the beneficiary is the contract owner's spouse, he or she may elect to
continue the contract as the new contract owner rather than receiving the
distribution. In such case, the distribution rules applicable when a contract
owner dies generally will apply when that spouse, as contract owner, dies.
DEATH OF ANNUITANT WHO IS NOT THE CONTRACT OWNER. In the case of a nonqualified
Contract, if there is no contingent annuitant, the Company will pay the death
proceeds to the beneficiary. However, if there is a contingent annuitant, he or
she becomes the annuitant and the Contract continues in effect (generally using
the original maturity date). The proceeds described above will be paid upon the
death of the last surviving contingent annuitant.
ENTITY AS OWNER. In the case of a nonqualified Contract owned by a nonnatural
person (e.g. a trust or another entity), any annuitant will be treated as the
contract owner. Any change in the annuitant will be treated as the death of the
contract owner.
DEATH PROCEEDS AFTER THE MATURITY DATE
If the death of any contract owner or annuitant occurs on or after the maturity
date, the Company will pay the beneficiary a death benefit consisting of any
benefit remaining under the annuity option then in effect.
THE ANNUITY PERIOD
- --------------------------------------------------------------------------------
MATURITY DATE
Under the Contract, you can receive regular income payments (annuity payments).
You can choose the month and the year in which those payments begin (maturity
date). You can also choose among income plans (annuity or income options) or
elect a lump-sum distribution. We ask you to choose the maturity date and the
annuity option when you purchase the contract. While the annuitant is alive, you
can change your selection any time up to the maturity date. Annuity payments
will begin on the maturity date stated in the Contract unless the Contract has
been fully surrendered or the proceeds have been paid to the beneficiary before
that date. Annuity payments are a series of periodic payments (a) for life; (b)
for life with either a minimum number of payments or a specific amount assured;
or (c) for the joint lifetime of the annuitant and another person, and
thereafter during the lifetime of the survivor. We may require proof that the
annuitant is alive before annuity payments are made.
Unless you elect otherwise, the maturity date will be the annuitant's 70th
birthday for qualified contracts or, for nonqualified contracts, the annuitant's
75th birthday, or ten years after the effective date of the contract, if later.
(For Contracts issued in Florida and New York, the maturity date elected may not
be later than the annuitant's 90th birthday.)
For nonqualified Contracts, at least 30 days before the original maturity date,
a contract owner may elect to extend the maturity date to any time prior to the
annuitant's 85th birthday or, for qualified Contracts, to a later date with the
Company's consent. Certain annuity options taken at the maturity date may be
used to meet the minimum required distribution requirements of federal tax law,
or a program of partial surrenders may be used instead. These mandatory
distribution requirements take effect generally upon the death of the contract
owner, or with qualified contracts upon either the later of the contract owner's
attainment of age 70 1/2 or year of retirement; or the death of the
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<PAGE> 20
contract owner. Independent tax advice should be sought regarding the election
of minimum required distributions.
ALLOCATION OF ANNUITY
When an annuity option is elected, it may be elected as a variable annuity, a
fixed annuity, or a combination of both. (Variable payouts may not be available
in all states. Refer to your contract.) If, at the time annuity payments begin,
no election has been made to the contrary, the cash surrender value will be
applied to provide an annuity funded by the same investment options (contract
value, in Oregon). At least 30 days before the maturity date, you may transfer
the contract value among the funding options in order to change the basis on
which annuity payments will be determined. (See "Transfers.")
VARIABLE ANNUITY
You may choose an annuity payout that fluctuates depending on the investment
experience of the variable funding options. The number of annuity units credited
to the Contract is determined by dividing the first monthly annuity payment
attributable to each funding option by the corresponding annuity unit value as
of 14 days before the date annuity payments begin. An annuity unit is used to
measure the dollar value of an annuity payment. The number of annuity units (but
not their value) remains fixed during the annuity period.
DETERMINATION OF FIRST ANNUITY PAYMENT. The Contract contains tables used to
determine the first monthly annuity payment. The amount applied to effect a
variable annuity will be the value of the funding options as of 14 days before
the date annuity payments begin less any applicable premium taxes not previously
deducted.
The amount of the first monthly payment depends on the annuity option elected. A
formula for determining the adjusted age is contained in the Contract. The total
first monthly annuity payment is determined by multiplying the benefit per
$1,000 of value shown in the tables of the Contract by the number of thousands
of dollars of value of the Contract applied to that annuity option. The Company
reserves the right to require satisfactory proof of age of any person on whose
life annuity payments are based before making the first payment under any of the
payment options.
DETERMINATION OF SECOND AND SUBSEQUENT ANNUITY PAYMENTS. The dollar amount of
the second and subsequent annuity payments is not predetermined and may change
from month to month based on the investment experience of the applicable funding
option. The total amount of each annuity payment will be equal to the sum of the
basic payments in each funding option. The actual amounts of these payments are
determined by multiplying the number of annuity units credited to each funding
option by the corresponding annuity unit value as of the date 14 days before the
date the payment is due.
FIXED ANNUITY
You may choose a fixed annuity that provides payments which do not vary during
the annuity period. We will calculate the dollar amount of the first fixed
annuity payment as described under "Variable Annuity," except that the amount
applied to effect the annuity will be the cash surrender value, determined as of
the date annuity payments begin. If it would produce a larger payment, the first
fixed annuity payment will be determined using the Life Annuity Tables in effect
on the maturity date.
PAYMENT OPTIONS
- --------------------------------------------------------------------------------
ELECTION OF OPTIONS
While the annuitant is alive, you can change your annuity option selection any
time up to the maturity date. Once annuity payments have begun, no further
elections are allowed.
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During the annuitant's lifetime, if you do not elect otherwise before the
maturity date, we will pay you (or another designated payee) the first of a
series of monthly annuity payments based on the life of the annuitant, in
accordance with Annuity Option 2 (Life Annuity with 120 monthly payments
assured). For certain qualified contracts, Annuity Option 4 (Joint and Last
Survivor Joint Life Annuity -- Annuity Reduced on Death of Primary Payee) will
be the automatic option as described in the contract.
The minimum amount that can be placed under an annuity option will be $1,000
unless we agree to a lesser amount. If any monthly periodic payment due is less
than $100, the Company reserves the right to make payments at less frequent
intervals, or to pay the contract value in a lump-sum.
On the maturity date, we will pay the amount due under the Contract in one lump
sum (except in Florida, where this is not permitted), or in accordance with the
payment option that you select. You must elect an option in writing, in a form
satisfactory to the Company. Any election made during the lifetime of the
annuitant must be made by the contract owner.
ANNUITY OPTIONS
Subject to the conditions described in "Election of Options" above, all or any
part of the cash surrender value (or, where required by state law, contract
value) may be paid under one or more of the following annuity options. Payments
under the annuity options may be elected on a monthly, quarterly, semiannual or
annual basis. We may offer additional options.
Option 1 -- Life Annuity -- No Refund. The Company will make annuity payments
during the lifetime of the annuitant ending with the last payment before death.
This option offers the maximum periodic payment, since there is no assurance of
a minimum number of payments or provision for a death benefit for beneficiaries.
Option 2 -- Life Annuity with 120, 180 or 240 Monthly Payments Assured. The
Company will make monthly annuity payments during the lifetime of the annuitant,
with the agreement that if, at the death of that person, payments have been made
for less than 120, 180 or 240 months as elected, we will continue making
payments to the beneficiary during the remainder of the period.
Option 3 -- Joint and Last Survivor Life Annuity -- No Refund. The Company will
make regular annuity payments during the lifetime of the annuitant and a second
person. When either person dies, we will continue making payments to the
survivor. No further payments will be made following the death of the survivor.
Option 4 -- Joint and Last Survivor Life Annuity -- Annuity Reduced on Death of
Primary Payee. The Company will make annuity payments during the lifetimes of
the annuitant and a second person. One will be designated the primary payee, the
other will be designated the secondary payee. On the death of the secondary
payee, the Company 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, the Company will continue
to make 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 once both payees have died.
Option 5 -- Other Annuity Options. The Company will make any other arrangements
for annuity payments as may be mutually agreed upon.
INCOME OPTIONS
Instead of one of the annuity options described above, and subject to the
conditions described under "Election of Options," all or part of the cash
surrender value (or, where required by state law, contract value) may be paid
under one or more of the following income options, provided that they are
consistent with federal tax law qualification requirements. Payments under the
income options may be elected on a monthly, quarterly, semiannual or annual
basis:
Option 1 -- Payments of a Fixed Amount. The Company will make equal payments of
the amount elected until the cash surrender value applied under this option has
been exhausted. The first
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payment and all later payments will be paid from amounts attributable to each
investment option in proportion to the cash surrender value attributable to
each. The final payment will include any amount insufficient to make another
full payment.
Option 2 -- Payments for a Fixed Period. The Company will make payments for the
fixed period selected based on the cash surrender value as of the date payments
begin. If, at the death of the annuitant, the total number of fixed payments has
not been made, the payments will be made to the beneficiary.
Option 3 -- Other Income Options. The Company will make any other arrangements
for income payments as may be mutually agreed upon.
The amount applied to effect an income option will be the cash surrender value
as of the date income payments begin, less any applicable premium taxes not
previously deducted and any applicable withdrawal charge. (Certain states may
have different requirements that we will honor.) The cash surrender value used
to determine the amount of any income payment will be determined on the same
basis as the cash surrender value during the accumulation period, including the
deduction for mortality and expense risks and the contract administrative
expense charge.
MISCELLANEOUS CONTRACT PROVISIONS
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RIGHT TO RETURN
You may return the Contract for a full refund of the contract value (including
charges) within twenty days after you receive it (the "right to return period").
Where state law requires a longer period, the Company will comply. You bear the
investment risk during the right to return period; therefore, the contract value
returned may be greater or less than your purchase payment. If the Contract is
purchased as an Individual Retirement Annuity, and is returned within the first
seven days after delivery, your purchase payment will be refunded in full;
during the remainder of the right to return period, the contract value
(including charges) will be refunded. The contract value will be determined
following the close of the business day on which we receive a written request
for a refund. Refer to your Contract for any state-specific information.
TERMINATION
You do not need to make any purchase payments after the first to keep the
Contract in effect. However, we reserve the right to terminate the Contract on
any business day if the contract value as of that date is less than $1,000 and
no purchase payments have been made for at least two years, unless otherwise
specified by state law. Termination will not occur until 31 days after the
Company has mailed notice of termination to the contract owner's last known
address and to any assignee of record. If the Contract is terminated, we will
pay you the cash surrender value (contract value less any applicable premium
tax, in the states that so require), less any applicable charges and any
outstanding loans.
REQUIRED REPORTS
As often as required by law, but at least once in each contract year before the
due date of the first annuity payment, we will furnish a report showing the
number of accumulation units credited to the Contract and the corresponding
accumulation unit value(s) as of the date of the report for each funding option
to which the contract owner has allocated amounts during the applicable period.
The Company will keep all records required under federal or state laws.
SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the date of any payment or
determination of values on any business day (1) when the New York Stock Exchange
("the Exchange") is closed; (2) when trading on the Exchange is restricted; (3)
when an emergency exists as determined by the SEC so that the sale of securities
held in the Separate Account may not
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reasonably occur or so that the Company may not reasonably determine the value
the Separate Account's net assets; or (4) during any other period when the SEC,
by order, so permits for the protection of security holders.
TRANSFERS OF CONTRACT VALUES TO OTHER ANNUITIES
We may permit contract owners to transfer their contract values into other
annuities offered by us or our affiliated insurance companies under rules then
in effect.
THE SEPARATE ACCOUNT
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The Travelers Separate Account PF For Variable Annuities ("Separate Account PF")
was established on July 30, 1997 and is registered with the SEC as a unit
investment trust (separate account) under the Investment Company Act of 1940, as
amended (the "1940 Act"). The assets of Separate Account PF will be invested
exclusively in the shares of the variable funding options.
The assets of Separate Account PF are held for the exclusive benefit of the
owners of this separate account, according to the laws of Connecticut. Income,
gains and losses, whether or not realized, from assets allocated to Separate
Account PF are, in accordance with the Contracts, credited to or charged against
Separate Account PF without regard to other income, gains and losses of the
Company. The assets held by Separate Account PF are not chargeable with
liabilities arising out of any other business which the Company may conduct.
Obligations under the Contract are obligations of the Company.
All investment income and other distributions of the funding options are payable
to Separate Account PF. All such income and/or distributions are reinvested in
shares of the respective funding option at net asset value. Shares of the
funding options are currently sold only to life insurance company separate
accounts to fund variable annuity and variable life insurance contracts.
PERFORMANCE INFORMATION
From time to time, we may advertise several types of historical performance for
the Contract's funding options. We may advertise the "standardized average
annual total returns" of the funding option, calculated in a manner prescribed
by the SEC, the "non-standardized total return," as described below, and
"adjusted historical performance," also described below. Once available,
specific examples of the performance information will appear in the SAI.
STANDARDIZED METHOD. Quotations of average annual total returns 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 annual
administrative charge ($30) is converted to a percentage of assets based on the
actual fee collected (or anticipated to be collected, if a new product), divided
by the average net assets for Contracts sold (or anticipated to be sold). Each
quotation assumes a total redemption at the end of each period with the
applicable withdrawal charge deducted at that time.
NONSTANDARDIZED METHOD. Nonstandardized "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 ten-year periods. Nonstandardized total returns will not reflect the
deduction of any withdrawal charge or the $30 annual contract administrative
charge, which, if reflected, would decrease the level of performance shown. The
withdrawal charge is not reflected because the Contract is designed for
long-term investment.
For funding options that were in existence prior to the date they became
available under the Separate Account, the standardized total return quotations
may be accompanied by returns showing the investment performance that such
funding options would have achieved (reduced by
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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.
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 the Separate Account and the variable funding
options.
FEDERAL TAX CONSIDERATIONS
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The following general discussion of the federal income tax consequences under
this Contract is not intended to cover all situations, and is not meant to
provide tax advice. Because of the complexity of the law and the fact that the
tax results will vary depending on many factors, you should consult your tax
adviser regarding your personal situation. For your information, a more detailed
tax discussion is contained in the SAI.
GENERAL TAXATION OF ANNUITIES
Congress has recognized the value of saving for retirement by providing certain
tax benefits, in the form of tax deferral, for money put into an annuity. The
Internal Revenue Code (Code) governs how this money is ultimately taxed,
depending upon the type of contract, qualified or non-qualified, and the manner
in which the money is distributed, as briefly described below.
TYPES OF CONTRACTS: QUALIFIED OR NONQUALIFIED
If you purchase an annuity contract with proceeds of an eligible rollover
distribution from any pension plan, specially sponsored program, or individual
retirement annuity (IRA) with pre-tax dollars, your contract is referred to as a
qualified contract. Some examples of qualified contracts are: IRAs, 403(b)
annuities, pension and profit-sharing plans (including 401(k) plans), Keogh
Plans, and certain other qualified deferred compensation plans. If you purchase
the contract on an individual basis with after-tax dollars and not under one of
the programs described above, your contract is referred to as nonqualified.
NONQUALIFIED ANNUITY CONTRACTS
As the owner of a nonqualified annuity, you do not receive any tax benefit
(deduction or deferral of income) on purchase payments, but you will not be
taxed on increases in the value of your contract until a distribution
occurs -- either as a withdrawal (distribution made prior to the maturity date),
or as annuity payments. When a withdrawal is made, you are taxed on the amount
of the withdrawal that is considered earnings. Similarly, when you receive an
annuity payment, part of each payment is considered a return of your purchase
payments and will not be taxed. The remaining portion of the annuity payment
(i.e., any earnings) will be considered ordinary income for tax purposes.
If a nonqualified annuity is owned by other than an individual, however, (e.g.,
by a corporation), increases in the value of the contract attributable to
purchase payments made after February 28, 1986 are includible in income
annually. Furthermore, for contracts issued after April 22, 1987, if you
transfer the contract without adequate consideration all deferred increases in
value will be includible in your income at the time of the transfer.
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If you make a partial withdrawal, this money will generally be taxed as first
coming from earnings, (income in the contract), and then from your purchase
payments. These withdrawn earnings are includible in your income. (See "Penalty
Tax for Premature Distributions" below.) There is income in the contract to the
extent the contract value exceeds your investment in the contract. The
investment in the contract equals the total purchase payments you paid less any
amount received previously which was excludible from gross income. Any direct or
indirect borrowing against the value of the contract or pledging of the contract
as security for a loan will be treated as a cash distribution under the tax law.
Federal tax law requires that nonqualified annuity contracts meet minimum
mandatory distribution requirements upon the death of the contract owner,
including the first of joint owners. If these requirements are not met, the
surviving joint owner, or the beneficiary, will have to pay taxes prior to
distribution. The distribution required depends, among other things, upon
whether an annuity option is elected or whether the new contract owner is the
surviving spouse. We will administer Contracts in accordance with these rules
and we will notify you when you should begin receiving payments.
QUALIFIED ANNUITY CONTRACTS
Under a qualified annuity, since amounts paid into the contract have not yet
been taxed, the full amount of all distributions, including lump-sum withdrawals
and annuity payments, are taxed at the ordinary income tax rate unless the
distribution is transferred to an eligible rollover account or contract. The
Contract is available as a vehicle for IRA rollovers and for other qualified
contracts. There are special rules which govern the taxation of qualified
contracts, including withdrawal restrictions, requirements for mandatory
distributions, and contribution limits. We have provided a more complete
discussion in the SAI.
PENALTY TAX FOR PREMATURE DISTRIBUTIONS
Taxable distributions taken before the contract owner has reached the age of
59 1/2 will be subject to a 10% additional tax penalty unless the distribution
is taken in a series of periodic distributions, for life or life expectancy, or
unless the distribution follows the death or disability of the contract owner.
Other exceptions may be available in certain qualified plans.
DIVERSIFICATION REQUIREMENTS FOR VARIABLE ANNUITIES
The Code requires that any nonqualified variable annuity contracts based on a
separate account shall not be treated as an annuity for any period if
investments made in the account are not adequately diversified. Final tax
regulations define how separate accounts must be diversified. The Company
monitors the diversification of investments constantly and believes that its
accounts are adequately diversified. The consequence of any failure to diversify
is essentially the loss to the Contract Owner of tax deferred treatment. The
Company intends to administer all contracts subject to this provision of law in
a manner that will maintain adequate diversification.
OWNERSHIP OF THE INVESTMENTS
Assets in the separate accounts, also referred to as segregated asset accounts,
must be owned by the Company and not by the Contract Owner for federal income
tax purposes. Otherwise, the deferral of taxes is lost and income and gains from
the accounts would be includable annually in the Contract Owner's gross income.
The Internal Revenue Service has stated in published rulings that a variable
contract owner will be considered the owner of the assets of a segregated asset
account if the owner possesses an incident of ownership in those assets, such as
the ability to exercise investment control over the assets. The Treasury
Department announced, in connection with the issuance of temporary regulations
concerning investment 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, rather than
the insurance company, to be treated as the owner of the assets of the account."
This announcement, dated September 15, 1986, also stated that the
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guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular subaccounts [of a
segregated asset account] without being treated as owners of the underlying
assets." As of the date of this prospectus, no such guidance has been issued.
The Company does not know if such guidance will be issued, or if it is, what
standards it may set. Furthermore, the Company does not know if such guidance
may be issued with retroactive effect. New regulations are generally issued with
a prospective-only effect as to future sales or as to future voluntary
transactions in existing contracts. The Company therefore reserves the right to
modify the contract as necessary to attempt to prevent Contract Owners from
being considered the owner of the assets of the separate account.
MANDATORY DISTRIBUTIONS FOR QUALIFIED PLANS
Federal tax law requires that minimum annual distributions begin by April 1st of
the calendar year following the calendar year in which an IRA owner attains age
70 1/2. Participants in qualified plans and 403(b) annuities may defer minimum
distributions until the later of April 1st of the calendar year following the
calendar year in which they attain age 70 1/2 or the year of retirement.
Distributions must begin or be continued according to required patterns
following the death of the contract owner or annuitant of both qualified and
nonqualified annuities.
OTHER INFORMATION
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THE INSURANCE 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. The Company's Home Office is located at One
Tower Square, Hartford, Connecticut 06183.
IMSA
The Company is a member of the Insurance Marketplace Standards Association
("IMSA"), and as such may use the IMSA logo and IMSA membership in its
advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and service for individually
sold life insurance and annuities. IMSA members have adopted policies and
procedures that demonstrate a commitment to honesty, fairness and integrity in
all customer contacts involving the sale and service of individual life
insurance and annuity products.
YEAR 2000 COMPLIANCE
Generally, computer programs were designed without considering the impact of the
upcoming change in the century. As a result, software and computer systems may
need to be upgraded or replaced in order to comply with "Year 2000"
requirements. If not corrected, these computer applications could fail or create
erroneous results by or at the Year 2000. The business, financial condition, and
results of operations of a company could be materially and adversely affected by
the failure of its systems and applications (or those either provided or
operated by third-parties) to properly operate or manage dates beyond the year
1999.
The Company has investigated the nature and extent of the work required for our
computer systems to process beyond the turn of the century, and has made
progress toward achieving this goal, including upgrading and/or replacing
existing systems. We are confirming with our service providers that they are
also in the process of replacing or modifying their systems with the same goal.
We expect that our principal systems will be Year 2000 compliant by early 1999.
While these efforts involve substantial costs, we closely monitor associated
costs and continue to evaluate
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associated risks based on actual expenses. While it is likely that these efforts
will be successful, if necessary modifications and conversions are not completed
in a timely manner, the Year 2000 issue could have a material adverse effect on
certain operations of the Company.
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
The Company intends to sell the Contracts in all jurisdictions where it is
licensed to do business and where the Contract is approved. The Contracts will
be sold by life insurance sales agents who represent the Company, and who are
licensed registered representatives of Primerica Financial Services, Inc. The
compensation paid to sales representatives will not exceed 7.0% of the payments
made under the Contracts.
From time to time, the Company may pay or permit other promotional incentives,
in cash, credit or other compensation.
Any sales representative or employee will have been qualified to sell variable
annuities under applicable federal and state laws. Each broker-dealer is
registered with the SEC under the Securities Exchange Act of 1934, and all are
members of the NASD. The principal underwriter for the Contracts is Tower Square
Securities, Inc., an affiliate of the Company; however, it is currently
anticipated that Travelers Distribution Company, an affiliated broker-dealer,
may become the principal underwriter for the Contracts during 1998.
CONFORMITY WITH STATE AND FEDERAL LAWS
The Contract is governed by the laws of the state in which it is delivered. Any
paid-up annuity, cash surrender value or death benefits that are available under
the Contract are not less than the minimum benefits required by the statutes of
the state in which the Contract is delivered. We reserve the right to make any
changes, including retroactive changes, in the Contract to the extent that the
change is required to meet the requirements of any law or regulation issued by
any governmental agency to which the Company, the Contract or the contract owner
is subject.
VOTING RIGHTS
The Company is the legal owner of the shares of the funding options. However, we
believe that when a funding option solicits proxies in conjunction with a vote
of shareholders we are required to obtain from you and from other owners
instructions on how to vote those shares. When we receive those instructions, we
will vote all of the shares we own in proportion to those instructions. This
will also include any shares we own on our own behalf. Should we determine that
we are no longer required to comply with the above, we will vote on the shares
in our own right.
LEGAL PROCEEDINGS AND OPINIONS
There are no pending material legal proceedings affecting Separate Account PF.
Legal matters in connection with the federal laws and regulations affecting the
issue and sale of the Contract described in this prospectus, as well as the
organization of the Company, its authority to issue variable annuity contracts
under Connecticut law and the validity of the forms of the variable annuity
contracts under Connecticut law, have been reviewed by the General Counsel of
the Company.
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APPENDIX A
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THE FIXED ACCOUNT
The Fixed Account is secured by part of the general assets of the Company. The
general assets of the Company include all assets of the Company other than those
held in Separate Account PF or any other separate account sponsored by the
Company or its affiliates.
The staff of the SEC does not generally review the disclosure in the prospectus
relating to the Fixed Account. Disclosure regarding the Fixed Account and the
general account may, however, be subject to certain provisions of the federal
securities laws relating to the accuracy and completeness of statements made in
the prospectus.
Under the Fixed Account, the Company assumes the risk of investment gain or
loss, guarantees a specified interest rate, and guarantees a specified periodic
annuity payment. The investment gain or loss of Fund PF or any of the funding
options does not affect the Fixed Account portion of the contract owner's
contract value, or the dollar amount of fixed annuity payments made under any
payout option.
We guarantee that, at any time, the Fixed Account contract value will not be
less than the amount of the purchase payments allocated to the Fixed Account,
plus interest credited as described below, less any applicable premium taxes or
prior surrenders. If the contract owner effects a surrender, the amount
available from the Fixed Account will be reduced by any applicable withdrawal
charge as described under "Charges and Deductions" in this prospectus.
Purchase payments allocated to the Fixed Account and any transfers made to the
Fixed Account become part of the Company's general account which supports
insurance and annuity obligations. Neither the general account nor any interest
therein is registered under, nor subject to the provisions of, the Securities
Act of 1933 or Investment Company Act of 1940. We will invest the assets of the
Fixed Account at our discretion. Investment income from such Fixed Account
assets will be allocated to us and to the Contracts participating in the Fixed
Account.
Investment income from the Fixed Account allocated to us includes compensation
for mortality and expense risks borne by us in connection with Fixed Account
Contracts. The amount of such investment income allocated to the Contracts will
vary from year to year in our sole discretion at such rate or rates as we
prospectively declare from time to time.
The initial rate for any allocations into the Fixed Account is guaranteed for
one year from the date of such allocation. Subsequent renewal rates will be
guaranteed for the calendar quarter. We also guarantee that for the life of the
Contract we will credit interest at not less than 3% per year. Any interest
credited to amounts allocated to the Fixed Account in excess of 3% per year will
be determined in our sole discretion. You assume the risk that interest credited
to the Fixed Account may not exceed the minimum guarantee of 3% for any given
year.
TRANSFERS
You may make transfers from the Fixed Account to any other available variable
funding option(s) twice a year during the 30 days following the semi-annual
anniversary of the contract effective date. The transfers are limited to an
amount of up to 15% of the Fixed Account Value on the semi-annual contract
effective date anniversary. (This restriction does not apply to transfers from
the Dollar Cost Averaging Program.) Amounts previously transferred from the
Fixed Account to other funding options may not be transferred back to the Fixed
Account for a period of at least six months from the date of transfer. We
reserve the right to waive either of these restrictions.
Automated transfers from the Fixed Account to any of the funding options may
begin at any time. Automated transfers from the Fixed Account may not deplete
your Fixed Account value in a period of less than twelve months from your
enrollment in the Dollar Cost Averaging Program.
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APPENDIX B
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WAIVER OF WITHDRAWAL CHARGE FOR NURSING HOME CONFINEMENT
If, after the first contract year and prior to the maturity date of the
Contract, the annuitant begins confinement in an Eligible Nursing Home, and
remains confined for the qualifying period, you may make a total or partial
withdrawal, subject to the maximum withdrawal amount described below, without
incurring a Withdrawal Charge. In order for the Withdrawal Charge to be waived,
the withdrawal must be made during continued confinement in an Eligible Nursing
Home after the qualifying period has been satisfied, or within sixty (60) days
after such confinement ends. The qualifying period is confinement in an Eligible
Nursing Home for ninety (90) consecutive days. We will require proof of
confinement in a form satisfactory to us, which may include certification by a
licensed physician that such confinement is medically necessary.
An Eligible Nursing Home is defined as an institution or special nursing unit of
a hospital which:
(a) is Medicare approved as a provider of skilled nursing care services; and
(b) is not, other than in name only, an acute care hospital, a home for the
aged, a retirement home, a rest home, a community living center, or a place
mainly for the treatment of alcoholism, mental illness or drug abuse.
OR
Meets all of the following standards:
(a) is licensed as a nursing care facility by the state in which it is licensed;
(b) is either a freestanding facility or a distinct part of another facility
such as a ward, wing, unit or swing-bed of a hospital or other facility;
(c) provides nursing care to individuals who are not able to care for themselves
and who require nursing care;
(d) provides, as a primary function, nursing care and room and board; and
charges for these services;
(e) care is provided under the supervision of a licensed physician, registered
nurse (RN) or licensed practical nurse (LPN);
(f) may provide care by a licensed physical, respiratory, occupational or speech
therapist; and
(g) is not, other than in name only, an acute care hospital, a home for the
aged, a retirement home, a rest home, a community living center, or a place
mainly for the treatment of alcoholism, mental illness or drug abuse.
FILING A CLAIM: You must provide the Company with written notice of a claim
during continued confinement following completion of the qualifying period, or
within sixty days after such confinement ends.
The maximum withdrawal amount available without incurring a Withdrawal Charge is
the contract value on the next valuation date following written proof of claim,
less any purchase payments made within a one year period prior to the date
confinement in an Eligible Nursing Home begins, less any additional purchase
payments made on or after the Annuitant's 71st birthday.
Any withdrawal requested which falls under the scope of this waiver will be paid
as soon as we receive proper written proof of your claim, and will be paid in a
lump sum. You should consult with your personal tax adviser regarding the
taxable nature of any withdrawals taken from your contract.
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APPENDIX C
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TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information and
financial statements relating to The Travelers Insurance 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
Performance Information
Federal Tax Considerations
Independent Accountants
Financial Statements
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Copies of the Statement of Additional Information dated April 30, 1998 (Form No.
L-12684S) are available without charge. To request a copy, please clip this
coupon on the dotted line above, enter your name and address in the spaces
provided below, and mail to: The Travelers Insurance Company, PrimElite
Travelers Service Center, One Tower Square, Hartford, Connecticut 06183-8036.
Name:
Address:
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PART B
Information Required in a Statement of Additional Information
<PAGE> 32
PRIMELITE
STATEMENT OF ADDITIONAL INFORMATION
dated
April 30, 1998
for
THE TRAVELERS SEPARATE ACCOUNT PF
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 Individual Variable
Annuity Contract Prospectus dated May 1, 1998. A copy of the Prospectus may be
obtained by writing to The Travelers Insurance Company, PrimElite Travelers
Service Center, One Tower Square, Hartford, Connecticut 06183-8036, or by
calling (888) 556-5412.
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE INSURANCE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PRINCIPAL UNDERWRITER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
DISTRIBUTION AND MANAGEMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 2
VALUATION OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FEDERAL TAX CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
<PAGE> 33
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. The Company is licensed to conduct
life insurance business in all states of the United States, the District of
Columbia, Puerto Rico, Guam, and the U.S. and British Virgin Islands and the
Bahamas. The Company's home office is located at One Tower Square, Hartford,
Connecticut 06183.
The Company is a wholly owned subsidiary of Travelers Group Inc., a
financial services holding company engaged, through its subsidiaries,
principally in four business segments: (i) Investment Services; (ii) Consumer
Finance Services; (iii) Life Insurance Services; and (iv) Property and Casualty
Insurance Services.
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. An annual statement covering the
operations of the Company for the preceding year, as well as its financial
condition 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 home state
(jurisdiction of domicile) in determining the field of permissible investments.
THE SEPARATE ACCOUNT. Separate Account PF 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 Separate Account PF II are
subject to the provisions of Section 38a-433 of the Connecticut General
Statutes which authorizes the Connecticut Insurance 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.
It is conceivable that in the future it may be disadvantageous for both
variable annuity and variable life insurance separate accounts, or for variable
separate accounts of different insurance companies, to invest simultaneously
in the same portfolios (called "mixed" and "shared" funding). Currently neither
the insurance companies nor the portfolios foresee any such disadvantages to
the companies or to variable contract owners. Each portfolio's board of
trustees, directors or managers intends to monitor events in order to identify
any material conflicts between such policy owners and to determine what action,
if any, should be taken in response thereto.
PRINCIPAL UNDERWRITER
Tower Square Securities, Inc. ("Tower Square"), an indirect,
wholly-owned subsidiary of the Company, serves as principal underwriter for the
Separate Account PF and the Contracts. The offering is continuous. Tower
Square's principal executive offices are located at One Tower Square, Hartford,
Connecticut. It is anticipated that Travelers Distribution Company, an
affiliated broker dealer, will become the principal underwriter during 1998.
DISTRIBUTION AND MANAGEMENT AGREEMENT
Under the terms of the Distribution and Management Agreement among the
Separate Account, 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 Separate
Account. Tower Square performs the sales functions related to the
Contracts. The Company reimburses Tower Square for commissions paid, other
sales expenses and certain overhead
1
<PAGE> 34
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 Separate Account 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 Separate Account all necessary office space, facilities, and personnel
to manage its affairs.
VALUATION OF ASSETS
FUNDING OPTIONS: The value of the assets of each funding option is determined
on each business day 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 business day. 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 business day 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 business
day 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.
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 into 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 business day is
determined by multiplying the value on the preceding business day 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 mortality and expense
risk charge and the administrative expense charge). The gross investment rate
of a funding option is equal to (a) minus (b), divided by (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.
2
<PAGE> 35
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.
ACCUMULATION UNIT VALUE. The value of the accumulation unit for each funding
option was initially established at $1.00. The value of an accumulation unit
on any business day is determined by multiplying the value on the preceding
business day by the net investment factor for the valuation period just ended.
The net investment factor is calculated for each funding option and takes into
account the investment performance, expenses and the deduction of certain
expenses.
ANNUITY UNIT VALUE. The initial Annuity Unit Value applicable to each funding
option was established at $1.00. An annuity unit value as of any business day
is equal to (a) the value of the annuity unit on the preceding business day,
multiplied by (b) the corresponding net investment factor for the valuation
period just ended, divided by (c) the assumed net investment factor for the
valuation period. (For example, the assumed net investment factor based on an
annual assumed net investment rate of 3.0% for a Valuation Period of one day is
1.000081 and, for a period of two days, is 1.000081 x 1.000081.)
PERFORMANCE INFORMATION
From time to time, the Company may advertise several types of
historical performance for the Funding Options of the Separate Account. 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 "nonstandardized total returns," as
described below:
STANDARDIZED METHOD. Quotations of average annual total returns 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. If a
Funding Option has been in existence for less than one year, the "since
inception" total return performance quotations are year-to-date and are not
average annual total returns. 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 annual administrative charge ($30)
is converted to a percentage of assets based on the actual fee collected (or
anticipated to be collected, if a new product), divided by the average net
assets for contracts sold (or anticipated to be 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 withdrawal charge at that time.
NONSTANDARDIZED METHOD. Nonstandardized "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 ten-year periods. Nonstandardized total returns will
not reflect the deduction of any applicable withdrawal charge or the $30 annual
contract administrative charge, which, if reflected, would decrease the level
of performance shown. The withdrawal charge is not reflected because the
Contract is designed for long-term investment.
3
<PAGE> 36
For Funding Options that were in existence prior to the date they
became available under the Separate Account, the standardized average annual
total return quotations may be accompanied by returns showing 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.
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 the
Separate Account and the Funding Options.
ACTUAL RETURNS FOR THE SEPARATE ACCOUNT ARE NOT AVAILABLE, SINCE THE
SEPARATE ACCOUNT IS NEW AND THEREFORE HAS NO INVESTMENT HISTORY. However,
average annual total returns have been calculated using each funding option's
investment performance since inception. The returns were computed according to
nonstandardized methods for the period ending June 30, 1997 as if they had been
available under the Separate Account during that time. They are set forth in
the following table.
4
<PAGE> 37
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
STANDARDIZED AVERAGE ANNUAL TOTAL RETURNS
-----------------------------------------
(taking into account all charges and fees)
Not applicable
<CAPTION>
NONSTANDARDIZED TOTAL RETURNS
------------------------------
(taking into account all charges and fees except
deferred sales charges and contract administrative charge)
- --------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR
INCEPTION
DATE (2)
====================================================================================================================
<S> <C> <C> <C> <C> <C>
GREENWICH STREET SERIES FUND
- --------------------------------------------------------------------------------------------------------------------
Appreciation Portfolio 10/16/91 24.66% 23.24% 14.03% 12.78% *
- --------------------------------------------------------------------------------------------------------------------
SMITH BARNEY CONCERT ALLOCATION SERIES
- --------------------------------------------------------------------------------------------------------------------
Concert Select Balanced Portfolio 3/10/97 9.10% * --- --- ---
- --------------------------------------------------------------------------------------------------------------------
Concert Select Conservative Portfolio 3/10/97 10.56% * --- --- ---
- --------------------------------------------------------------------------------------------------------------------
Concert Select Growth Portfolio 3/10/97 9.71% * --- --- ---
- --------------------------------------------------------------------------------------------------------------------
Concert Select High Growth Portfolio 3/10/97 8.75% * --- --- ---
- --------------------------------------------------------------------------------------------------------------------
Concert Select Income Portfolio 3/10/97 10.39% * --- --- ---
- --------------------------------------------------------------------------------------------------------------------
TRAVELERS SERIES FUND, INC.
- --------------------------------------------------------------------------------------------------------------------
MFS Total Return Portfolio 6/20/94 19.56 18.70 14.94% * ---
- --------------------------------------------------------------------------------------------------------------------
Smith Barney High Income Portfolio 6/20/94 12.27% 13.71% 11.12% * ---
- --------------------------------------------------------------------------------------------------------------------
Smith Barney International Equity Portfolio 6/20/94 1.27% 8.85% 6.04% * ---
- --------------------------------------------------------------------------------------------------------------------
Smith Barney Large Cap Value Portfolio 6/20/94 24.87% 24.59% 19.86% * ---
- --------------------------------------------------------------------------------------------------------------------
Smith Barney Money Market Portfolio 6/20/94 3.63% 3.69% 3.54% * ---
- --------------------------------------------------------------------------------------------------------------------
THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------------------------------------------
MFS Mid Cap Growth Portfolio 3/23/98 --- --- --- ---
- --------------------------------------------------------------------------------------------------------------------
MFS Research Portfolio 3/23/98 --- --- --- ---
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 38
FEDERAL TAX CONSIDERATIONS
The following description of the federal income tax consequences under this
Contract is not exhaustive and is not intended to cover all situations.
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 purchase of an annuity contract and by a
contract owner or beneficiary who may make elections under a contract. For
further information, please consult a qualified tax adviser.
MANDATORY DISTRIBUTIONS FOR QUALIFIED PLANS
Federal tax law requires that minimum annual distributions begin by April
1st of the calendar year following the calendar year in which a participant
under a qualified plan, a Section 403(b) annuity, or an IRA attains age 701/2.
Distributions must also begin or be continued according to required patterns
following the death of the contract owner or the annuitant.
NONQUALIFIED ANNUITY CONTRACTS
Individuals may purchase tax-deferred annuities without tax law funding
limits. The purchase payments receive no tax benefit, deduction or deferral,
but increases in the value of the contract are generally deferred from tax
until distribution. If a nonqualified annuity is owned by other than an
individual, however, (e.g., by a corporation), the increases in value
attributable to purchase payments made after February 28, 1986 are includable
in income annually. Furthermore, for contracts issued after April 22, 1987,
all deferred increases in value will be includable in the income of a contract
owner when the contract owner transfers the contract without adequate
consideration.
If two or more annuity contracts are purchased from the same insurer within
the same calendar year, distributions from any of them will be taxed based upon
the amount of income in all of the same calendar year series of annuities.
This will generally have the effect of causing taxes to be paid sooner on the
deferred gain in the contracts.
Those receiving partial distributions made before the maturity date will
generally be taxed on an income-first basis to the extent of income in the
contract. If you are exchanging another annuity contract for this annuity,
certain pre-August 14, 1982 deposits into an annuity contract that have been
placed in the contract by means of a tax-deferred exchange under Section 1035
of the Code may be withdrawn first without income tax liability. This
information on deposits must be provided to the Company by the other insurance
company at the time of the exchange. There is income in the contract generally
to the extent the cash value exceeds the investment in the contract. The
investment in the contract is equal to the amount of premiums paid less any
amount received previously which was excludable from gross income. Any direct
or indirect borrowing against the value of the contract or pledging of the
contract as security for a loan will be treated as a cash distribution under
the tax law.
The federal tax law requires that nonqualified annuity contracts meet
minimum mandatory distribution requirements upon the death of the contract
owner, including the first of joint owners. Failure to meet these requirements
will cause the surviving joint owner, or the beneficiary, to lose the tax
benefits associated with annuity contracts, i.e., primarily the tax deferral
prior to distribution. The distribution required depends, among other things,
upon whether an annuity option is elected or whether the new contract owner is
the surviving spouse. Contracts will be administered by the
6
<PAGE> 39
Company in accordance with these rules and the Company will make a notification
when payments should be commenced.
INDIVIDUAL RETIREMENT ANNUITIES
To the extent of earned income for the year and not exceeding $2,000 per
individual, an individual may make deductible contributions to an individual
retirement annuity (IRA). There are certain limits on the deductible amount
based on the adjusted gross income of the individual and spouse and based on
their participation in a retirement plan. If an individual is married and the
spouse does not have earned income, the individual may establish IRAs for the
individual and spouse. Purchase payments may then be made annually into IRAs
for both spouses in the maximum amount of 100% of earned income up to a
combined limit of $4,000.
The Code provides for the purchase of a Simplified Employee Pension (SEP)
plan. A SEP is funded through an IRA with an annual employer contribution
limit of 15% of compensation up to $30,000 for each participant.
SIMPLE Plan IRA Form
Effective January 1, 1997, employers may establish a savings incentive match
plan for employees ("SIMPLE plan") under which employees can make elective
salary reduction contributions to an IRA based on a percentage of compensation
of up to $6,000. (Alternatively, the employer can establish a SIMPLE cash or
deferred arrangement under IRS Section 401(k)). Under a SIMPLE plan IRA, the
employer must either make a matching contribution of 100% on the first 3% or 7%
contribution for all eligible employees. Early withdrawals are subject to the
10% early withdrawal penalty generally applicable to IRAs, except that an early
withdrawal by an employee under a SIMPLE plan IRA, within the first two years
of participation, shall be subject to a 25% early withdrawal tax.
ROTH IRAS
Effective January 1, 1998, Section 408A of the Code permits certain
individuals to contribute to a Roth IRA. Eligibility to make contributions is
based upon income, and the applicable limits vary based on marital status
and/or whether the contribution is a rollover contribution from another IRA or
an annual contribution. Contributions to a Roth IRA, which are subject to
certain limitations ($2,000 per year for annual contributions), are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A conversion of a "traditional" IRA to a Roth IRA may
be subject to tax and other special rules apply. You should consult a tax
adviser before combining any converted amounts with other Roth IRA
contributions, including any other conversion amounts from other tax years.
Qualified distributions from a Roth IRA are tax-free. A qualified
distribution requires that the Roth IRA has been held for at least 5 years, and
the distribution is made after age 59 1/2, on death or disability of the owner,
or for a limited amount ($10,000) for a qualified first time home purchase for
the owner or certain relatives. Income tax and a 10% penalty tax may apply to
distributions made (1) before age 59 1/2 (subject to certain exceptions) or
(2) during five taxable years starting with the year in which the first
contribution is made to the Roth IRA.
7
<PAGE> 40
QUALIFIED PENSION AND PROFIT-SHARING PLANS
Under a qualified pension or profit-sharing plan, 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 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. Certain lump-sum distributions may be eligible for special
forward averaging tax treatment for certain classes of individuals.
FEDERAL INCOME TAX WITHHOLDING
The portion of a distribution which is taxable income to the recipient will
be subject to federal income tax withholding as follows:
1. ELIGIBLE ROLLOVER DISTRIBUTION FROM SECTION 403(b) PLANS OR ARRANGEMENTS
OR FROM QUALIFIED PENSION AND PROFIT-SHARING PLANS
There is a mandatory 20% tax withholding for plan distributions that
are eligible for rollover to an IRA or to another retirement plan but that are
not directly rolled over. 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 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 after the attainment of the age of 701/2 or as otherwise
required by law.
A distribution including a rollover that is not a direct rollover will
be subject to the 20% withholding, and a 10% additional tax penalty may apply
to any amount not added back in the rollover. 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)
To the extent not described as requiring 20% withholding in 1 above,
the portion of a non-periodic distribution which constitutes taxable income
will be subject to federal income tax withholding, if the aggregate
distributions exceed $200 for the year, unless the recipient elects not to have
taxes withheld. If no such election is made, 10% of the taxable distribution
will 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.
8
<PAGE> 41
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, 1998, a recipient receiving
periodic payments (e.g., monthly or annual payments under an annuity option)
which total $15,200 or less per year, will generally be exempt from periodic
withholding.
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 not sufficient to cover tax
liabilities.
Recipients who do not provide a social security number or other
taxpayer identification number will not be permitted to elect out of
withholding. Additionally, U.S citizens residing outside of the country, or
U.S. legal residents temporarily residing outside the country, are not
permitted to elect out of withholding.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Travelers Insurance
Company and Subsidiaries as of December 31, 1997 and 1996, and for each of the
years in the three-year period ended December 31, 1997, have been included
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
9
<PAGE> 42
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Travelers
Insurance Company and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income and retained earnings and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Travelers
Insurance Company and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 26, 1998
F-1
<PAGE> 43
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
($ IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
REVENUES
Premiums $1,583 $1,387 $1,504
Net investment income 2,037 1,950 1,884
Realized investment gains 199 65 106
Other revenues 354 284 204
- -------------------------------------------------------------------------------------------
Total Revenues $4,173 $3,686 $3,698
- -------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,341 1,187 1,206
Interest credited to contractholders 829 863 997
Amortization of deferred acquisition costs and value of
insurance in force 293 281 290
General and administrative expenses 427 380 368
- -------------------------------------------------------------------------------------------
Total Benefits and Expenses 2,890 2,711 2,861
- -------------------------------------------------------------------------------------------
Income from continuing operations before federal income taxes 1,283 975 837
- -------------------------------------------------------------------------------------------
Federal income taxes:
Current expense 434 284 233
Deferred 10 58 57
- -------------------------------------------------------------------------------------------
Total Federal Income Taxes 444 342 290
- -------------------------------------------------------------------------------------------
Income from continuing operations 839 633 547
- -------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes
Income from operations (net of taxes of $0, $0 and $18) -- -- 72
Gain on disposition (net of taxes of $0, $14 and $68) -- 26 131
- -------------------------------------------------------------------------------------------
Income from Discontinued Operations -- 26 203
- -------------------------------------------------------------------------------------------
Net income 839 659 750
Retained earnings beginning of year 2,471 2,312 1,562
Dividends to parent 500 500 --
- -------------------------------------------------------------------------------------------
Retained Earnings End of Year $2,810 $2,471 $2,312
===========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 44
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost,
$20,682; $19,284) $21,511 $19,637
Equity securities, at fair value (cost, $480; $330) 512 338
Mortgage loans 2,869 2,920
Real estate held for sale 134 297
Trading securities, at market value 800 --
Policy loans 1,872 1,910
Short-term securities 1,102 902
Other invested assets 1,702 1,253
- ----------------------------------------------------------------------------------
Total Investments $30,502 $27,257
- ----------------------------------------------------------------------------------
Cash 58 74
Investment income accrued 338 355
Premium balances receivable 106 105
Reinsurance recoverables 4,339 3,858
Deferred acquisition costs and value of insurance in force 2,312 2,133
Separate and variable accounts 11,319 8,127
Other assets 1,052 1,064
- ----------------------------------------------------------------------------------
Total Assets $50,026 $42,973
- ----------------------------------------------------------------------------------
LIABILITIES
Contractholder funds 14,913 14,189
Future policy benefits 12,569 11,762
Policy and contract claims 378 536
Trading securities sold not yet purchased, at market value 462 --
Separate and variable accounts 11,309 8,115
Commercial paper -- 50
Deferred federal income taxes 409 57
Other liabilities 2,661 1,936
- ----------------------------------------------------------------------------------
Total Liabilities $42,701 $36,645
- ----------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized,
issued and outstanding 100 100
Additional paid-in capital 3,187 3,170
Retained earnings 2,810 2,471
Unrealized investment gains, net of taxes 1,228 587
- ----------------------------------------------------------------------------------
Total Shareholder's Equity $ 7,325 $ 6,328
- ----------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $50,026 $42,973
==================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 1,519 $ 1,387 $ 1,346
Net investment income received 2,059 1,910 1,855
Other revenues received 180 131 90
Benefits and claims paid (1,230) (1,060) (846)
Interest credited to contractholders (853) (820) (960)
Operating expenses paid (445) (343) (615)
Income taxes paid (368) (328) (63)
Trading account investments, (purchases) sales, net (54) -- --
Other 18 (70) (137)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 826 807 670
Net cash used in discontinued operations -- (350) (596)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations $ 826 $ 457 $ 74
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 2,259 1,928 1,974
Mortgage loans 663 917 680
Proceeds from sales of investments
Fixed maturities 7,592 9,101 6,773
Equity securities 341 479 379
Mortgage loans 207 178 704
Real estate held for sale 169 210 253
Purchases of investments
Fixed maturities (11,143) (11,556) (10,748)
Equity securities (483) (594) (305)
Mortgage loans (771) (470) (144)
Policy loans, net 38 (23) (325)
Short-term securities, (purchases) sales, net (2) 498 291
Other investments, (purchases) sales, net (260) (137) (267)
Securities transactions in course of settlement 311 (52) 258
Net cash provided by investing activities of discontinued operations -- 348 1,425
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (used in) Investing Activities $ (1,079) $ 827 $ 948
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of commercial paper, net (50) (23) (1)
Contractholder fund deposits 3,544 2,493 2,705
Contractholder fund withdrawals (2,757) (3,262) (3,755)
Dividends to parent company (500) (500) --
Other -- 9 --
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (used in) Financing Activities $ 237 $ (1,283) $ (1,051)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ (16) $ 1 $ (29)
- ----------------------------------------------------------------------------------------------------------------------
Cash at December 31, $ 58 $ 74 $ 73
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the accompanying
financial statements follow.
Basis of Presentation
The Travelers Insurance Company and Subsidiaries (the Company) is a wholly
owned subsidiary of The Travelers Insurance Group Inc. (TIGI), an indirect
wholly owned subsidiary of Travelers Group Inc. (Travelers Group). The
consolidated financial statements include the accounts of the Company and its
insurance and non-insurance subsidiaries on a fully consolidated basis. The
primary insurance subsidiaries of the Company are The Travelers Life and
Annuity Company (TLAC) and Primerica Life Insurance Company (Primerica Life)
and its subsidiary National Benefit Life Insurance Company (NBL).
- TRAVELERS LIFE AND ANNUITY offers fixed and variable deferred annuities,
payout annuities and term, universal and variable life and long-term care
insurance to individuals and small businesses. It also provides group
pension products, including guaranteed investment contracts and group
annuities for employer-sponsored retirement and savings plans. These
products are primarily marketed through The Copeland Companies (Copeland),
an indirect, wholly owned subsidiary of the Company, the Financial
Consultants of Salomon Smith Barney, an affiliate of the Company, and a
nationwide network of independent agents. The Company's Corporate and
Other Segment was absorbed into Travelers Life and Annuity during the
second quarter of 1996.
- PRIMERICA LIFE INSURANCE offers individual life products, primarily term
insurance, to consumers through a nationwide sales force of approximately
80,000 full and part-time independent agents.
As discussed in Note 2 of Notes to Consolidated Financial Statements, in
January 1995 the group life insurance and related businesses of the Company
were sold to Metropolitan Life Insurance Company (MetLife). Also in January
1995, the group medical component was exchanged for a 42% interest in The
MetraHealth Companies, Inc. (MetraHealth). The Company's interest in
MetraHealth was sold on October 2, 1995 and through that date was accounted
for on the equity method. The Company's discontinued operations reflect the
results of the medical insurance business not transferred, the equity
interest in the earnings of MetraHealth through October 2, 1995 (date of
sale) and the gains from the sales of these businesses.
In September 1995, Travelers Group made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings Inc.,
which at the time was a wholly owned subsidiary of Travelers Group and was
the indirect owner of the business of Transport Life Insurance Company
(Transport Life). Immediately prior to this distribution, the Company
distributed Transport Life, an indirect wholly owned subsidiary of the
Company, to TIGI, as a return of capital.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and benefits and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
F-5
<PAGE> 47
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Accounting Changes
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In February, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (FAS 132). FAS 132
supersedes the disclosure requirements in FASB Statements No. 87, "Employers'
Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefits Pension Plans and Termination of Benefits,"
and No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." FAS 132 addresses disclosure only and does not address measurement
or recognition. In addition to other disclosure changes, FAS 132 allows
employers to disclose total contributions to multi-employer plans without
disaggregating the amounts attributable to pensions and other postretirement
benefits. This statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Effective December 31,
1997, the Company adopted FAS 132. The adoption of this standard did not have
any impact on results of operations, financial condition or liquidity.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 125
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are
based on an approach that focuses on control. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. FAS 125 provides standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The requirements of FAS 125 are effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and are to be applied
prospectively. However, in December 1996 the FASB issued Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125," which delays until January 1,
1998 the effective date for certain provisions. Application of FAS 125 prior
to the effective date or retroactively is not permitted. The adoption of the
provisions of FAS 125 effective January 1, 1997 did not have a material
impact on results of operations, financial condition or liquidity. The
adoption of the provisions of FAS 127 effective January, 1998 are
not expected to have a material impact on the results of operations,
financial condition or liquidity.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes accounting standards for the impairment of long-lived assets and
certain identifiable intangibles to be disposed. This statement requires a
write down to fair value when long-lived assets to be held and used are
impaired. The statement also requires long-lived assets to be disposed (e.g.,
real estate held for sale) be carried at the lower of cost or fair value less
cost to sell, and does not allow such assets to be depreciated. The adoption
of this standard did not have a material impact on the Company's financial
condition, results of operations or liquidity.
F-6
<PAGE> 48
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans as well as transactions in which an entity issues
its equity instruments to acquire goods or services from non-employees. This
statement defines a fair value-based method of accounting for employee stock
options or similar equity instruments, and encourages all entities to adopt
this method of accounting for all employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Entities electing to remain with the accounting method
prescribed in APB 25 must make pro-forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined
by FAS 123 had been applied. FAS 123 is applicable to fiscal years beginning
after December 15, 1995. The Company has elected to continue to account for
its stock-based employee compensation plans using the accounting method
prescribed by APB 25 and has included in the notes to consolidated financial
statements the pro-forma disclosures required by FAS 123. See Note 9. The
Company has adopted FAS 123 for its stock-based non-employee compensation
plans.
Accounting Policies
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks. Fair
values of investments in fixed maturities are based on quoted market prices
or dealer quotes or, if these are not available, discounted expected cash
flows using market rates commensurate with the credit quality and maturity of
the investment. Also included in fixed maturities are loan-backed and
structured securities, which are amortized using the retrospective method.
Fixed maturities are classified as "available for sale" and are reported at
fair value, with unrealized investment gains and losses, net of income taxes,
charged or credited directly to shareholder's equity.
Equity securities, which include common and nonredeemable preferred stocks,
are classified as "available for sale" and carried at fair value based
primarily on quoted market prices. Changes in fair values of equity
securities are charged or credited directly to shareholder's equity, net of
income taxes.
Mortgage loans are carried at amortized cost. A mortgage loan is considered
impaired when it is probable that the Company will be unable to collect
principal and interest amounts due. For mortgage loans that are determined to
be impaired, a reserve is established for the difference between the
amortized cost and fair market value of the underlying collateral. In
estimating fair value, the Company uses interest rates reflecting the higher
returns required in the current real estate financing market. Impaired loans
were insignificant at December 31, 1997 and 1996.
Real estate held for sale is carried at the lower of cost or fair value less
estimated cost to sell. Fair value of foreclosed properties is established at
the time of foreclosure by internal analysis or external appraisers, using
discounted cash flow analyses and other accepted techniques. Thereafter, an
allowance for losses on real estate held for sale is established if the
carrying value of the property exceeds its current fair value less estimated
costs to sell. There was no such allowance at December 31, 1997 and 1996.
F-7
<PAGE> 49
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Trading securities are carried at market value. Realized and unrealized gains
and losses on trading securities are included in investment income.
Short-term securities, consisting primarily of money market instruments and
other debt issues purchased with a maturity of less than one year, are
carried at amortized cost which approximates market.
Accrual of income, included in other assets, is suspended on fixed maturities
or mortgage loans that are in default, or on which it is likely that future
payments will not be made as scheduled. Interest income on investments in
default is recognized only as payment is received.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, equity options, forward contracts and interest rate swaps
and caps, as a means of hedging exposure to interest rate, equity price and
foreign currency risk. Hedge accounting is used to account for derivatives.
To qualify for hedge accounting the changes in value of the derivative must
be expected to substantially offset the changes in value of the hedged item.
Hedges are monitored to ensure that there is a high correlation between the
derivative instruments and the hedged investment.
Gains and losses arising from financial futures contracts are used to adjust
the basis of hedged investments and are recognized in net investment income
over the life of the investment.
Forward contracts, equity options, and interest rate swaps and caps were not
significant at December 31, 1997 and 1996. Information concerning derivative
financial instruments is included in Note 6.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pretax
revenues based upon specific identification of the investments sold on the
trade date. Also included are gains and losses arising from the remeasurement
of the local currency value of foreign investments to U.S. dollars, the
functional currency of the Company. The foreign exchange effects of Canadian
operations are included in unrealized gains and losses.
POLICY LOANS
Policy loans are carried at the amount of the unpaid balances that are not in
excess of the net cash surrender values of the related insurance policies.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE
Costs of acquiring individual life insurance, annuities and long-term care
business, principally commissions and certain expenses related to policy
issuance, underwriting and marketing, all of which vary with and are
primarily related to the production of new business, are deferred.
Acquisition costs relating to traditional life insurance, including term
insurance and long-term care insurance, are amortized in relation to
anticipated premiums; universal life in relation to estimated gross profits;
and annuity contracts employing a level yield method. For life insurance, a
10- to 25-year amortization period is used; for long-term care business, a
10- to 20-year period is used, and a 10- to 20-year period is employed for
annuities. Deferred acquisition costs are reviewed periodically for
recoverability to determine if any adjustment is required.
F-8
<PAGE> 50
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The value of insurance in force is an asset recorded at the time of
acquisition of an insurance company. It represents the actuarially determined
present value of anticipated profits to be realized from life insurance,
annuities and health contracts at the date of acquisition using the same
assumptions that were used for computing related liabilities where
appropriate. The value of insurance in force was the actuarially determined
present value of the projected future profits discounted at interest rates
ranging from 14% to 18%. Traditional life insurance and guaranteed renewable
health policies are amortized in relation to anticipated premiums; universal
life is amortized in relation to estimated gross profits; and annuity
contracts are amortized employing a level yield method. The value of
insurance in force is reviewed periodically for recoverability to determine
if any adjustment is required.
SEPARATE AND VARIABLE ACCOUNTS
Separate and variable accounts primarily represent funds for which investment
income and investment gains and losses accrue directly to, and investment
risk is borne by, the contractholders. Each account has specific investment
objectives. The assets of each account are legally segregated and are not
subject to claims that arise out of any other business of the Company. The
assets of these accounts are carried at market value. Certain other separate
accounts provide guaranteed levels of return or benefits and the assets of
these accounts are primarily carried at market value. Amounts assessed to the
contractholders for management services are included in revenues. Deposits,
net investment income and realized investment gains and losses for these
accounts are excluded from revenues, and related liability increases are
excluded from benefits and expenses.
GOODWILL
Goodwill represents the cost of acquired businesses in excess of net assets
and is being amortized on a straight-line basis principally over a 40-year
period. The carrying amount is regularly reviewed for indication of
impairment in value that in the view of management would be other than
temporary. Impairments would be recognized in operating results if a
permanent diminution in value is deemed to have occurred.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal life,
pension investment and certain deferred annuity contracts. Contractholder
fund balances are increased by such receipts and credited interest and
reduced by withdrawals, mortality charges and administrative expenses charged
to the contractholders. Interest rates credited to contractholder funds range
from 3.5% to 9.45%.
FUTURE POLICY BENEFITS
Benefit reserves represent liabilities for future insurance policy benefits.
Benefit reserves for life insurance and annuities have been computed based
upon mortality, morbidity, persistency and interest assumptions applicable to
these coverages, which range from 2.5% to 10.0%, including adverse deviation.
These assumptions consider Company experience and industry standards. The
assumptions vary by plan, age at issue, year of issue and duration.
Appropriate recognition has been given to experience rating and reinsurance.
F-9
<PAGE> 51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company, whose insurance subsidiaries are domiciled principally in
Connecticut and Massachusetts, prepares statutory financial statements in
accordance with the accounting practices prescribed or permitted by the
insurance departments of those states. Prescribed statutory accounting
practices include certain publications of the National Association of
Insurance Commissioners as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed. The impact of any permitted
accounting practices on statutory surplus of the Company is not material.
PREMIUMS
Premiums are recognized as revenues when due. Reserves are established for
the portion of premiums that will be earned in future periods and for
deferred profits on limited-payment policies that are being recognized in
income over the policy term.
OTHER REVENUES
Other revenues include surrender, mortality and administrative charges and
fees as earned on investment, universal life and other insurance contracts.
Other revenues also include gains and losses on dispositions of assets and
operations other than realized investment gains and losses and revenues of
non-insurance subsidiaries.
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, pension investment and certain deferred annuity contracts in accordance
with contract provisions.
FEDERAL INCOME TAXES
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income taxes
arise from changes during the year in cumulative temporary differences
between the tax basis and book basis of assets and liabilities. The deferred
federal income tax asset is recognized to the extent that future realization
of the tax benefit is more likely than not, with a valuation allowance for
the portion that is not likely to be recognized.
Future Application of Accounting Standards
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund and
other insurance-related assessments, how to measure that liability, and when
an asset may be recognized for the recovery of such assessments through
premium tax offsets or policy surcharges. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998, and the effect
of initial adoption is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not allowed. The
Company has not yet determined when it will implement this SOP and does not
anticipate any material impact on the Company's financial condition, results
of operations or liquidity.
F-10
<PAGE> 52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All items
that are required to be recognized under accounting standards as components
of comprehensive income are to be reported in a financial statement that is
displayed with the same prominence as other financial statements. FAS 130
stipulates that comprehensive income reflect the change in equity of an
enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income will thus
represent the sum of net income and other comprehensive income, although FAS
130 does not require the use of the terms comprehensive income or other
comprehensive income. The accumulated balance of other comprehensive income
shall be displayed separately from retained earnings and additional paid-in
capital in the statement of financial position. FAS 130 is effective for
fiscal years beginning after December 15, 1997. The Company anticipates that
the adoption of FAS 130 will result primarily in reporting unrealized gains
and losses on investments in debt and equity securities in comprehensive
income.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (FAS 131). FAS 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that selected information about those operating
segments be reported in interim financial statements. FAS 131 supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise" (FAS 14). FAS 131 requires that all
public enterprises report financial and descriptive information about its
reportable operating segments. Operating segments are defined as components
of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. FAS 131 is effective for
fiscal years beginning after December 15, 1997. The Company is currently
determining the impact of the adoption of FAS 131.
2. DISPOSITIONS AND DISCONTINUED OPERATIONS
On January 3, 1995, the Company and its affiliates completed the sale of
their group life and related non-medical group insurance businesses to
MetLife for $350 million and recognized in the first quarter of 1995 a gain
of $20 million net of taxes. In connection with the sale, the Company ceded
100% of its risks in the group life and related businesses to MetLife on an
indemnity reinsurance basis, effective January 1, 1995. In connection with
the reinsurance transaction, the Company transferred assets with a fair
market value of approximately $1.5 billion to MetLife, equal to the statutory
reserves and other liabilities transferred.
On January 3, 1995, the Company and MetLife and certain of their affiliates,
formed the MetraHealth joint venture by contributing their group medical
businesses to MetraHealth, in exchange for shares of common stock of
MetraHealth. No gain was recognized as a result of this transaction . Upon
formation of the joint venture, the Company owned 42% of the outstanding
capital stock of MetraHealth, TIGI owned 8% and the other 50% was owned by
MetLife and its affiliates. In March 1995, MetraHealth acquired HealthSpring,
Inc. for common stock of MetraHealth resulting in a reduction in the
participation of the Company and TIGI, and MetLife in the MetraHealth venture
to 48.25% each. As the medical insurance business of the Company came due for
renewal, the risks were transferred to MetraHealth and the related operating
results for this medical insurance business were reported by the Company in
1995 as part of discontinued operations.
F-11
<PAGE> 53
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On October 2, 1995, the Company and its affiliates completed the sale of
their ownership in MetraHealth to United HealthCare Corporation and through
that date had accounted for its interest in MetraHealth on the equity method.
Gross proceeds to the Company in 1995 were $708 million in cash, an after-tax
gain of $111 million was recognized. During 1996 the Company received a
contingency payment based on MetraHealth's 1995 results. In conjunction with
this payment, certain reserves associated with the group medical business and
exit costs related to the discontinued operations were reevaluated resulting
in a final after-tax gain of $26 million.
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's Managed Care and Employee Benefit Operations
(MCEBO) segment prior to 1995. The Company's discontinued operations in 1996
and 1995 reflect the results of the medical insurance business not
transferred, the equity interest in the earnings of MetraHealth through
October 2, 1995 (date of sale) and the gains from sales of these businesses.
Revenues from discontinued operations were insignificant for the year ended
December 31, 1996 and $1.2 billion for the year ended December 31, 1995.
In September 1995, Travelers Group made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings Inc.,
which at the time was a wholly owned subsidiary of Travelers Group and was
the indirect owner of the business of Transport Life. Immediately prior to
this distribution, the Company distributed Transport, an indirect wholly
owned subsidiary of the Company, to TIGI as a return of capital, resulting in
a reduction in additional paid-in capital of $334 million. The results of
Transport through September 1995 are included in income from continuing
operations.
3. COMMERCIAL PAPER AND LINES OF CREDIT
The Company issues commercial paper directly to investors. No commercial
paper was outstanding at December 31, 1997 and $50 million was outstanding at
December 31, 1996. The Company maintains unused credit availability under
bank lines of credit at least equal to the amount of the outstanding
commercial paper. Interest expense related to the commercial paper was not
significant in 1997 or 1996.
Travelers Group, Commercial Credit Company (CCC) (an indirect wholly owned
subsidiary of Travelers Group) and the Company have an agreement with a
syndicate of banks to provide $1.0 billion of revolving credit, to be
allocated to any of Travelers Group, CCC or the Company. The Company's
participation in this agreement is limited to $250 million. The revolving
credit facility consists of a five-year revolving credit facility that
expires in 2001. At December 31, 1997, $50 million was allocated to the
Company. Under this facility the Company is required to maintain certain
minimum equity and risk-based capital levels. At December 31, 1997, the
Company was in compliance with these provisions. There were no amounts
outstanding under this agreement at December 31, 1997 and 1996. If the
Company had borrowings on this facility, the interest rate would be based
upon LIBOR plus a negotiated margin.
F-12
<PAGE> 54
\ THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. REINSURANCE
The Company participates in reinsurance in order to limit losses, minimize
exposure to large risks, provide additional capacity for future growth and to
effect business-sharing arrangements. Reinsurance is accomplished through
various plans of reinsurance, primarily yearly renewable term coinsurance and
modified coinsurance. The Company remains primarily liable as the direct
insurer on all risks reinsured. During 1997, new universal life business was
reinsured under an 80%/20% quota share reinsurance program and new term life
business was reinsured under a 90%/10% quota share reinsurance program.
Maximum retention of $1.5 million is generally reached on policies in excess
of $7.5 million. For other plans of insurance, it is the policy of the
Company to obtain reinsurance for amounts above certain retention limits on
individual life policies, which limits vary with age and underwriting
classification. Generally, the maximum retention on an ordinary life risk is
$1.5 million.
The Company writes workers' compensation business through its Accident
Department. This business is ceded 100% to an affiliate, The Travelers
Indemnity Company.
A summary of reinsurance financial data reflected within the consolidated
statement of operations and retained earnings is presented below ($ in
millions):
<TABLE>
<CAPTION>
---------------------------------------------------------------------
WRITTEN PREMIUMS 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Direct $2,148 $1,982 $2,166
Assumed from:
Non-affiliated companies 1 5 --
Ceded to:
Affiliated companies (280) (284) (374)
Non-affiliated companies (273) (309) (302)
---------------------------------------------------------------------
Total Net Written Premiums $1,596 $1,394 $1,490
=====================================================================
<CAPTION>
---------------------------------------------------------------------
EARNED PREMIUMS 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Direct $2,170 $1,897 $2,067
Assumed from:
Non-affiliated companies 1 5 --
Ceded to:
Affiliated companies (321) (219) (283)
Non-affiliated companies (291) (315) (298)
---------------------------------------------------------------------
Total Net Earned Premiums $1,559 $1,368 $1,486
=====================================================================
</TABLE>
F-13
<PAGE> 55
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reinsurance recoverables at December 31, 1997 and 1996 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------
REINSURANCE RECOVERABLES 1997 1996
----------------------------------------------------------
<S> <C> <C>
Life and Accident and Health
Business:
Non-affiliated companies $1,362 $1,497
Property-Casualty Business:
Affiliated companies 2,977 2,361
----------------------------------------------------------
Total Reinsurance Recoverables $4,339 $3,858
==========================================================
</TABLE>
Total reinsurance recoverables at December 31, 1997 and 1996 include $697
million and $720 million, respectively, from MetLife in connection with the
sale of the Company's group life and related businesses. See Note 2.
5. SHAREHOLDER'S EQUITY
Additional Paid-In Capital
The increase of $17 million in additional paid-in capital during 1997 is due
to tax benefits related to exercising Travelers Group stock options by the
Company's employees.
Unrealized Investment Gains (Losses)
An analysis of the change in unrealized gains and losses on investments is
shown in Note 13.
Shareholder's Equity and Dividend Availability
The Company's statutory net income, which includes all insurance
subsidiaries, was $754 million, $656 million, and $235 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company's statutory capital and surplus was $4.12 billion and $3.44
billion at December 31, 1997 and 1996, respectively.
The Company is currently subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to its parent
without prior approval of insurance regulatory authorities. Statutory surplus
of $551 million is available in 1998 for dividend payments by the Company
without prior approval of the Connecticut Insurance Department. In addition,
under a revolving credit facility, the Company is required to maintain
certain minimum equity and risk based capital levels. The Company is in
compliance with these covenants at December 31, 1997 and 1996.
F-14
<PAGE> 56
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures, equity options, forward contracts and interest rate swaps as a means
of hedging exposure to foreign currency, equity price changes and/or interest
rate risk on anticipated transactions or existing assets and liabilities. The
Company does not hold or issue derivative instruments for trading purposes.
These derivative financial instruments have off-balance sheet risk. Financial
instruments with off-balance sheet risk involve, to varying degrees, elements
of credit and market risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of these instruments reflect the
extent of involvement the Company has in a particular class of financial
instrument. However, the maximum loss of cash flow associated with these
instruments can be less than these amounts. For forward contracts and
interest rate swaps, credit risk is limited to the amounts calculated to be
due the Company on such contracts. Financial futures contracts and purchased
listed option contracts have little credit risk since organized exchanges are
the counterparties.
The Company monitors creditworthiness of counterparties to these financial
instruments by using criteria of acceptable risk that are consistent with
on-balance sheet financial instruments. The controls include credit
approvals, limits and other monitoring procedures.
The Company uses exchange traded financial futures contracts to manage its
exposure to changes in interest rates which arise from the sale of certain
insurance and investment products, or the need to reinvest proceeds from the
sale or maturity of investments. To hedge against adverse changes in interest
rates, the Company enters long or short positions in financial futures
contracts to offset asset price changes resulting from changes in market
interest rates until an investment is purchased or a product is sold.
Margin payments are required to enter a futures contract and contract gains
or losses are settled daily in cash. The contract amount of futures contracts
represents the extent of the Company's involvement, but not future cash
requirements, as open positions are typically closed out prior to the
delivery date of the contract.
At December 31, 1997 and 1996, the Company held financial futures contracts
with notional amounts of $625 million and $169 million, respectively, and a
deferred gain of $.7 million and a deferred loss of $4.1 million and a
deferred gain of $1.2 million, and a deferred loss of $.1 million,
respectively. Total losses of $5.8 million and gains of $2.0 million from
financial futures were deferred at December 31, 1997 and 1996, respectively,
relating to anticipated investment purchases and investment product sales,
and are reported as other liabilities. At December 31, 1997 and 1996, the
Company's futures contracts had no fair value because these contracts were
marked to market and settled in cash daily.
The off-balance sheet risks of equity options, forward contracts, and
interest rate swaps were not significant at December 31, 1997 and 1996.
F-15
<PAGE> 57
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company purchased a 5-year interest rate cap, with a notional amount of
$200 million, from Travelers Group in 1995 to hedge against losses that could
result from increasing interest rates. This instrument, which does not have
off-balance sheet risk, gives the Company the right to receive payments if
interest rates exceed specific levels at specific dates. The premium of $2
million paid for this instrument is being amortized over its life. The
interest rate cap asset is reported at fair value which is $0 and $1 million
at December 31, 1997 and 1996, respectively.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company issues fixed and variable rate
loan commitments and has unfunded commitments to partnerships. The
off-balance sheet risk of these financial instruments was not significant at
December 31, 1997 and 1996.
Fair Value of Certain Financial Instruments
The Company uses various financial instruments in the normal course of its
business. Fair values of financial instruments that are considered insurance
contracts are not required to be disclosed and are not included in the
amounts discussed.
At December 31, 1997 and 1996, investments in fixed maturities had a carrying
value and a fair value of $21.5 billion and $19.6 billion, respectively. See
Notes 1 and 13.
At December 31, 1997 and 1996, mortgage loans had a carrying value of $2.9
billion, which approximated fair value. In estimating fair value, the Company
used interest rates reflecting the higher returns required in the current
real estate financing market.
The carrying values of $143 million and $174 million of financial instruments
classified as other assets approximated their fair values at December 31,
1997 and 1996, respectively. The carrying values of $2.0 billion and $850
million of financial instruments classified as other liabilities also
approximated their fair values at December 31, 1997 and 1996, respectively.
Fair value is determined using various methods, including discounted cash
flows, as appropriate for the various financial instruments.
At December 31, 1997, contractholder funds with defined maturities had a
carrying value of $2.3 billion and a fair value of $2.3 billion, compared
with a carrying value of $1.4 billion and a fair value of $1.5 billion at
December 31, 1996. The fair value of these contracts is determined by
discounting expected cash flows at an interest rate commensurate with the
Company's credit risk and the expected timing of cash flows. Contractholder
funds without defined maturities had a carrying value of $9.7 billion and a
fair value of $9.5 billion at December 31, 1997, compared with a carrying
value of $9.1 billion and a fair value of $8.8 billion at December 31, 1996.
These contracts generally are valued at surrender value.
The assets of separate accounts providing a guaranteed return had a carrying
value and a fair value of $260 million and $260 million, respectively, at
December 31, 1997, compared with a carrying value and a fair value of $217
million and $217 million, respectively, at December 31, 1996. The liabilities
of separate accounts providing a guaranteed return had a carrying value and a
fair value of $209 million and $206 million, respectively, at December 31,
1997, compared with a carrying value and a fair value of $208 million and
$204 million, respectively, at December 31, 1996.
F-16
<PAGE> 58
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The carrying values of cash, short-term securities, trading securities,
investment income accrued, trading securities sold not purchased, and
commercial paper approximated their fair values.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
7. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
See Note 6 for a discussion of financial instruments with off-balance sheet
risk.
Litigation
In March 1997, a purported class action entitled Patterman v. The Travelers,
Inc. was commenced in the Superior Court of Richmond County, Georgia,
alleging, among other things, violations of the Georgia RICO statute and
other state laws by an affiliate of the Company, Primerica Financial
Services, Inc. and certain of its affiliates. Plaintiffs seek unspecified
compensatory and punitive damages and other relief. In April 1997, the
lawsuit was removed to the U.S. District Court for the Southern District of
Georgia, and in October 1997, the lawsuit was remanded to the Superior Court
of Richmond County. Later in October 1997, the defendants answered the
complaint, denied liability and asserted numerous affirmative defenses. In
February 1998, the Superior Court of Richmond County transferred the lawsuit
to the Superior Court of Gwinnett County, Georgia, and certified the transfer
order for immediate appellate review. Also in February 1998, plaintiffs
served an application for appellate review of the transfer order; defendants
subsequently opposed that application; and later in February 1998, the Court
of Appeals of the State of Georgia granted plaintiffs' application for
appellate review. Pending appeal proceedings in the trial court have been
stayed. The Company intends to vigorously contest the litigation.
The Company is also a defendant or co-defendant in various other litigation
matters in the normal course of business. Although there can be no
assurances, as of December 31, 1997, the Company believes, based on
information currently available, that the ultimate resolution of these legal
proceedings would not be likely to have a material adverse effect on its
results of operations, financial condition or liquidity.
8. BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by an affiliate. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by an affiliate. The Company's share of net expense for the
qualified pension and other postretirement benefit plans was not significant
for 1997, 1996 and 1995. Beginning January 1, 1996, the Company's other
postretirement benefit plans were amended to restrict benefit eligibility to
retirees and certain retiree-eligible employees. Previously, covered
employees could become eligible for postretirement benefits if they reached
retirement age while working for the Company.
F-17
<PAGE> 59
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Through plans sponsored by TIGI, the Company also provides defined
contribution pension plans for certain agents. Company contributions are
primarily a function of production. The expense for these plans was not
significant in 1997, 1996 and 1995.
401(k) Savings Plan
Substantially all of the Company's employees are eligible to participate in a
401(k) savings plan sponsored by Travelers Group. Prior to January 1, 1996,
the Company made matching contributions to the 401(k) savings plan on behalf
of participants in the amount of 50% of the first 5% of pre-tax contributions
made by the employee, plus an additional variable matching contribution based
on the profitability of TIGI and its subsidiaries. During 1996, the Company
made matching contributions in an amount equal to the lesser of 100% of the
pre-tax contributions made by the employee or $1,000. Effective January 1,
1997, the Company discontinued matching contributions for the majority of its
employees. The Company's expenses in connection with the 401(k) savings plan
were not significant in 1997, 1996 and 1995.
9. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and expenses,
for certain subsidiaries and affiliates of TIGI are handled by two companies.
The Travelers Insurance Company (Life Department) handles banking functions
for the life and annuity operations of Travelers Life and Annuity and some of
its non-insurance affiliates. The Travelers Indemnity Company handles banking
functions for the property-casualty operations, including most of its
property-casualty insurance and non-insurance affiliates. Settlements between
companies are made at least monthly. The Company provides various employee
benefits coverages to employees of certain subsidiaries of TIGI. The premiums
for these coverages were charged in accordance with cost allocation
procedures based upon salaries or census. In addition, investment advisory
and management services, data processing services and claims processing
services are shared with affiliated companies. Charges for these services are
shared by the companies on cost allocation methods based generally on
estimated usage by department.
The Company maintains a short-term investment pool in which its insurance
affiliates participate. The position of each company participating in the
pool is calculated and adjusted daily. At December 31, 1997 and 1996, the
pool totaled approximately $2.6 billion and $2.9 billion, respectively. The
Company's share of the pool amounted to $725 million and $196 million at
December 31, 1997 and 1996, respectively, and is included in short-term
securities in the consolidated balance sheet.
The Company sells structured settlement annuities to The Travelers Indemnity
Company in connection with the settlement of certain policyholder
obligations. Such deposits were $88 million, $40 million, and $38 million for
1997, 1996 and 1995, respectively.
The Company markets deferred annuity products and life and health insurance
through its affiliate, Salomon Smith Barney. Premiums and deposits related to
these products were $1.0 billion, $820 million, and $583 million in 1997,
1996 and 1995, respectively.
At December 31, 1996, the Company had an investment of $22 million in bonds
of its affiliate, CCC. This was included in fixed maturities in the
consolidated balance sheet.
F-18
<PAGE> 60
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company had an investment of $1.15 billion and $648 million in common
stock of Travelers Group at December 31, 1997 and 1996, respectively. This
investment is carried at fair value.
The Company participates in a stock option plan sponsored by Travelers Group
that provides for the granting of stock options in Travelers Group common
stock to officers and key employees. To further encourage employee stock
ownership, during 1997 Travelers Group introduced the WealthBuilder stock
option program. Under this program all employees meeting certain requirements
have been granted Travelers Group stock options.
The Company applies APB 25 and related interpretations in accounting for
stock options. Since stock options under the Travelers Group plans are issued
at fair market value on the date of award, no compensation cost has been
recognized for these awards. FAS 123 provides an alternative to APB 25
whereby fair values may be ascribed to options using a valuation model and
amortized to compensation cost over the vesting period of the options.
Had the Company applied FAS 123 in accounting for Travelers Group stock
options, net income would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
YEAR ENDING DECEMBER 31, 1997 1996 1995
($ IN MILLIONS)
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $839 $659 $750
-----------------------------------------------------------------------
FAS 123 pro forma adjustments, (9) (3) (1)
after tax
-----------------------------------------------------------------------
Net income, pro forma $830 $656 $749
</TABLE>
The Company has an interest rate cap agreement with Travelers Group. See Note
6.
10. LEASES
Most leasing functions for TIGI and its subsidiaries are administered by TAP.
In 1996, TAP assumed the obligations for several leases. Rent expense related
to all leases are shared by the companies on a cost allocation method based
generally on estimated usage by department. Rent expense was $15 million, $24
million, and $22 million in 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
--------------------------------------------------
YEAR ENDING DECEMBER 31, MINIMUM OPERATING
($ in millions) RENTAL PAYMENTS
--------------------------------------------------
<S> <C>
1998 $ 49
1999 44
2000 43
2001 45
2002 43
Thereafter 337
--------------------------------------------------
Total Rental Payments $561
==================================================
</TABLE>
F-19
<PAGE> 61
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Future sublease rental income of approximately $73 million will partially
offset these commitments. Also, the Company will be reimbursed for 50% of the
rental expense for a particular lease totaling $218 million, by an affiliate.
Minimum future capital lease payments are not significant.
The Company is reimbursed for use of furniture and equipment through cost
sharing agreements by its affiliates.
11. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
EFFECTIVE TAX RATE
---------------------------------------------------------------------
For The Year Ended December 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
Income Before Federal Income Taxes $1,283 $ 975 $ 837
Statutory Tax Rate 35% 35% 35%
---------------------------------------------------------------------
Expected Federal Income Taxes 449 341 293
Tax Effect of:
Non-taxable investment income (4) (3) (4)
Other, net (1) 4 1
=====================================================================
Federal Income Taxes $ 444 $ 342 $ 290
=====================================================================
Effective Tax Rate 35% 35% 35%
---------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 410 $ 263 $ 220
Foreign 24 21 13
---------------------------------------------------------------------
Total 434 284 233
---------------------------------------------------------------------
Deferred:
United States 10 57 52
Foreign -- 1 5
---------------------------------------------------------------------
Total 10 58 57
---------------------------------------------------------------------
Federal Income Taxes $ 444 $ 342 $ 290
=====================================================================
</TABLE>
Tax benefits allocated directly to shareholder's equity for the years ended
December 31, 1997, 1996 and 1995 were $17 million, $8 million and $7 million,
respectively.
F-20
<PAGE> 62
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 1997 and 1996 were comprised
of the tax effects of temporary differences related to the following assets
and liabilities:
<TABLE>
<CAPTION>
($ in millions) 1997 1996
------- -------
<S> <C> <C>
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 550 $ 510
Contractholder funds 11 32
Operating lease reserves 68 71
Other employee benefits 102 104
Other 139 121
- -----------------------------------------------------------------------------------
Total 870 838
- -----------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of 608 571
insurance in force
Investments, net 484 131
Other 87 93
- -----------------------------------------------------------------------------------
Total 1,179 795
- -----------------------------------------------------------------------------------
Net Deferred Tax (Liability) Asset Before Valuation Allowance (309) 43
Valuation Allowance for Deferred Tax Assets (100) (100)
- -----------------------------------------------------------------------------------
Net Deferred Tax Liability After Valuation Allowance $ (409) $ (57)
- -----------------------------------------------------------------------------------
</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
group on a separate return basis adjusted for credits and other amounts
required by the consolidation process. Any resulting liability will be paid
currently to the Company. Any credits for losses will be paid by the Company
to the extent that such credits are for tax benefits that have been utilized
in the consolidated federal income tax return.
A net deferred tax asset valuation allowance of $100 million has been
established to reduce the deferred tax asset on investment losses to the
amount that, based upon available evidence, is more likely than not to be
realized. Reversal of the valuation allowance is contingent upon the
recognition of future capital gains in the Company's consolidated life
insurance company federal income tax return through 1998, and if
life/non-life consolidation is elected in 1999, the consolidated federal
income tax return of Travelers Group commencing in 1999, or a change in
circumstances which causes the recognition of the benefits to become more
likely than not. There was no change in the valuation allowance during 1997.
The initial recognition of any benefit produced by the reversal of the
valuation allowance will be recognized by reducing goodwill.
At December 31, 1997, the Company had no ordinary or capital loss
carryforwards.
The policyholders surplus account, which arose under prior tax law, is
generally that portion of the gain from operations that has not been
subjected to tax, plus certain deductions. The balance of this account,
which, under provisions of the Tax Reform Act of 1984, will not increase
after 1983, is estimated to be $932 million. This amount has not been
subjected to current income taxes but, under certain conditions that
management considers to be remote, may become subject to income taxes in
future years. At current rates, the maximum amount of such tax (for which no
provision has been made in the financial statements) would be approximately
$326 million.
F-21
<PAGE> 63
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
GROSS INVESTMENT INCOME
Fixed maturities $1,460 $1,387 $1,248
Mortgage loans 291 334 419
Policy loans 137 156 166
Real estate held for sale 88 94 111
Other, including trading 150 77 97
securities
---------------------------------------------------------------------
2,126 2,048 2,041
---------------------------------------------------------------------
Investment expenses 89 98 157
---------------------------------------------------------------------
Net investment income $2,037 $1,950 $1,884
---------------------------------------------------------------------
</TABLE>
13. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
REALIZED INVESTMENT GAINS
Fixed maturities $71 $(63) $(43)
Equity securities (9) 47 36
Mortgage loans 59 49 47
Real estate held for sale 67 33 18
Other 11 (1) 48
---------------------------------------------------------------------
Total Realized Investment Gains $199 $65 $106
---------------------------------------------------------------------
</TABLE>
F-22
<PAGE> 64
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Changes in net unrealized investment gains (losses) that are included as a
separate component of shareholder's equity were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
-------------------------------------------------------------------------
<S> <C> <C> <C>
UNREALIZED INVESTMENT GAINS
Fixed maturities $ 446 $ (323) $1,974
Equity securities 25 (35) 46
Other 520 220 200
-------------------------------------------------------------------------
Total Realized Investment Gains 991 (138) 2,220
-------------------------------------------------------------------------
Related taxes 350 (43) 778
-------------------------------------------------------------------------
Change in unrealized investment gains
(losses) 641 (95) 1,442
Balance beginning of year 587 682 (760)
-------------------------------------------------------------------------
Balance End of Year $1,228 $ 587 $ 682
-------------------------------------------------------------------------
</TABLE>
Included in Other are gains of $506 million, $203 million and $214 million
for 1997, 1996 and 1995, respectively, related to appreciation of Travelers
Group stock.
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale were
$7.6 billion, $10.2 billion and $6.8 billion in 1997, 1996 and 1995,
respectively. Gross gains of $170 million, $107 million and $80 million and
gross losses of $99 million, $175 million and $124 million in 1997, 1996 and
1995, respectively, were realized on those sales.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted expected
cash flows using market rates commensurate with the credit quality and
maturity of the investment. The fair value of investments for which a quoted
market price or dealer quote are not available amounted to $5.1 billion and
$4.6 billion at December 31, 1997 and 1996, respectively.
F-23
<PAGE> 65
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of investments in fixed maturities were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
DECEMBER 31, 1997 GROSS GROSS
($ in millions) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 3,842 $ 124 $ 2 $ 3,964
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,580 149 1 1,728
Obligations of states, municipalities
and political subdivisions 78 8 -- 86
Debt securities issued by
foreign governments 622 31 4 649
All other corporate bonds 14,548 547 24 15,071
Redeemable preferred stock 12 1 -- 13
- ---------------------------------------------------------------------------------------
Total Available For Sale $20,682 860 31 $21,511
- ---------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1996 GROSS GROSS
($ in millions) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 3,821 $ 71 $ 23 $ 3,869
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,329 56 4 1,381
Obligations of states, municipalities and
political subdivisions 89 1 1 89
Debt securities issued by foreign
governments 618 26 3 641
All other corporate bonds 13,421 273 43 13,651
Redeemable preferred stock 6 -- -- 6
- ----------------------------------------------------------------------------------------
Total Available For Sale $19,284 $ 427 $ 74 $19,637
- ----------------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE> 66
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1997,
by contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
----------------------------------------------------------
($ in millions) AMORTIZED FAIR
COST VALUE
----------------------------------------------------------
<S> <C> <C>
MATURITY:
Due in one year or less $ 1,184 $ 1,191
Due after 1 year through 5 years 5,200 5,335
Due after 5 years through 10 years 5,332 5,515
Due after 10 years 5,124 5,506
---------------------------------------------------------
16,840 17,547
---------------------------------------------------------
Mortgage-backed securities 3,842 3,964
---------------------------------------------------------
Total Maturity $20,682 $21,511
---------------------------------------------------------
</TABLE>
The Company makes investments in collateralized mortgage obligations (CMOs).
CMOs typically have high credit quality, offer good liquidity, and provide a
significant advantage in yield and total return compared to U.S. Treasury
securities. The Company's investment strategy is to purchase CMO tranches
which are protected against prepayment risk, including planned amortization
class (PAC) tranches. Prepayment protected tranches are preferred because
they provide stable cash flows in a variety of interest rate scenarios. The
Company does invest in other types of CMO tranches if a careful assessment
indicates a favorable risk/return tradeoff. The Company does not purchase
residual interests in CMOs.
At December 31, 1997 and 1996, the Company held CMOs classified as available
for sale with a fair value of $2.1 billion and $2.0 billion, respectively.
Approximately 72% and 88%, respectively, of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 1997
and 1996. In addition, the Company held $1.9 billion and $1.9 billion of
GNMA, FNMA or FHLMC mortgage-backed pass-through securities at December 31,
1997 and 1996, respectively. Virtually all of these securities are rated AAA.
F-25
<PAGE> 67
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Equity Securities
The cost and fair values of investments in equity securities were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
EQUITY SECURITIES:
GROSS GROSS
($ in millions) UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Common stocks $179 $ 34 $ 11 $202
Non-redeemable preferred stocks 301 13 4 310
-----------------------------------------------------------------------------
Total Equity Securities $480 $ 47 $ 15 $512
-----------------------------------------------------------------------------
DECEMBER 31, 1996
Common stocks $212 $ 39 $ 30 $221
Non-redeemable preferred stocks 118 2 3 117
-----------------------------------------------------------------------------
Total Equity Securities $330 $ 41 $ 33 $338
-----------------------------------------------------------------------------
</TABLE>
Proceeds from sales of equity securities were $341 million, $487 million and
$379 million in 1997, 1996 and 1995, respectively. Gross gains of $53
million, $64 million and $27 million and gross losses of $62 million, $11
million and $2 million in 1997, 1996 and 1995, respectively, were realized on
those sales.
Mortgage Loans and Real Estate Held For Sale
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest rates
below market.
At December 31, 1997 and 1996, the Company's mortgage loan and real estate
held for sale portfolios consisted of the following ($ in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------
1997 1996
----------------------------------------------------------
<S> <C> <C>
Current Mortgage Loans $2,866 $2,869
Underperforming Mortgage Loans 3 51
----------------------------------------------------------
Total 2,869 2,920
----------------------------------------------------------
Real Estate Held For Sale 134 297
----------------------------------------------------------
Total $3,003 $3,217
----------------------------------------------------------
</TABLE>
F-26
<PAGE> 68
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------
YEAR ENDING DECEMBER 31,
($ in millions)
------------------------------------------------
<S> <C>
Past Maturity $ 54
1998 243
1999 252
2000 321
2001 393
2002 121
Thereafter 1,485
------------------------------------------------
Total $2,869
================================================
</TABLE>
Joint Venture
In October 1997, the Company and Tishman Speyer Properties (Tishman), a
worldwide real estate owner, developer and manager, formed a joint real
estate venture with an initial equity commitment of $792 million. The Company
and certain of its affiliates committed $420 million in real estate equity
and $100 million in cash while Tishman committed $272 million in properties
and cash. Both companies are serving as asset managers for the venture and
Tishman is primarily responsible for the venture's real estate acquisition
and development efforts.
Trading Securities
Trading securities are held in a special purpose subsidiary, Tribeca
Investments LLC.
<TABLE>
<CAPTION>
-----------------------------------------------------
TRADING SECURITIES OWNED 1997
<S> <C>
Merger arbitrage $352
Convertible bond arbitrage 370
Other 78
-----------------------------------------------------
Total $800
-----------------------------------------------------
TRADING SECURITIES SOLD NOT YET PURCHASED
Merger arbitrage $213
Convertible bond arbitrage 249
-----------------------------------------------------
Total $462
-----------------------------------------------------
</TABLE>
The Company's trading portfolio investments and related liabilities are
normally held for periods less than six months. Therefore, expected future
cash flows for these assets and liabilities are expected to be realized in
less than one year.
F-27
<PAGE> 69
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Concentrations
At December 31, 1997 and 1996, the Company had no concentration of credit
risk in a single investee exceeding 10% of consolidated shareholder's equity.
The Company participates in a short-term investment pool maintained by an
affiliate. See Note 9.
Included in fixed maturities are below investment grade assets totaling $1.4
billion and $1.1 billion at December 31, 1997 and 1996, respectively. The
Company defines its below investment grade assets as those securities rated
"Ba1" or below by external rating agencies, or the equivalent by internal
analysts when a public rating does not exist. Such assets include publicly
traded below investment grade bonds and certain other privately issued bonds
that are classified as below investment grade loans.
The Company had concentrations of investments, primarily fixed maturities, in
the following industries:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
Banking $2,215 $1,959
Finance 1,556 1,823
Electric Utilities 1,377 1,093
Asset-Backed Credit Cards 778 688
-------------------------------------------------
</TABLE>
Below investment grade assets included in the preceding table were not
significant.
At December 31, 1997 and 1996, concentrations of mortgage loans were for
properties located in highly populated areas in the states listed below:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
California $794 $643
New York 310 297
-------------------------------------------------
</TABLE>
Other mortgage loan investments are relatively evenly dispersed throughout
the United States, with no holdings in any state exceeding $284 million and
$258 million at December 31, 1997 and 1996, respectively.
Concentrations of mortgage loans by property type at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
Office $1,382 $1,208
Agricultural 771 693
Apartment 204 291
Hotel 201 217
-------------------------------------------------
</TABLE>
F-28
<PAGE> 70
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, limits and other
monitoring procedures. Collateral for fixed maturities often includes pledges
of assets, including stock and other assets, guarantees and letters of
credit. The Company's underwriting standards with respect to new mortgage
loans generally require loan to value ratios of 75% or less at the time of
mortgage origination.
Non-Income Producing Investments
Investments included in the consolidated balance sheets that were non-income
producing for the preceding 12 months were insignificant.
Restructured Investments
The Company had mortgage loans and debt securities that were restructured at
below market terms totaling approximately $7 million and $18 million at
December 31, 1997 and 1996, respectively. The new terms typically defer a
portion of contract interest payments to varying future periods. The accrual
of interest is suspended on all restructured assets, and interest income is
reported only as payment is received. Gross interest income on restructured
assets that would have been recorded in accordance with the original terms of
such loans amounted to $.9 million in 1997 and $5 million in 1996. Interest
on these assets, included in net investment income, aggregated $.2 million
and $2 million in 1997 and 1996, respectively.
14. DEPOSIT FUNDS AND RESERVES
At December 31, 1997, the Company had $24.0 billion of life and annuity
deposit funds and reserves. Of that total, $13.0 billion is not subject to
discretionary withdrawal based on contract terms. The remaining $11.0 billion
is for life and annuity products that are subject to discretionary withdrawal
by the contractholder. Included in the amount that is subject to
discretionary withdrawal is $2.0 billion of liabilities that are
surrenderable with market value adjustments. Also included are an additional
$5.2 billion of the life insurance and individual annuity liabilities which
are subject to discretionary withdrawals, and have an average surrender
charge of 4.8%. In the payout phase, these funds are credited at
significantly reduced interest rates. The remaining $3.8 billion of
liabilities are surrenderable without charge. More than 16.8% of these relate
to individual life products. These risks would have to be underwritten again
if transferred to another carrier, which is considered a significant
deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding
policy loans and related accrued interest prior to payout.
F-29
<PAGE> 71
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income From Continuing Operations $ 839 $ 633 $ 547
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized gains (199) (65) (106)
Deferred federal income taxes 10 58 57
Amortization of deferred policy
acquisition costs and value of
insurance in force 293 281 290
Additions to deferred policy
acquisition costs (471) (350) (454)
Investment income accrued 14 2 (9)
Premium balances receivable 3 (6) (8)
Insurance reserves and accrued expenses 131 (1) 291
Other 206 255 62
- --------------------------------------------------------------------------------
Net cash provided by operating activities 826 807 670
Net cash used in discontinued operations -- (350) (596)
Net cash provided by operations $ 826 $ 457 $ 74
- --------------------------------------------------------------------------------
</TABLE>
16. NON-CASH INVESTING AND FINANCING ACTIVITIES
Significant noncash investing and financing activities include: a) the
conversion of $119 million of real estate held for sale to other invested
assets as a joint venture in 1997; b) the 1995 transfer of assets with a fair
market value of approximately $1.5 billion and statutory reserves and other
liabilities of approximately $1.5 billion to MetLife (see Note 2); c) the
1995 return of capital of Transport to TIGI (see Note 2); d) the acquisition
of real estate through foreclosures of mortgage loans amounting to $10
million, $117 million and $97 million in 1997, 1996 and 1995, respectively;
e) the acceptance of purchase money mortgages for sales of real estate
aggregating $4 million, $23 million and $27 million in 1997, 1996 and 1995,
respectively.
F-30
<PAGE> 72
PRIMELITE
STATEMENT OF ADDITIONAL INFORMATION
FUND PF
Individual Variable Annuity Contract
issued by
The Travelers Insurance Company
One Tower Square
Hartford, Connecticut 06183
L-12684S May, 1998
10
<PAGE> 73
PART C
Other Information
Item 24. Financial Statements and Exhibits
(a) The financial statements of the Registrant will not be provided since
the Registrant will have no assets as of the effective date of the
Registrant Statement.
The consolidated financial statements of The Travelers Insurance
Company and Subsidiaries and the report of Independent Accountants,
are contained in the Statement of Additional Information. The
consolidated financial statements of The Travelers Insurance Company
and Subsidiaries include:
Consolidated Statements of Income and Retained Earnings for the
years ended December 31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995
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 July 31, 1997.)
2. Not Applicable.
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 July 31, 1997.)
3(b). Form of Selling Agreement. (Incorporated herein by reference to
Exhibit 3(b) to the Registration Statement on Form N-4, File No.
333-27687, filed May 23, 1997.)
4. Variable Annuity Contract. (Incorporated herein by reference to
Exhibit 4 to the Registration Statement on Form N-4 filed July 31,
1997.)
5. Application. (Incorporated herein by reference to Exhibit 5 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-4, filed November 4, 1997.)
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.)
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.)
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 July 31, 1997.)
10(a). Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
<PAGE> 74
13. Computation of Total Return Calculations - Standardized and
Non-Standardized. (Incorporated herein by reference to Exhibit 13 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-4 filed November 4, 1997 )
15. Powers of Attorney authorizing Ernest J. Wright or Kathleen A. McGah
as signatory for Michael A. Carpenter, Jay S. Benet, George C.
Kokulis, Robert I. Lipp, Ian R. Stuart, Katherine M. Sullivan and Marc
P. Weill. (Incorporated herein by reference to Exhibit 15 to the
Registration Statement on Form N-4 filed July 31, 1997.)
Item 25. Directors and Officers of the Depositor
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address with Insurance Company
- ---------------- ----------------------
<S> <C>
Michael A. Carpenter* Director, Chairman of the Board
President and Chief Executive Officer
Jay S. Benet* Director and Senior Vice President
George C. Kokulis* Director and Senior Vice President
Robert I. Lipp* Director
Ian R. Stuart* Director, Senior Vice President,
Chief Financial Officer, Chief
Accounting Officer and Controller
Katherine M. Sullivan* Director and Senior Vice President
and General Counsel
Marc P. Weill** Director and Senior Vice President
Stuart Baritz** Senior Vice President
Jay S. Fishman* Senior Vice President
Elizabeth C. Georgakopoulos* Senior Vice President
Barry Jacobson* Senior Vice President
Russell H. Johnson* Senior Vice President
Warren H. May* Senior Vice President
Christine M. Modie* Senior Vice President
David A. Tyson* Senior Vice President
F. Denney Voss* Senior Vice President
Paula Burton* Vice President
Virginia Meany* Vice Presidnet
Selig Erhlich* Vice President and Actuary
Donald R. Munson, Jr.* Second Vice President
Ernest J. Wright* Vice President and Secretary
Kathleen A. McGah* Assistant Secretary and Counsel
Principal Business Address:
* The Travelers Insurance Company ** Travelers Group Inc.
One Tower Square 388 Greenwich Street
Hartford, CT 06183 New York, N.Y. 10013
</TABLE>
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant
Incorporated herein by reference to Item 26 of Post-Effective Amendment No. 5
of the Registration Statement on Form N-4, File No. 33-73466, filed April 10,
1998.
<PAGE> 75
Item 27. Number of Contract Owners
As of March 1, 1998 there were no contract owners.
Item 28. Indemnification
Section 33-770 of the Connecticut General Statutes ("C.G.S.") regarding
indemnification of directors and officers of Connecticut corporations provides
in general that Connecticut corporations shall indemnify their officers,
directors and certain other defined individuals against judgments, fines,
penalties, amounts paid in settlement and reasonable expenses actually incurred
in connection with proceedings against the corporation. The corporation's
obligation to provide such indemnification generally does not apply unless (1)
the individual is successful on the merits in the defense of any such
proceeding; or (2) a determination is made (by persons specified in the
statute) that the individual acted in good faith and in the best interests of
the corporation; or (3) the court, upon application by the individual,
determines in view of all of the circumstances that such person is fairly and
reasonably entitled to be indemnified, and then for such amount as the court
shall determine. With respect to proceedings brought by or in the right of the
corporation, the statute provides that the corporation shall indemnify its
officers, directors and certain other defined individuals, against reasonable
expenses actually incurred by them in connection with such proceedings, subject
to certain limitations.
C.G.S. Section 33-770 provides an exclusive remedy; a Connecticut corporation
cannot indemnify a director or officer to an extent either greater or less than
that authorized by the statute, e.g., pursuant to its certificate of
incorporation, by-laws, or any separate contractual arrangement. However, the
statute does specifically authorize a corporation to procure indemnification
insurance to provide greater indemnification rights. The premiums for such
insurance may be shared with the insured individuals on an agreed basis.
Travelers Group Inc. also provides liability insurance for its directors and
officers and the directors and officers of its subsidiaries, including the
Depositor. This insurance provides for coverage against loss from claims made
against directors and officers in their capacity as such, including, subject to
certain exceptions, liabilities under the Federal securities laws.
Rule 484 Undertaking
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liability (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE> 76
Item 29. Principal Underwriter
(a) Tower Square Securities, Inc.
One Tower Square
Hartford, Connecticut 06183
Tower Square Securities, Inc. also serves as principal underwriter for the
following :
The Travelers Growth and Income Stock Account for Variable Annuities
The Travelers Quality Bond Account for Variable Annuities
The Travelers Money Market Account for Variable Annuities
The Travelers Timed Growth and Income Stock Account for Variable Annuities
The Travelers Timed Short-Term Bond Account for Variable Annuities
The Travelers Timed Aggressive Stock Account for Variable Annuities
The Travelers Timed Bond Account for Variable Annuities
The Travelers Fund U for Variable Annuities
The Travelers Fund VA for Variable Annuities
The Travelers Fund BD for Variable Annuities
The Travelers Fund BD II for Variable Annuities
The Travelers Fund BD III for Variable Annuities
The Travelers Fund BD IV for Variable Annuities
The Travelers Fund ABD for Variable Annuities
The Travelers Fund ABD II for Variable Life Insurance
The Travelers Separate Account QP for Variable Annuities
The Travelers Separate Account PF II for Variable Annuities
The Travelers Fund UL for Variable Life Insurance
The Travelers Fund UL II for Variable Life Insurance
The Travelers Variable Life Insurance Separate Account One
The Travelers Variable Life Insurance Separate Account Two
The Travelers Variable Life Insurance Separate Account Three
The Travelers Variable Life Insurance Separate Account Four
<TABLE>
<CAPTION>
(b) Name and Principal Positions and Offices
Business Address * With Underwriter
------------------ ----------------
<S> <C>
Russell H. Johnson Chairman of the Board Chief Executive Officer,
President and Chief Operating Officer
William F. Scully, III Member, Board of Directors,
Senior Vice President, Treasurer
and Chief Financial Officer
Cynthia P. Macdonald Vice President, Chief Compliance
Officer, and Assistant Secretary
Joanne K. Russo Member, Board of Directors
Senior Vice President
William D. Wilcox General Counsel and Secretary
Kathleen A. McGah Assistant Secretary
Jay S. Benet Member, Board of Directors
George C. Kokulis Member, Board of Directors
Warren H. May Member, Board of Directors
Donald R. Munson, Jr. Senior Vice President
Stuart L. Baritz Vice President
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
(b) Name and Principal Positions and Offices
Business Address * With Underwriter
------------------ ----------------
<S> <C>
Michael P. Kiley Vice President
Tracey Kiff-Judson Vice President
Robin A. Jones Second Vice President
Whitney F. Burr Second Vice President
Marlene M. Ibsen Second Vice President
John F. Taylor Second Vice President
John J. Williams, Jr. Director and Assistant Compliance Officer
Susan M. Curcio Director and Operations Manager
Dennis D. D'Angelo Director
Thomas P. Tooley Director
Nancy S. Waldrop Assistant Treasurer
</TABLE>
* Principal business address: One Tower Square, Hartford,
Connecticut 06183
(c) Not Applicable
Item 30. Location of Accounts and Records
(1) The Travelers Insurance Company
One Tower Square
Hartford, Connecticut 06183
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
The undersigned Registrant hereby undertakes:
(a) To file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial
statements in the registration statement are never more than sixteen
months old for so long as payments under the variable annuity
contracts may be accepted;
(b) To include either (1) as part of any application to purchase a
contract offered by the prospectus, a space that an applicant can
check to request a Statement of Additional Information, or (2) a
post card or similar written communication affixed to or included in
the prospectus that the applicant can remove to send for a Statement
of Additional Information; and
(c) To deliver any Statement of Additional Information and any financial
statements required to be made available under this Form N-4
promptly upon written or oral request.
The Company hereby represents:
(a). That the aggregate charges under the Contracts of the Registrant
described herein are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks
assumed by the Company.
<PAGE> 78
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this amendment to this registration statement
and has caused this amendment to this registration statement to be signed on
its behalf, in the City of Hartford, and State of Connecticut, on this 13th day
of April, 1998.
THE TRAVELERS SEPARATE ACCOUNT PF FOR VARIABLE ANNUITIES
(Registrant)
THE TRAVELERS INSURANCE COMPANY
(Depositor)
By: *IAN R. STUART
--------------------------------------------------
Ian R. Stuart
Senior Vice President, Chief Financial Officer,
Chief Accounting Office and Controller
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities indicated on April 13, 1998.
<TABLE>
<S> <C>
*MICHAEL A. CARPENTER Director, Chairman of the Board, President
- ------------------------------------------- and Chief Executive Officer
(Michael A. Carpenter)
*JAY S. BENET Director
- -------------------------------------------
(Jay S. Benet)
*GEORGE C. KOKULIS Director
- -------------------------------------------
(George C. Kokulis
*ROBERT I. LIPP Director
- -------------------------------------------
(Robert I. Lipp)
*IAN R. STUART Director, Senior Vice President, Chief
- ------------------------------------------- Financial Officer, Chief Accounting Officer
(Ian R. Stuart)
*KATHERINE M. SULLIVAN Director, Senior Vice President and
- ------------------------------------------- General Counsel
(Katherine M. Sullivan)
*MARC P. WEILL Director
- -------------------------------------------
(Marc P. Weill)
*By: Ernest J. Wright, Attorney-in-Fact
</TABLE>
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
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 July 31, 1997.)
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 July 31, 1997.)
3(b). Form of Selling Agreement. (Incorporated herein by reference
to Exhibit 3(b) to the Registration Statement on Form N-4,
File No. 333-27687 filed May 23, 1997.)
4. Form of Variable Annuity Contract. (Incorporated herein by
reference to Exhibit 1 to the Registration Statement on Form N-4
filed July 31, 1997.)
5. Application. (Incorporated herein by reference to Exhibit 5 to
Pre-Effective Amendment No. 1 to the Registration Statement
on Form N-4, filed November 4, 1997.)
6(a). Charter of The Travelers Insurance Company, as amended on
October 19, 1994. (Incorporated herein by reference to
Exhibit 3(a)(i) to the Registration Statement on Form S-2,
File No. 33-58677, filed on April 18, 1995.)
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 on April 18, 1995.)
9. Opinion of Counsel as to the legality of securities being registered
by Registrant. (Incorporated herein by reference to Exhibit 9 to
the Registration Statement on Form N-4 filed July 31, 1997.)
10(a). Consent of KPMG Peat Marwick LLP, Independent Certified Electronically
Public Accountants.
13. Schedule for Computation of Total Return Calculations -
Standardized and Non-Standardized. (Incorporated herein by
reference to Exhibit 13 to Pre-Effective Amendment No. 1 to
the Registration on Form N-4 filed November 4, 1997.)
15. Powers of Attorney authorizing Ernest J. Wright or Kathleen A.
McGah as signatory for Michael A. Carpenter, Jay S. Benet,
George C. Kokulis, Robert I. Lipp, Ian R. Stuart, Katherine M.
Sullivan and Marc P. Weill. (Incorporated herein by reference
to Exhibit 15 to the Registration Statement on Form N-4
filed July 31, 1997.)
</TABLE>
<PAGE> 1
EXHIBIT 10(A)
Consent of Independent Certified Public Accountants
The Board of Directors
The Travelers Insurance Company
We consent to the use of our reports included herein and to the reference to our
firm as experts under the heading "Independent Accountants".
KPMG Peat Marwick LLP
Hartford, Connecticut
April 13, 1998