<PAGE> 1
Registration Statement No. 333-60227
811-08909
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective No. 1
And
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Post-Effective No. 1
THE TRAVELERS SEPARATE ACCOUNT SEVEN 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, 1999 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
PART A
Information Required in a Prospectus
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TRAVELERS PREMIER ADVISERS -- ASSETMANAGER PROSPECTUS:
THE TRAVELERS SEPARATE ACCOUNT SEVEN
FOR VARIABLE ANNUITIES
This prospectus describes TRAVELERS PREMIER ADVISERS -- ASSETMANAGER, 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"). Travelers Premier Advisers -- Asset
Manager 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,
we refer to both Contracts and certificates as "Contracts."
You can choose to have your purchase payments accumulate on a fixed basis and/or
a variable basis. Your contract value will vary daily to reflect the investment
experience of the funding options you select and any interest credited to the
Fixed Account. The variable funding options currently available are:
MORGAN STANLEY UNIVERSAL FUNDS, INC.:
Emerging Markets Equity Portfolio
Global Equity Portfolio
Mid Cap Value Portfolio
Value Portfolio
SALOMON BROTHERS VARIABLE SERIES FUNDS, INC.:
Salomon Brothers Variable Capital Fund
Salomon Brothers Variable High Yield Bond Fund
Salomon Brothers Variable Investors Fund
Salomon Brothers Variable Strategic Bond Fund
VAN KAMPEN LIFE INVESTMENT TRUST:
Domestic Income Portfolio
Emerging Growth Portfolio
Enterprise Portfolio
Government Portfolio
Growth and Income Portfolio
Money Market Portfolio
Morgan Stanley Real Estate Securities
Portfolio
The Fixed Account is described in Appendix A. 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 VARIABLE FUNDING
OPTIONS. READ AND RETAIN THEM FOR FUTURE REFERENCE.
This prospectus provides the information that you should know before investing
in the Contract. You can receive additional information about The Travelers
Separate Account Seven for Variable Annuities by requesting a copy of the
Statement of Additional Information ("SAI") dated May 1, 1999. 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, Annuity Investor Services, One Tower Square, Hartford,
Connecticut 06183, call (800) 599-9460 or access the SEC's website
(http://www.sec.gov). The table of contents of the SAI appears in Appendix B of
this Prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
VARIABLE ANNUITY CONTRACTS ARE NOT DEPOSITS OF ANY BANK AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
PROSPECTUS DATED JANUARY 11, 1999
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
Index of Special Terms................. 2
Summary................................ 3
Fee Table.............................. 6
The Annuity Contract................... 8
Contract Owner Inquiries............. 8
Purchase Payments.................... 8
Accumulation Units................... 8
The Funding Options.................. 8
Charges and Deductions................. 10
General.............................. 10
Administrative Charges............... 11
Mortality and Expense Risk Charge.... 11
Funding Option Expenses.............. 11
Premium Tax.......................... 11
Changes in Taxes Based Upon Premium
or Value.......................... 12
Transfers.............................. 12
Dollar Cost Averaging................ 12
Access to your Money................... 13
Systematic Withdrawals............... 12
Loans................................ 13
Ownership Provisions................... 13
Types of Ownership................... 13
Beneficiary.......................... 14
Annuitant............................ 14
Death Benefit.......................... 14
Death Proceeds Before the Maturity
Date.............................. 14
Payment of Proceeds.................. 15
Death Proceeds After the Maturity Date . 16
The Annuity Period..................... 16
Maturity Date........................ 16
Allocation of Annuity................ 16
Variable Annuity..................... 17
Fixed Annuity........................ 17
Payment Options........................ 17
Election of Options.................. 17
Annuity Options...................... 18
Income Options....................... 18
Miscellaneous Contract Provisions...... 19
Right to Return...................... 19
Termination.......................... 19
Required Reports..................... 19
Suspension of Payments............... 19
Transfers of Contract Values to Other
Annuities......................... 20
The Separate Account................... 20
Performance Information.............. 20
Federal Tax Considerations............. 21
General Taxation of Annuities........ 21
Types of Contracts: Qualified or
Nonqualified...................... 21
Nonqualified Annuity Contracts....... 21
Qualified Annuity Contracts.......... 22
Penalty Tax for Premature Distributions . 22
Diversification Requirements for
Variable Annuities................ 22
Ownership of the Investments......... 22
Mandatory Distributions for Qualified
Plans............................. 23
Other Information...................... 23
The Insurance Company................ 23
Financial Statements................. 23
IMSA................................. 23
Year 2000 Compliance................. 23
Distribution of Variable Annuity
Contracts......................... 24
Conformity with State and Federal Laws . 24
Voting Rights........................ 24
Legal Proceedings And Opinions....... 25
Appendix A: The Fixed Account.......... 26
Appendix B: Contents of the Statement
of Additional Information............ 27
</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...................... 8
Accumulation Period.................... 8
Annuitant.............................. 14
Annuity Payments....................... 16
Annuity Unit........................... 17
Contract Date.......................... 8
Contract Owner (You, Your)............. 8
Contract Value......................... 8
Contract Year.......................... 8
Fixed Account.......................... 26
Funding Option(s)...................... 8
Income Payments........................ 16
Maturity Date.......................... 16
Purchase Payment....................... 8
Written Request........................ 8
</TABLE>
2
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SUMMARY:
TRAVELERS PREMIER ADVISERS -- ASSETMANAGER
THIS SUMMARY DETAILS SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD KNOW AND
CONSIDER BEFORE PURCHASING THE CONTRACT. PLEASE READ THE ENTIRE PROSPECTUS
CAREFULLY.
CAN YOU GIVE ME A GENERAL DESCRIPTION OF THE VARIABLE ANNUITY CONTRACT? The
Contract is intended for retirement savings or other long-term investment
purposes. We may issue it 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,
we refer to Contracts and certificates as "Contracts." The Contract provides a
choice of a standard or enhanced death benefit as well as guaranteed income
options. You direct your payment(s) to one or more of the variable funding
options and/or to the Fixed Account. We guarantee money directed to the Fixed
Account as to principal and interest. 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 payout 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 payout 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 payout phase.
During the payout phase, you may choose to receive annuity payments from the
Fixed Account or the variable funding options. If you want to receive payments
from your annuity, you can choose one of a number of annuity options or income
options.
Once you elect an annuity option or an income option and begin to receive
payments, it cannot be changed. During the payout 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.
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
Sections 401(a), 403(b), or 408(b) of the Internal Revenue Code of 1986, as
amended.
You may purchase the Contract with an initial payment of at least $20,000. You
may make additional payments of at least $500 at any time during the
accumulation phase.
IS THERE A RIGHT TO RETURN PERIOD? 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.
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WHAT TYPES OF INVESTMENT OPTIONS ARE AVAILABLE? You can direct your money into
the Fixed Account or any or all of the funding options shown on the cover page.
The funding options are described in the prospectuses for the funds. Depending
on market conditions, you may make or lose money in any of these options.
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. The Separate Account is new, and therefore has no past performance.
However, the funding options have been available for various time periods.
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.
You can transfer between the 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. We may, in the future, charge a fee
for any transfer request, or limit the number of transfers allowed. At a
minimum, we would always allow one transfer every six months. You may transfer
between the Fixed Account and the funding options twice a year (during the 30
days after the six-month contract date anniversary), provided the amount is not
greater than 15% of the Fixed Account Value on that date.
WHAT EXPENSES WILL BE ASSESSED UNDER THE CONTRACT? The Contract has insurance
features and investment features, and there are costs related to each. For
Contracts with a value of less than $75,000 on the deduction date, the Company
deducts an annual contract administrative charge of $50. The subaccount
administrative charge and the mortality and expense risk ("M&E") charge are
deducted from the amounts in the variable funding options. The subaccount charge
is .15% annually. The annual M&E charge depends on the death benefit you choose:
<TABLE>
<CAPTION>
CONTRACT YEARS 1-6 CONTRACT YEARS 7 AND LATER
------------------ --------------------------
<S> <C> <C>
Standard Death Benefit................... 1.45% 1.40%
Enhanced Death Benefit................... 1.60% 1.40%
</TABLE>
Each funding option has a charge for investment management and other expenses.
Please refer to the Fee Table for more details.
HOW WILL MY CONTRIBUTIONS AND WITHDRAWALS BE TAXED? Generally, 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 or income
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.
HOW MAY I ACCESS MY MONEY? You can take withdrawals any time during the
accumulation phase. While there is no withdrawal charge, income taxes and a
penalty tax may apply to taxable amounts withdrawn.
WHAT IS THE DEATH BENEFIT UNDER THE CONTRACT? You may choose to purchase the
Standard or the Enhanced Death Benefit. The death benefit applies upon the first
death of the owner, joint owner, or annuitant. Assuming you are the Annuitant,
if you die before the payout 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. The enhanced
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death benefit may not be available in all states. Certain states may have
varying age requirements. Please refer to the Death Benefit section in the
prospectus for more details.
ARE THERE ANY 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.
5
<PAGE> 8
SEPARATE ACCOUNT SEVEN FEE TABLE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ANNUAL CONTRACT ADMINISTRATIVE CHARGE $50
(Waived if contract value is $75,000 or more)
</TABLE>
ANNUAL SEPARATE ACCOUNT CHARGES:
(as a percentage of the average daily net assets of the Separate Account)
<TABLE>
<CAPTION>
CONTRACT YEARS 1-6 CONTRACT YEARS 7 AND LATER
------------------ --------------------------
<S> <C> <C>
STANDARD DEATH BENEFIT
Mortality & Expense Risk Charge................ 1.45% 1.40%
Administrative Expense Charge.................. 0.15% 0.15%
---- ----
Total Separate Account Charges............. 1.60% 1.55%
ENHANCED DEATH BENEFIT
Mortality & Expense Risk Charge................ 1.60% 1.40%
Administrative Expense Charge.................. 0.15% 0.15%
---- ----
Total Separate Account Charges............. 1.75% 1.55%
</TABLE>
FUNDING OPTION EXPENSES:
(as a percentage of average daily net assets of the Funding Option as of
December 31, 1998, unless otherwise noted)
<TABLE>
<CAPTION>
TOTAL ANNUAL
MANAGEMENT OTHER OPERATING
FEE EXPENSES EXPENSES
(AFTER EXPENSES (AFTER EXPENSES (AFTER EXPENSES
PORTFOLIO NAME ARE REIMBURSED) ARE REIMBURSED) ARE REIMBURSED)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MORGAN STANLEY UNIVERSAL FUNDS, INC.:
Emerging Markets Equity Portfolio.............. 0.00% 1.95% 1.95%(1)
Global Equity Portfolio........................ 0.32% 0.83% 1.15%(1)
Mid Cap Value Portfolio........................ 0.23% 0.82% 1.05%(1)
Value Portfolio................................ 0.08% 0.77% 0.85%(1)
SALOMON BROTHERS VARIABLE SERIES FUNDS, INC.:
Salomon Brothers Variable Investors Fund....... 0.70% 0.30% 1.00%(2)
Salomon Brothers Variable Capital Fund......... 0.85% 0.15% 1.00%(2)
Salomon Brothers Variable High Yield Bond Fund... 0.75% 0.25% 1.00%(2)
Salomon Brothers Variable Strategic Bond
Fund......................................... 0.75% 0.25% 1.00%(2)
VAN KAMPEN LIFE INVESTMENT TRUST:
Domestic Income Portfolio...................... 0.01% 0.59% 0.60%(3)
Emerging Growth Portfolio...................... 0.32% 0.53% 0.85%(3)
Enterprise Portfolio........................... 0.46% 0.14% 0.60%(3)
Government Portfolio........................... 0.37% 0.23% 0.60%(3)
Growth and Income Portfolio.................... 0.26% 0.49% 0.75%(3)
Money Market Portfolio......................... 0.11% 0.49% 0.60%(3)
Morgan Stanley Real Estate Securities
Portfolio.................................... 1.00% 0.08% 1.08%
</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 Advisers, with respect to the Portfolios listed in the Morgan Stanley
Universal Funds, Inc. Series Trust, have voluntarily agreed to a reduction
in its management fees and to reimburse the Portfolios for which it acts as
investment
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adviser if such fees would cause Total Annual Operating Expenses to exceed
the amounts set forth in the tables above. Absent such reductions, the
expenses would have been as follows:
<TABLE>
<CAPTION>
TOTAL ANNUAL
MANAGEMENT OTHER OPERATING
PORTFOLIO FEES EXPENSES EXPENSES
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Markets Equity........................ 1.25% 2.20% 3.45%
Global Equity.................................. 0.80% 0.83% 1.63%
Value.......................................... 0.55% 0.77% 1.32%
Mid Cap Value.................................. 0.75% 0.82% 1.57%
</TABLE>
(2) Reflects the voluntary agreement by Salomon Brothers Asset Management to
impose an expense cap for the fiscal year ending December 31, 1998 on the
Total Annual Operating Expenses of each fund at the amount shown in the
table through the reimbursement of expenses. Absent such agreement, the
ratio of Other Expenses and Total Operating Expenses would be:
<TABLE>
<CAPTION>
TOTAL ANNUAL
MANAGEMENT OTHER OPERATING
PORTFOLIO FEES EXPENSES EXPENSES
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital........................................ 0.85% 2.41% 3.26%
High Yield Bond................................ 0.75% 1.29% 2.04%
Investors...................................... 0.70% 1.37% 2.07%
Strategic Bond................................. 0.75% 1.04% 1.79%
</TABLE>
(3) Van Kampen has voluntarily agreed to a reduction in its management fees and
to reimburse the Portfolios for which it acts as investment adviser if such
fees would cause total annual operating expenses to exceed the amounts set
forth in the tables above. Absent such reductions, the expenses would have
been:
<TABLE>
<CAPTION>
TOTAL ANNUAL
MANAGEMENT OTHER OPERATING
PORTFOLIO FEES EXPENSES EXPENSES
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic Income Portfolio...................... 0.50% 0.59% 1.09%
Enterprise Portfolio........................... 0.50% 0.14% 0.64%
Emerging Growth Portfolio...................... 0.70% 0.53% 1.23%
Government Portfolio........................... 0.50% 0.23% 0.73%
Growth and Income Portfolio.................... 0.60% 0.49% 1.09%
Morgan Stanley Real Estate Securities
Portfolio.................................... (no waiver) (no waiver) (no waiver)
Money Market Portfolio......................... 0.50% 0.49% 0.99%
</TABLE>
EXAMPLE*
Assuming a 5% annual return, a $1,000 investment would be subject to the
following expenses whether the Contract is surrendered, annuitized, or if no
withdrawals have been made:
<TABLE>
<CAPTION>
STANDARD DEATH BENEFIT ENHANCED DEATH BENEFIT
AT THE END OF THE PERIOD SHOWN AT THE END OF THE PERIOD SHOWN
- ------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME 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>
MORGAN STANLEY UNIVERSAL FUNDS,
INC.:
Emerging Markets Portfolio...... $36 $111 $187 $386 $38 $115 $194 $393
Global Equity Portfolio......... 28 87 149 312 30 92 156 320
Mid Cap Value Portfolio......... 27 84 144 303 29 89 151 310
Value Portfolio................. 25 78 134 283 27 83 141 291
SALOMON BROTHERS VARIABLE SERIES
FUNDS, INC.:
Variable Capital Fund........... 27 83 141 298 28 87 149 306
Variable High Yield Bond Fund... 27 83 141 298 28 87 149 306
Variable Investors Fund......... 27 83 141 298 28 87 149 306
Variable Strategic Bond Fund.... 27 83 141 298 28 87 149 306
VAN KAMPEN LIFE INVESTMENT TRUST:
Domestic Income Portfolio....... 23 71 121 258 24 75 129 266
Emerging Growth Portfolio....... 25 78 134 283 27 83 141 291
Enterprise Portfolio............ 23 71 121 258 24 75 129 266
Government Portfolio............ 23 71 121 258 24 75 129 266
Growth and Income Portfolio..... 24 75 129 273 26 80 136 281
Money Market Portfolio.......... 23 71 121 258 24 75 129 266
Morgan Stanley Real Estate
Securities Portfolio.......... 28 85 145 305 29 90 153 313
</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 ANNUAL CONTRACT ADMINISTRATIVE CHARGE AS AN ANNUAL CHARGE
OF .0006% OF ASSETS.
7
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THE ANNUITY CONTRACT
-------------------------------------------------------------------------------
Travelers Premier Advisers -- AssetManager is a contract between the contract
owner ("you"), and Travelers Insurance Company (called "us" or the "Company").
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 or income
payments, beginning on a future date that you choose, the maturity date. The
purchase payments accumulate tax deferred in the funding options of your choice.
We offer multiple variable funding options, and one fixed account option. The
contract owner assumes the risk of gain or loss according to the performance of
the variable 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. The date the contract and
its benefits became effective is referred to as the contract date. Each 12-month
period following the 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.
CONTRACT OWNER INQUIRIES
Any questions you have about your Contract should be directed to the Company's
Home Office at 1-800-599-9460.
PURCHASE PAYMENTS
The initial purchase payment must be at least $20,000. You may make additional
payments of at least $500 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 in good order at our Home Office. 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 their values 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 its 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, we credit your Contract. The
period between the contract effective date and the maturity date is the
accumulation period. 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 variable funding options to have your purchase
payments allocated to. These funding options are subsections of the Separate
Account, which invest in the underlying mutual funds. You will find detailed
information about the options and their inherent risks in the current underlying
mutual fund prospectuses which must accompany this prospectus. You are not
investing directly in the underlying mutual fund. Since each option has varying
degrees
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of risk, please read the prospectuses carefully before investing. You may obtain
additional copies of the prospectuses by contacting your registered
representative or by calling 1-800-599-9460.
If any of the funding options becomes 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.
The current variable funding options are listed below, along with their
investment advisers and any subadviser:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORGAN STANLEY UNIVERSAL
FUNDS, INC.:
Emerging Markets Equity Seeks long-term capital appreciation by investing Morgan Stanley Asset
Portfolio primarily in equity securities of emerging market Management Inc. ("MSAM")
country issuers with a focus on those in which the
adviser believes the economies are developing strongly
and in which the markets are becoming more
sophisticated.
Global Equity Portfolio Seeks long-term capital appreciation by investing MSAM
primarily in equity securities of issuers throughout the
world, including the U.S.
Mid Cap Value Portfolio Seeks above-average total return over a market cycle of Miller Anderson &
three to five years by investing in common stock and Sherrerd, LLP ("MAS")
other equity securities of issuers with equity
capitalizations in the range of the companies
represented in the S&P Mid Cap 400 Index (currently $100
million to $8 billion).
Value Portfolio Seeks above-average total return over a market cycle of MAS
three to five years by investing primarily in a
diversified portfolio of common stocks and other equity
securities that the adviser believes to be relatively
undervalued based on various measures such as price
earnings ratios and price book ratios.
SALOMON BROTHERS VARIABLE
SERIES FUNDS, INC.:
Variable Capital Fund Capital appreciation, primarily through investments in Salomon Brothers Asset
common stocks which are believed to have above-average Management ("SBAM")
price appreciation potential and which may involve
above-average risk.
Variable High Yield To maximize current income, and, secondarily, to seek SBAM
Bond Fund capital appreciation through investments in medium or
lower rating categories.
Variable Investors Fund Long-term growth of capital, and, secondarily, current SBAM
income, through investments in common stocks of well-
known companies.
Variable Strategic Bond Seeks a high level of current income. As a secondary SBAM
Fund objective, the portfolio will seek capital appreciation.
VAN KAMPEN LIFE INVESTMENT
TRUST:
Domestic Income Seeks current income, primarily and capital appreciation Van Kampen Asset
Portfolio as a secondary objective only when consistent with its Management, Inc. ("VKAM")
primary investment objective. The Portfolio attempts to
achieve these objectives through investment primarily in
a diversified portfolio of fixed-income securities. The
Portfolio may invest in investment-grade securities and
lower rated and nonrated securities. Lower rated
securities (commonly known as "junk bonds") are regarded
by the rating agencies as predominantly speculative with
respect to the issuer's continuing ability to meet
principal and interest payments.
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Emerging Growth Seeks capital appreciation by investing in a portfolio VKAM
Portfolio of securities consisting principally of common stocks of
small and medium sized companies considered by the
adviser to be emerging growth companies.
Enterprise Portfolio Seeks capital appreciation through investments believed VKAM
by the Adviser to have above-average potential for
capital appreciation.
Government Portfolio Seeks to provide investors with a high current return VKAM
consistent with preservation of capital by investing
primarily in debt securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities.
Growth and Income Seeks long-term growth of capital and income by VKAM
Portfolio investing primarily in income-producing equity
securities, including common stocks and convertible
securities.
Money Market Portfolio Seeks protection of capital and high current income VKAM
through investments in money market instruments.
Investments in the Money Market Portfolio are neither
insured nor guaranteed by the U.S. Government. Although
the Money Market Portfolio seeks to maintain a stable
net asset value of $1.00 per share, there is no
assurance that it will be able to do so.
Morgan Stanley Real Seeks long-term growth of capital, with current income VKAM
Estate Securities as a secondary consideration, by investing principally
Portfolio in securities of companies operating in the real estate
industry ("Real Estate Securities"). A "real estate
industry company" is a company that derives at least 50%
of its assets (market to market), gross income or net
profits from the ownership, construction, management or
sale of residential, commercial or industrial real
estate.
</TABLE>
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
GENERAL
We deduct the charges described below. The charges are for the service and
benefits we provide, costs and expenses we incur, and risks we assume under the
Contracts. Services and benefits we provide include:
- the ability for you to make withdrawals and surrenders under the
Contracts;
- the death benefit paid on the death of the contract owner, annuitant, or
first of the joint contract owners,
- the available funding options and related programs (including dollar-cost
averaging, portfolio rebalancing and systematic withdrawal programs);
- administration of the annuity options available under the Contracts; and
- the distribution of various reports to contract owners.
Costs and expenses we incur include:
- losses associated with various overhead and other expenses associated
with providing the services and benefits provided by the Contracts,
- sales and marketing expenses, and
- other costs of doing business.
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<PAGE> 13
Risks we assume include:
- risks that annuitants may live longer than estimated when the annuity
factors under the Contracts were established,
- that the amount of the death benefit will be greater than the contract
value, and
- that the costs of providing the services and benefits under the Contracts
will exceed the charges deducted.
We may also deduct a charge for taxes.
Unless otherwise specified, charges are deducted proportionately from all
funding options in which you are invested.
ADMINISTRATIVE CHARGES
We will deduct an annual contract administrative charge on the fourth Friday of
each August from Contracts with a value of less than $75,000 on that date. This
charge compensates us for expenses incurred in establishing and maintaining the
Contract. The $50 charge is deducted from the contract value by canceling
accumulation units applicable to each variable funding option on a pro rata
basis. For the first contract 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) if the distribution results from the death
of the contract owner or the annuitant with no contingent annuitant surviving,
(2) after an annuity payout has begun, or (3) if the contract value on the
deduction date $75,000 or more.
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 ("M&E")
charge from amounts held in the variable funding options. The deduction is
reflected in our calculation of accumulation and annuity unit values. We reserve
the right to lower this charge at any time.
If you choose the Standard Death Benefit, the M&E charge is 1.45% annually for
the first six Contract years. Beginning in the seventh year, the charge is
reduced to 1.40%.
If you choose the Enhanced Death Benefit, the M&E charge is 1.60% annually for
the first six Contract years. Beginning in the seventh Contract year, the charge
is reduced to 1.40%.
FUNDING OPTION EXPENSES
The charges and expenses of the 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, we 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 we have a tax
liability under state law.
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<PAGE> 14
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.
TRANSFERS
- --------------------------------------------------------------------------------
Up to 30 days before the maturity date, you may transfer all or part of the
contract value between funding options. Transfers are made at the value(s) next
determined after we receive your request at the Home Office. 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 to one 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 transfers between the Fixed Account and the variable
funding options.
DOLLAR COST AVERAGING
Dollar cost averaging or the pre-authorized transfer program (the "DCA Program")
allows you to transfer a set dollar amount to other funding options on a monthly
or quarterly basis during the accumulation phase of the Contract so that more
accumulation units are purchased in a funding option if the value per unit is
low and fewer 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 the DCA Program through written request or other method acceptable
to the Company. You must have a minimum total contract value of $5,000 to enroll
in the DCA Program. The minimum amount that may be transferred through this
program is $400.
You may establish pre-authorized transfers of contract values from the Fixed
Account, subject to certain restrictions. Under the DCA Program, automated
transfers from the Fixed Account may not deplete your Fixed Account Value in
less than twelve months from your enrollment in the DCA Program.
In addition to the DCA Program, Travelers may credit increased interest rates to
contract owners under an administrative Special DCA Program established at the
discretion of Travelers, depending on availability and state law. Under this
program, the contract owner may pre-authorize level transfers to any of the
funding options under either a 6 Month Program or 12 Month Program. The 6 Month
Program and the 12 Month Program will generally have different credited interest
rates. Under the 6 Month Transfer Program, the interest rate can accrue up to 6
months on funds in the Special DCA Program and all purchase payments and accrued
interest must be transferred on a level basis to the selected funding option in
6 months. Under the 12 Month Program, the interest rate can accrue up to 12
months on funds in the Special DCA Program and all purchase payments and accrued
interest in this Program must be transferred on a level basis to the selected
funding options in 12 months.
The pre-authorized transfers will begin after the initial Program purchase
payment and complete enrollment instructions are received by Travelers. If
complete Program enrollment instructions are not received by the Company within
15 days of receipt of the initial Program purchase payment, the entire balance
in the Program will be credited with the non-Program interest rate then in
effect for the Fixed Account.
You may start or stop participation in the DCA 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. If you stop the Special DCA Program
and elect to remain in the Fixed Account, your
12
<PAGE> 15
contract value will be credited for the remainder of 6 or 12 months with the
interest rate for non-Program funds.
A contract owner may only have one DCA Program or Special DCA Program in place
at one time. Any subsequent purchase payments received by the Company within the
Program period selected will be allocated to the current funding options over
the remainder of that Program transfer period, unless otherwise directed by the
contract owner.
All provisions and terms of the Contract apply to the DCA and Special DCA
Programs, 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.
ACCESS TO YOUR MONEY
- --------------------------------------------------------------------------------
Any time before the maturity date, you may redeem all or any portion of the
contract value, less any premium tax not previously deducted. Unless you submit
a written request specifying the fixed or variable funding option(s) from which
amounts are to be withdrawn, the withdrawal will be made on a pro rata basis.
The contract value will be determined as of the close of business after we
receive your surrender request at the Home Office. The contract value may be
more or less than the purchase payments made. For information about withdrawals
from your payout option after the maturity date (with no life contingency),
refer to the Statement of Additional Information.
We may defer payment of any contract 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
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 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.
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.
13
<PAGE> 16
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. If the first joint owner to die is also
the annuitant, the death benefit will be paid to the beneficiary. If the first
joint owner to die is not the annuitant, the entire interest under 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
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, where the owner and the annuitant are not the
same person, the contract owner may also name one individual as a contingent
annuitant by written request before the Contract becomes effective. If the
annuitant dies before the maturity date, and a contingent annuitant has been
named, the contingent annuitant becomes the annuitant and the Contract
continues. However, if the annuitant who is also the owner dies before the
maturity date, the death benefit is paid to the beneficiary. The contingent
annuitant does not become the annuitant and is not entitled to receive any
contract benefits. A contingent annuitant may not be changed, deleted or added
after the Contract becomes effective.
DEATH BENEFIT
- --------------------------------------------------------------------------------
At purchase, you elect either the Standard Death Benefit, or the Enhanced Death
Benefit. Before the maturity date, when there is no contingent annuitant, a
death benefit is payable when either the annuitant or a contract owner dies. The
death benefit is calculated at the close of the business day on which the
Company's Home Office receives due proof of death and written payment
instructions.
DEATH PROCEEDS BEFORE THE MATURITY DATE
STANDARD DEATH BENEFIT: The Company will pay a death benefit in an amount equal
to the greater of (1) and (2) below, each reduced by any applicable premium tax,
withdrawals not previously deducted and any outstanding loans:
1) the contract value; or
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<PAGE> 17
2) the total purchase payments made under the Contract.
ENHANCED DEATH BENEFIT: The Company will pay a death benefit in an amount equal
to the greatest of (1), (2) or (3) below, each reduced by any applicable premium
tax, withdrawals not previously deducted and any outstanding loans:
1) the contract value;
2) the total purchase payments made under the Contract; or
3) the maximum "step-up value" associated with any contract year
anniversary occurring before the annuitant's 80th birthday.
Under Option (3), the step-up value established on each anniversary is increased
by the amount of any subsequent purchase payments and reduced by a partial
withdrawal reduction for any withdrawals. The examples shown below approximate
the level of the partial withdrawal reduction.
PARTIAL WITHDRAWAL REDUCTION. On each contract anniversary, a step-up value is
established, and equals the contract value on that day. If you make a partial
surrender, each step-up value is reduced by a partial surrender reduction which
equals (1) the step-up value multiplied by (2) the amount of the partial
surrender divided by the contract value before the surrender.
For example, assume your current contract value is $55,000. If your original
step-up value is $50,000, and you decide to make a partial withdrawal of
$10,000, the step-up value would be reduced as follows:
50,000 x (10,000/55,000)59,000
Your new step-up value would be 50,000-9,000, or $41,000.
The following example shows what would happen in a declining market. Assume your
current contract value is $30,000. If your original step-up value is $50,000,
and you decide to make a partial withdrawal of $10,000, the step-up value would
be reduced as follows:
50,000 x (10,000/30,000)516,500
Your new step-up value would be 50,000-16,500, or $33,500.
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.
DEATH OF ANNUITANT WHO IS THE CONTRACT OWNER. The Company will pay the proceeds
to the beneficiary(ies), or if none, to the contract owner's estate.
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 which is payable over the life of the beneficiary or over a period not
exceeding the beneficiary's life expectancy.
Under a nonqualified contract, 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 (NONQUALIFIED CONTRACTS ONLY).
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.
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<PAGE> 18
DEATH OF CONTRACT OWNER WHO IS NOT THE ANNUITANT (NONQUALIFIED CONTRACTS ONLY).
The Company will pay the proceeds to any surviving joint owner, or if none, to
the beneficiary(ies), or if none, to the contract owner's estate. If the
surviving joint owner (or if none, 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.
ENTITY AS OWNER. In the case of a nonqualified Contract owned by a nonnatural
person (e.g. a trust or other entity), the death benefit will be paid only upon
the death of the annuitant.
DEATH PROCEEDS AFTER THE MATURITY DATE
If any owner or the annuitant dies on or after the maturity date, the Company
will pay the beneficiary a death benefit consisting of any benefit remaining
under the annuity or income option then in effect.
THE ANNUITY PERIOD
- --------------------------------------------------------------------------------
MATURITY DATE
Under the Contract, you can receive scheduled annuity payments. You can choose
the month and the year in which those payments begin (maturity date). You can
also choose among payout plans (annuity or income options) or elect a lump-sum
distribution. While the annuitant is alive, you can change your selection any
time up to the maturity date. Annuity or income 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.
You may choose to annuitize at any time after you purchase the contract. Unless
you elect otherwise, the maturity date will be the annuitant's 90th 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.)
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 90th birthday
or 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 contract owner. You should seek independent tax advice
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 contract value will be applied to
provide an annuity funded by the same investment options as you have selected
during the accumulation period. 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.")
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<PAGE> 19
VARIABLE ANNUITY
You may choose to receive annuity payments that are based on the performance of
one or more of the variable funding options. This is called a variable payout
because the amount you receive each month will increase or decrease depending on
how the variable funding options perform. When you annuitize, we will credit you
with annuity units. An annuity unit measures the dollar value of an annuity
payment. We determine the number of annuity units to credit you with by dividing
the first monthly annuity payment for each funding option by the accumulation
unit value for that funding option as of 14 days before the annuity payments
begin. The number of annuity units (but not their value) remains fixed during
the annuity period.
HOW WE DETERMINE THE FIRST ANNUITY PAYMENT. The Contract contains tables used to
determine the first monthly annuity payment. If a variable annuity is elected,
the amount applied to it will be the value of the funding option as of 14 days
before the annuity payments begin less any premium taxes due.
The first monthly payment amount depends on the annuity option elected and the
annuitant's adjusted age. The Contract contains a formula for determining the
adjusted age. We calculate the first monthly payment by multiplying the benefit
per $1,000 applied, shown in the Contract tables, by the number of thousands of
dollars of Contract value applied to the annuity option. We also factor in an
assumed daily net investment factor of 3%. This assumed daily net investment
factor is used to determine the guaranteed payout rates shown. If net investment
rates are higher at the time annuitization is selected, payout rates will be
higher than those shown. Payout rates will not be lower than those shown. We
reserve the right to require satisfactory proof of an annuitant's age before we
make the first annuity payment.
HOW WE DETERMINE THE PAYMENTS AFTER THE FIRST. The dollar amount of all annuity
payments after the first will change from month to month based on the investment
performance of the applicable funding options. The total amount of each annuity
payment will equal 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 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 begin the annuity will be the contract 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 or income option
selection any time up to the maturity date. Income options differ from annuity
options in that the amount of the payments made under income options are not
based upon the life of any person. Therefore, the annuitant may outlive the
payment period. Once annuity or income payments have begun, no further elections
are allowed.
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
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<PAGE> 20
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 or income option will be
$2,000 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. The amount
applied to begin an income or annuity option will be the contract value as of
the date the payments begin, less any applicable premium taxes not previously
deducted. (Certain states may have different requirements that we will honor.)
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 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.
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 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:
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<PAGE> 21
Option 1 -- Payments of a Fixed Amount. The Company will make equal payments of
the amount elected until the contract value applied under this option has been
exhausted. The first payment and all later payments will be paid from amounts
attributable to each investment option in proportion to the contract 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 contract 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.
MISCELLANEOUS CONTRACT PROVISIONS
- --------------------------------------------------------------------------------
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").
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. Where state law requires a longer period, or the return of
purchase payments or other variations of this provision, the Company will
comply. 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 contract value less any applicable premium tax, and any applicable
administrative charge.
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 report date 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 and 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 reasonably occur or so that the Company may
not reasonably determine the value the Separate
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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
- --------------------------------------------------------------------------------
The Travelers Separate Account Seven For Variable Annuities was established on
June 30, 1998 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 the Separate Account will be invested exclusively in
the shares of the variable funding options.
The assets of the Separate Account 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 the Separate
Account are, in accordance with the Contracts, credited to or charged against
the Separate Account without regard to other income, gains and losses of the
Company. The assets held by the Separate Account 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 the Separate Account. 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. Once we have a year's worth of performance
history, we may advertise the "standardized average annual total returns" of the
funding option, calculated in a manner prescribed by the SEC. Beginning
immediately, we may advertise the "nonstandardized total return," as described
below. Specific examples of the performance information 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 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).
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 the annual contract administrative charge, which, if reflected,
would decrease the level of performance shown.
For funding options that were in existence before they became available under
the Separate Account, the nonstandardized average annual total return quotations
will reflect 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.
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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
- --------------------------------------------------------------------------------
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. An exception to
this is a qualified plan called a Roth IRA. Under Roth IRAs, after-tax
contributions accumulate until maturity, when amounts (including earnings) may
be withdrawn tax-free. 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.
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
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<PAGE> 24
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 and also special rules regarding Roth
IRAS. 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 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
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<PAGE> 25
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
- --------------------------------------------------------------------------------
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 Citigroup Inc. The Company's Home Office is located at One Tower
Square, Hartford, Connecticut 06183.
FINANCIAL STATEMENTS
The financial statements for the insurance company are located in the Statement
of Additional Information. The financial statements for the separate account
will be made available through annual reports to shareholders. These reports are
accessible through the SEC's website that appears on the first page of the
prospectus.
IMSA
The Company is a member of the Insurance Marketplace Standards Association
("IMSA"), and as such may use the IMSA logo and IMSA membership in its
advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and service for individually
sold life insurance and annuities. IMSA members have adopted policies and
procedures that demonstrate a commitment to honesty, fairness and integrity in
all customer contacts involving the sale and service of individual life
insurance and annuity products.
YEAR 2000 COMPLIANCE
The Company is highly dependent on computer systems and system applications for
conducting its ongoing business functions. In 1996, the Company began the
process of identifying, assessing and implementing changes to computer programs
necessary to address the Year 2000 issue and developed a comprehensive plan to
address the issue. This issue involves the ability of computer systems that have
time sensitive programs to recognize properly the Year 2000. The inability to do
so could result in major failures or miscalculations that would disrupt the
Company's ability to meet its customer and other obligations on a timely basis.
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The Company has achieved substantial compliance with respect to its business
critical systems in accordance with its Year 2000 plan and is in the process of
certification to validate compliance. The Company anticipates completing the
certification process by June 30, 1999. An ongoing re-certification process will
be put in place for third and fourth quarter 1999 to ensure all systems and
products remain compliant.
The total pre-tax cost associated with the required modifications and
conversions is expected to be between $25 million and $35 million and is being
expensed as incurred in the period 1996 through 1999. The Company has incurred
approximately $22 million to date on these efforts. The Company also has third
party customers, financial institutions, vendors and others with which it
conducts business and has confirmed their plans to address and resolve Year 2000
issues on a timely basis. While it is likely that these efforts by third party
vendors and customers will be successful, it is possible that a series of
failures by third parties could have a material adverse effect on the Company's
results of operations in future periods.
In addition, the Company is developing contingency plans to address perceived
risks associated with the Year 2000 effort. These include business resumption
plans to address the possibility of internal systems failures and the
possibility of failure of systems or processes outside the Company's control. As
of year-end 1998, the Company has completed initial business resumption
contingency plans which would enable business critical units to function
beginning January 1, 2000 in the event of an unexpected failure. Business
resumption contingency plans are expected to be finalized by June 30, 1999.
Preparations for the management of the date change will continue through 1999.
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. Any sales
representative or employee who sells the Contracts will be 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 and distributor of the
Contracts is CFBDS, Inc., 21 Milk St., Boston, MA. CFBDS, Inc. is not affiliated
with the Company or the Separate Account.
Up-front compensation paid to sales representatives will not exceed 7.00 % of
the purchase payments made under the Contracts. If asset-based compensation is
paid, it will not exceed 2% of the average account value annually. From time to
time, the Company may pay or permit other promotional incentives, in cash,
credit or other compensation.
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, contract 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.
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LEGAL PROCEEDINGS AND OPINIONS
There are no pending material legal proceedings affecting the Separate Account.
There is one material pending legal proceeding, other than ordinary routine
litigation incidental to the business, to which the Company is a party. In March
1997, a purported class action entitled Patterman v. The Travelers, Inc. et al,
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 October 1997, 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. The plaintiffs appealed the transfer order, and in
December 1998 the Court of Appeals of the state of Georgia reversed the lower
court's decision. Later in December 1998, defendants petitioned the Georgia
Supreme Court to hear the appeal from the decision of the Court of Appeals.
Pending appeal, proceedings in the trial court have been stayed. Defendants
intend to vigorously contest the litigation.
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 passed on by the General Counsel of
the Company.
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APPENDIX A
- --------------------------------------------------------------------------------
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 the separate accounts 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 the Separate Account 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.
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 funding
option(s) twice a year during the 30 days following the semiannual anniversary
of the contract effective date. The transfers are limited to an amount of up to
15% of the Fixed Account Value on the semiannual contract effective date
anniversary. (This restriction does not apply to transfers under the Dollar Cost
Averaging Program.) Amounts previously transferred from the Fixed Account to
other 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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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 Principal Underwriting Agreement
Valuation of Assets
Performance Information
Mixed and Shared Funding
Federal Tax Considerations
Independent Accountants
Financial Statements
- --------------------------------------------------------------------------------
Copies of the Statement of Additional Information dated May 1, 1999 (Form No.
L-21258S) 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, Annuity Investor
Services, One Tower Square, Hartford, Connecticut 06183.
Name:
- ----------------------------------------
Address:
- ----------------------------------------
- ----------------------------------------
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L-21258 May, 1999
<PAGE> 31
PART B
Information Required in a Statement of Additional Information
<PAGE> 32
TRAVELERS PREMIER ADVISERS - ASSET MANAGER
STATEMENT OF ADDITIONAL INFORMATION
dated
May 1, 1999
for
THE TRAVELERS SEPARATE ACCOUNT SEVEN 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 Variable Annuity Contract
Prospectus dated May 1, 1999. A copy of the Prospectus may be obtained by
writing to The Travelers Insurance Company, Annuity Services, One Tower Square,
Hartford, Connecticut 06183-8036, or by calling (800) 599-9460 or by accessing
the Securities and Exchange Commission's website at http://www.sec.gov.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
THE INSURANCE COMPANY .................................................... 1
PRINCIPAL UNDERWRITER .................................................... 1
DISTRIBUTION AND PRINCIPAL UNDERWRITING AGREEMENT ........................ 1
VALUATION OF ASSETS ...................................................... 2
MIXED AND SHARED FUNDING ................................................. 3
PERFORMANCE INFORMATION .................................................. 3
FEDERAL TAX CONSIDERATIONS ............................................... 7
INDEPENDENT ACCOUNTANTS .................................................. 10
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, the U.S. and British Virgin Islands and the Bahamas. The
Company's Home Office is located at One Tower Square, Hartford, Connecticut
06183 and its telephone number is (860) 277-0111.
The Company is indirectly owned by a wholly owned subsidiary of
Citigroup, Inc. Citigroup Inc. consists of businesses that produce a broad range
of financial services, including asset management, banking and consumer finance,
credit and charge cards, insurance, investments, investment banking and trading.
Among its businesses are Citibank, Commercial Credit, Primerica Financial
Services, Salomon Smith Barney, Salomon Smith Barney Asset Management, and
Travelers Property Casualty.
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 ("Commissioner"). An annual statement covering the
operations of the Company for the preceding year, as well as its financial
conditions as of December 31 of such year, must be filed with the Commissioner
in a prescribed format on or before March 1 of each year. The Company's books
and assets are subject to review or examination by the Commissioner or his
agents at all times, and a full examination of its operations is conducted at
least once every four years.
The Company is also subject to the insurance laws and regulations of
all other states in which it is licensed to operate. However, the insurance
departments of each of these states generally apply the laws of the home state
(jurisdiction of domicile) in determining the field of permissible investments.
THE SEPARATE ACCOUNT. The Separate Account 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 the Separate Account are
subject to the provisions of Section 38a-433 of the Connecticut General Statutes
which authorizes the Commissioner to adopt regulations under it. Section 38a-433
contains no restrictions on the investments of the Separate Account, and the
Commissioner has adopted no regulations under the Section that affect the
Separate Account.
PRINCIPAL UNDERWRITER
CFBDS, Inc. serves as principal underwriter for the Separate Account
and the Contracts. The offering is continuous. CFBDS's principal executive
offices are located at 21 Milk St., Boston, MA 02109. CFBDS is not affiliated
with the Company or the Separate Account.
DISTRIBUTION AND PRINCIPAL UNDERWRITING AGREEMENT
Under the terms of the Distribution and Principal Underwriting
Agreement among Separate Account Seven, CFBDS and the Company, CFBDS acts as
agent for the distribution of the Contracts and as principal underwriter for the
Contracts. The Company reimburses CFBDS for certain sales and overhead expenses
connected with sales functions.
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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.
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.
2
<PAGE> 35
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.) After the
maturity date, withdrawals from the annuity unit value will be permitted only if
you have elected a variable payout option for a fixed period which is not based
on any lifetime. The maximum withdrawal amount will be calculated by computing
the payments at 7% annual interest rate.
MIXED AND SHARED FUNDING
Certain variable annuity separate accounts and variable life insurance
separate accounts may invest in the Funding Options simultaneously (called
"mixed" and "shared" funding). It is conceiveable that in the future it may be
disadvantageous to do so. Although the Company and the Funding Options do not
currently foresee any such disadvantages either to variable annuity contract
owners or variable life policy owners, each Funding Option's Board of Directors
intends to monitor events in order to identify any material conflicts between
them and to determine what action, if any, should be taken. If a Board of
Directors was to conclude that separate funds should be established for variable
life and variable annuity separate accounts, the variable annuity contract
owners would not bear any of the related expenses, but variable annuity contract
owners and variable life insurance policy owners would no longer have the
economies of scale resulting from a larger combined fund.
PERFORMANCE INFORMATION
From time to time, the Company may advertise several types of
historical performance for the Funding Options of the Separate Account. Once we
have a year's worth of performance history, we may advertise the "standardized
average annual total returns" of the Funding Option, calculated in a manner
prescribed by the Securities and Exchange Commission. Beginning immediately, we
may advertise the "nonstandardized total return," 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 contract administrative charge 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 SAI relates.
Each quotation assumes a total redemption at the end of each period.
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
3
<PAGE> 36
returns will not reflect the annual contract administrative charge, which, if
reflected, would decrease the level of performance shown.
For Funding Options that were in existence before they became available
under the Separate Account, the nonstandardized average annual total return
quotations will reflect 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.
Average annual total returns for each of the Funding Options excluding
Money Market Portfolio computed according to the nonstandardized methods for the
period ending December 31, 1998 are set forth in the following table. 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.
4
<PAGE> 37
PREMIER ADVISERS ASSET MANAGER
SEC STANDARDIZED PERFORMANCE
Average Annual Returns as of 12/31/1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
STOCK FUNDS: 1 Year 5 Year 10 Year (or inception)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAS Mid Cap Value Portfolio 13.80% - 25.61% (1/97)
- ------------------------------------------------------------------------------------------------------------------------------
MAS Value Portfolio -4.08% - 6.79% (1/97)
- ------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Emerging Markets Equity Portfolio -25.62% - -13.87% (10/96)
- ------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Global Equity Portfolio 11.38% - 14.67% (1/97)
- ------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Real Estate Securities Portfolio -13.25% - 12.97% (7/95)
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Capital Fund - - 16.04% (2/98)
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Investors Fund - - 8.77% (2/98)
- ------------------------------------------------------------------------------------------------------------------------------
Van Kampen Emerging Growth Portfolio 35.01% - 24.01% (7/95)
- ------------------------------------------------------------------------------------------------------------------------------
Van Kampen Enterprise Portfolio 22.65% 19.76% 16.44% (8/88)
- ------------------------------------------------------------------------------------------------------------------------------
Van Kampen Growth and Income Portfolio 17.45% - 18.02% (12/96)
- ------------------------------------------------------------------------------------------------------------------------------
BOND FUNDS:
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers High Yield Bond Fund - - -1.19% (5/98)
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Strategic Bond Fund - - 4.44% (2/98)
- ------------------------------------------------------------------------------------------------------------------------------
Van Kampen Domestic Income Portfolio 5.06% 6.26% 5.58% (12/88)
- ------------------------------------------------------------------------------------------------------------------------------
Van Kampen Government Portfolio 7.67% 4.61% 6.54% (8/88)
- ------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS:
- ------------------------------------------------------------------------------------------------------------------------------
Van Kampen Money Market Portfolio 3.36% 2.99% 3.48% (8/88)
- ------------------------------------------------------------------------------------------------------------------------------
As illustrated above, "Inception Date" reflects the date
that the underlying fund became active under the Separate
Account.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 38
PREMIER ADVISERS ASSET MANAGER
NONSTANDARDIZED PERFORMANCE AS OF 12/31/1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative Returns Average Annual Returns
- -----------------------------------------------------------------------------------------------------------------------------------
YTD 1 YR 3YR 5YR 10YR 3YR 5YR 10YR
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STOCK FUNDS:
- -----------------------------------------------------------------------------------------------------------------------------------
MAS Mid Cap Value Portfolio 13.95% 13.95% - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
MAS Value Portfolio -3.94% -3.94% - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Emerging Markets Equity Portfolio -25.50% -25.50% - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Global Equity Portfolio 11.52% 11.52% - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Real Estate Securities Portfolio -13.13% -13.13% 43.12% - - 12.68% - -
- -----------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Capital Fund - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Investors Fund - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Van Kampen Emerging Growth 35.17% 35.17% 83.40% - - 22.38% - -
- -----------------------------------------------------------------------------------------------------------------------------------
Van Kampen Enterprise Portfolio 22.81% 22.81% 93.45% 147.32% 353.05% 24.58% 19.84% 16.30%
- -----------------------------------------------------------------------------------------------------------------------------------
Van Kampen Growth and Income 17.60% 17.60% - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BOND FUNDS:
- -----------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers High Yield Bond Fund - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Strategic Bond Fund - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Van Kampen Domestic Income Portfolio 5.20% 5.20% 21.28% 36.01% 73.45% 6.64% 6.34% 5.66%
- -----------------------------------------------------------------------------------------------------------------------------------
Van Kampen Government Portfolio 7.81% 7.81% 16.53% 25.76% 89.21% 5.23% 4.69% 6.58%
- -----------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS:
- -----------------------------------------------------------------------------------------------------------------------------------
Van Kampen Money Market Portfolio 3.50% 3.50% 10.12% 16.32% 40.56% 3.26% 3.07% 3.46%
- -----------------------------------------------------------------------------------------------------------------------------------
As presented above, "Inception" is the date that
the underlying fund commenced operations.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Average Annual Returns Calendar Year Returns
- ---------------------------------------------------------------------------------------------------------------
Inception 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STOCK FUNDS:
- ---------------------------------------------------------------------------------------------------------------
MAS Mid Cap Value Portfolio 25.73% (1/97) - - -
- ---------------------------------------------------------------------------------------------------------------
MAS Value Portfolio 6.90% (1/97) - - -
- ---------------------------------------------------------------------------------------------------------------
Morgan Stanley Emerging Markets Equity Portfolio -13.79% (10/96) -1.44% - -
- ---------------------------------------------------------------------------------------------------------------
Morgan Stanley Global Equity Portfolio 14.78% (1/97) - - -
- ---------------------------------------------------------------------------------------------------------------
Morgan Stanley Real Estate Securities Portfolio 13.08% (7/95) 19.42% 37.95% -
- ---------------------------------------------------------------------------------------------------------------
Salomon Brothers Capital Fund 16.19% (2/98) - - -
- ---------------------------------------------------------------------------------------------------------------
Salomon Brothers Investors Fund 8.91% (2/98) - - -
- ---------------------------------------------------------------------------------------------------------------
Van Kampen Emerging Growth 24.12% (7/95) 18.36% 14.63% -
- ---------------------------------------------------------------------------------------------------------------
Van Kampen Enterprise Portfolio 11.64% (4/86) 28.44% 22.65% 34.67%
- ---------------------------------------------------------------------------------------------------------------
Van Kampen Growth and Income 18.12% (12/96) 19.49% - -
- ---------------------------------------------------------------------------------------------------------------
BOND FUNDS:
- ---------------------------------------------------------------------------------------------------------------
Salomon Brothers High Yield Bond Fund -1.06% (5/98) - - -
- ---------------------------------------------------------------------------------------------------------------
Salomon Brothers Strategic Bond Fund 4.57% (2/98) - - -
- ---------------------------------------------------------------------------------------------------------------
Van Kampen Domestic Income Portfolio 6.33% (11/87) 9.98% 4.82% 19.30%
- ---------------------------------------------------------------------------------------------------------------
Van Kampen Government Portfolio 5.45% (4/86) 7.72% 0.34% 15.16%
- ---------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS:
- ---------------------------------------------------------------------------------------------------------------
Van Kampen Money Market Portfolio 3.74% (4/86) 3.24% 3.06% 3.64%
- ---------------------------------------------------------------------------------------------------------------
As presented above, "Inception" is the date that
the underlying fund commenced operations.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 39
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 generally 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 70 1/2. 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 Company in
accordance with these rules and the Company will make a notification when
payments should be commenced.
7
<PAGE> 40
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.
8
<PAGE> 41
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 70 1/2 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.
9
<PAGE> 42
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, 1999, a recipient receiving
periodic payments (e.g., monthly or annual payments under an annuity option)
which total $14,700 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, 1998 and 1997, and for each of the
years in the three-year period ended December 31, 1998, have been included
herein in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
10
<PAGE> 43
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, 1998 and 1997, and the
related consolidated statements of income, changes in retained earnings and
accumulated other changes in equity from non-owner sources and cash flows for
each of the years in the three-year period ended December 31, 1998. These
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
January 25, 1999
F-1
<PAGE> 44
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $1,740 $1,583 $1,387
Net investment income 2,185 2,037 1,950
Realized investment gains 149 199 65
Other revenues 440 354 284
- ------------------------------------------------------------------------------------------------
Total Revenues 4,514 4,173 3,686
- ------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,475 1,341 1,187
Interest credited to contractholders 876 829 863
Amortization of deferred acquisition costs and value of 311 293 281
insurance in force
General and administrative expenses 469 427 380
- ------------------------------------------------------------------------------------------------
Total Benefits and Expenses 3,131 2,890 2,711
- ------------------------------------------------------------------------------------------------
Income from continuing operations before federal income 1,383 1,283 975
taxes
- ------------------------------------------------------------------------------------------------
Federal income taxes:
Current expense 442 434 284
Deferred 39 10 58
- ------------------------------------------------------------------------------------------------
Total Federal Income Taxes 481 444 342
- ------------------------------------------------------------------------------------------------
Income from continuing operations 902 839 633
Discontinued operations, net of income taxes
Gain on disposition (net of taxes of $0, $0 and $14) - - 26
- ------------------------------------------------------------------------------------------------
Income from Discontinued Operations - - 26
================================================================================================
Net income $ 902 $ 839 $ 659
================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $23,893 $21,511
$22,973, $20,682)
Equity securities, at fair value (cost, $474, $480) 518 512
Mortgage loans 2,606 2,869
Real estate held for sale 143 134
Policy loans 1,857 1,872
Short-term securities 1,098 1,102
Trading securities, at market value 1,186 800
Other invested assets 2,251 1,702
- ---------------------------------------------------------------------------------------------
Total Investments 33,552 30,502
- ---------------------------------------------------------------------------------------------
Cash 65 58
Investment income accrued 393 338
Premium balances receivable 99 106
Reinsurance recoverables 3,387 3,753
Deferred acquisition costs and value of insurance in force 2,567 2,312
Separate and variable accounts 15,313 11,319
Other assets 1,172 1,052
- ---------------------------------------------------------------------------------------------
Total Assets $56,548 $49,440
- ---------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $16,739 $14,913
Future policy benefits and claims 12,326 12,361
Separate and variable accounts 15,305 11,309
Deferred federal income taxes 422 409
Trading securities sold not yet purchased, at market value 873 462
Other liabilities 2,783 2,661
- ---------------------------------------------------------------------------------------------
Total Liabilities 48,448 42,115
- ---------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized, 100 100
issued and outstanding
Additional paid-in capital 3,800 3,187
Retained earnings 3,602 2,810
Accumulated other changes in equity from non-owner sources 598 535
Unrealized gain on Citigroup Inc. stock, net of tax - 693
- ---------------------------------------------------------------------------------------------
Total Shareholder's Equity 8,100 7,325
- ---------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $56,548 $49,440
=============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS AND ACCUMULATED
OTHER CHANGES IN EQUITY FROM NON-OWNER SOURCES
($ IN MILLIONS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
STATEMENTS OF CHANGES IN RETAINED 1998 1997 1996
EARNINGS
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $2,810 $2,471 $2,312
Net income 902 839 659
Dividends to parent 110 500 500
- --------------------------------------------------------------------------
Balance, end of year $3,602 $2,810 $2,471
==========================================================================
- --------------------------------------------------------------------------
STATEMENTS OF ACCUMULATED OTHER CHANGES
IN EQUITY FROM NON-OWNER SOURCES
- --------------------------------------------------------------------------
Balance, beginning of year $ 535 $ 223 $ 449
Unrealized gains (losses), net of tax 62 313 (226)
Foreign currency translation, net of 1 (1) -
tax
- --------------------------------------------------------------------------
Balance, end of year $ 598 $ 535 $ 223
==========================================================================
- --------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NON-OWNER SOURCES
- --------------------------------------------------------------------------
Net Income $ 902 $ 839 $ 659
Other changes in equity from
non-owner sources 63 312 (226)
- --------------------------------------------------------------------------
Total changes in equity from
non-owner sources $ 965 $1,151 $ 433
==========================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 47
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, 1998 1997 1996
---- ---- ----
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $1,763 $1,519 $1,387
Net investment income received 2,021 2,059 1,910
Other revenues received 255 180 131
Benefits and claims paid (1,127) (1,230) (1,060)
Interest credited to contractholders (918) (853) (820)
Operating expenses paid (587) (445) (343)
Income taxes paid (506) (368) (328)
Trading account investments, (purchases) sales, net (38) (54) -
Other 12 18 (70)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 875 826 807
Net cash used in discontinued operations - - (350)
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by Operations 875 826 457
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 2,608 2,259 1,928
Mortgage loans 722 663 917
Proceeds from sales of investments
Fixed maturities 13,390 7,592 9,101
Equity securities 212 341 479
Mortgage loans - 207 178
Real estate held for sale 53 169 210
Purchases of investments
Fixed maturities (18,072) (11,143) (11,556)
Equity securities (194) (483) (594)
Mortgage loans (457) (771) (470)
Policy loans, net 15 38 (23)
Short-term securities, (purchases) sales, net (495) (2) 498
Other investments, purchases, net (550) (260) (137)
Securities transactions in course of settlement 192 311 (52)
Net cash provided by investing activities of - - 348
discontinued operations
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Investing Activities (2,576) (1,079) 827
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of commercial paper, net - (50) (23)
Contractholder fund deposits 4,383 3,544 2,493
Contractholder fund withdrawals (2,565) (2,757) (3,262)
Dividends to parent company (110) (500) (500)
Other - - 9
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Financing Activities 1,708 237 (1,283)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 7 (16) 1
- ---------------------------------------------------------------------------------------------------
Cash at December 31, $ 65 $ 58 $ 74
===================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 48
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 (TIC) and, collectively with its subsidiaries
(the Company) is a wholly owned subsidiary of The Travelers Insurance Group
Inc. (TIGI), an indirect wholly owned subsidiary of Citigroup Inc.
(Citigroup), formerly Travelers Group Inc. The consolidated financial
statements include the accounts of TIC 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).
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 a final contingent payment was
made during 1996. The Company's discontinued operations reflect the results
of the gain from the contingent payment in 1996.
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 1998
presentation.
F-6
<PAGE> 49
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING CHANGES
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). This
statement establishes accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on an approach that focuses on control. Under this
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. FAS 125 provides standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. Effective January 1, 1998, the Company adopted
the collateral provisions of FAS 125 which were not effective until 1998 in
accordance with Statement of Financial Accounting Standards No. 127,
"Deferral of the Effective Date of Certain Provisions of SFAS 125". The
adoption of the collateral provisions of FAS 125 created additional assets
and liabilities on the Company's consolidated statement of financial position
related to the recognition of securities provided and received as collateral.
There was no impact on the Company's results of operations from the adoption
of the collateral provisions of FAS 125.
Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS
130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. All items that are required to be recognized under accounting
standards as components of comprehensive income are required to be reported
in an annual financial statement that is displayed with the same prominence
as other financial statements. This statement stipulates that comprehensive
income reflect the change in equity of an enterprise during a period from
transactions and other events and circumstances from non-owner sources.
Comprehensive income thus represents the sum of net income and other
changes in equity from non-owner sources. The accumulated balance of other
changes in equity from non-owner sources is required to be displayed
separately from retained earnings and additional paid-in capital in the
consolidated balance sheet. The adoption of FAS 130 resulted primarily in the
Company reporting unrealized gains and losses on investments in debt and
equity securities in changes in equity from non-owner sources. See Note 5.
F-7
<PAGE> 50
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Disclosures About Segments of an Enterprise and Related Information
During 1998, the Company adopted 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. This statement supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise". FAS 131 requires that all public enterprises report financial and
descriptive information about its reportable operating segments. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decisionmaker in deciding how to allocate resources and in assessing
performance. As a result of the adoption of FAS 131, the Company has two
reportable operating segments, Travelers Life and Annuity and Primerica Life
Insurance. See Note 17.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
During the third quarter of 1998, the Company adopted (effective January 1,
1998) the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants' Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use and for determining when
specific costs should be capitalized or expensed. The adoption of SOP 98-1
did not have a material impact on the Company's financial condition,
statement of operations or liquidity.
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.
The effective yield used to determine amortization is calculated based upon
actual historical and projected future cash flows, which are obtained from a
widely-accepted securities data provider. Fixed maturities are classified as
"available for sale" and are reported at fair value, with unrealized
investment gains and losses, net of income taxes, charged or credited
directly to shareholder's equity.
Equity securities, which include common and 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, 1998 and 1997.
F-8
<PAGE> 51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, 1998 and 1997.
Trading securities and related liabilities are normally held for periods less
than six months. These investments are marked to market with the change
recognized in net investment income during the current period.
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 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, options, forward contracts and interest rate swaps and
caps, as a means of hedging exposure to interest rate and foreign currency
risk. Hedge accounting is used to account for derivatives. To qualify for
hedge accounting the changes in value of the derivative must be expected to
substantially offset the changes in value of the hedged item. Hedges are
monitored to ensure that there is a high correlation between the derivative
instruments and the hedged investment.
Gains and losses arising from financial futures contracts are used to adjust
the basis of hedged investments and are recognized in net investment income
over the life of the investment.
Payments to be received or made under interest rate swaps are accrued and
recognized in net investment income. Swaps are carried at fair value with
unrealized gains and losses, net of taxes, charged or credited directly to
shareholder's equity.
Forward contracts, and options, and interest rate caps were not significant
at December 31, 1998 and 1997. Information concerning derivative financial
instruments is included in Note 6.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pre-tax
revenues based upon specific identification of the investments sold on the
trade date. Also included are gains and losses arising from the remeasurement
of the local currency value of foreign investments to U.S. dollars, the
functional currency of the Company. The foreign exchange effects of Canadian
operations are included in unrealized gains and losses.
F-9
<PAGE> 52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
POLICY LOANS
Policy loans are carried at the amount of the unpaid balances that are not in
excess of the net cash surrender values of the related insurance policies.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE
Costs of acquiring individual life insurance, annuities and 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
15 to 20 year amortization period is used; for long-term care business, a 10
to 20 year period is used, and a 7 to 20 year period is employed for
annuities. Deferred acquisition costs are reviewed periodically for
recoverability to determine if any adjustment is required.
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.
F-10
<PAGE> 53
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal life,
corporate owned life insurance, 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 9.1%.
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.
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 the states of domicile. Prescribed statutory
accounting practices include certain publications of the National Association
of Insurance Commissioners (NAIC) as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The impact of any
permitted accounting practices on statutory surplus of the Company is not
material.
The NAIC recently completed a process intended to codify statutory accounting
practices for certain insurance enterprises. As a result of this process, the
NAIC will issue a revised statutory Accounting Practices and Procedures
Manual version effective January 1, 2001 (the revised Manual) that will be
effective January 1, 2001 for the calendar year 2001 statutory financial
statements. It is expected that the State of Connecticut will require that,
effective January 1, 2001, insurance companies domiciled in Connecticut
prepare their statutory basis financial statements in accordance with the
revised Manual subject to any deviations prescribed or permitted by the
Connecticut insurance commissioner. The Company has not yet determined the
impact that this change will have on the statutory capital and surplus of its
insurance subsidiaries.
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 earned on investment, universal life and other insurance contracts.
Other revenues also include gains and losses on dispositions of assets other
than realized investment gains and losses and revenues of non-insurance
subsidiaries.
F-11
<PAGE> 54
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, corporate owned life insurance, 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 plans to implement SOP 97-3 in the first quarter of 1999 and expects
there to be no material impact on the Company's financial condition, results
of operations or liquidity.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends
on the intended use of the derivative and the resulting designation. FAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Upon initial application of FAS 133, hedging relationships must be
designated anew and documented pursuant to the provisions of this statement.
The Company has not yet determined the impact that FAS 133 will have on its
consolidated financial statements.
F-12
<PAGE> 55
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 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.
On October 2, 1995, the Company and its affiliates completed the sale of
their ownership in MetraHealth to United HealthCare Corporation. 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.
3. COMMERCIAL PAPER AND LINES OF CREDIT
TIC issues commercial paper directly to investors. No commercial paper was
outstanding at December 31, 1998 or 1997. TIC maintains unused credit
availability under bank lines of credit at least equal to the amount of the
outstanding commercial paper. No interest was paid in 1998 and interest
expense was not significant in 1997.
Citigroup, Commercial Credit Company (CCC) (an indirect wholly owned
subsidiary of Citigroup) and TIC have an agreement with a syndicate of banks
to provide $1.0 billion of revolving credit, to be allocated to any of
Citigroup, CCC or TIC. TIC's participation in this agreement is limited to
$250 million. The agreement consists of a five-year revolving credit facility
that expires in 2001. At December 31, 1998, $700 million was allocated to
Citigroup, $300 million was allocated to CCC and $0 was allocated to TIC.
Under this facility TIC is required to maintain certain minimum equity and
risk-based capital levels. At December 31, 1998, TIC was in compliance with
these provisions. There were no amounts outstanding under this agreement at
December 31, 1998 and 1997. If TIC had borrowings outstanding on this
facility, the interest rate would be based upon LIBOR plus a negotiated
margin.
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.
Beginning in 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 $1.5 million.
The Company writes workers' compensation business through its Accident
Department. This business is ceded 100% to an affiliate, The Travelers
Indemnity Company.
F-13
<PAGE> 56
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A summary of reinsurance financial data reflected within the consolidated
statements of income and balance sheets is presented below ($ in millions):
<TABLE>
<CAPTION>
WRITTEN PREMIUMS 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Direct $2,310 $2,148 $1,982
Assumed from:
Non-affiliated companies - 1 5
Ceded to:
Affiliated companies (242) (280) (284)
Non-affiliated companies (317) (273) (309)
----------------------------------------------------------------------
Total Net Written Premiums $1,751 $1,596 $1,394
======================================================================
</TABLE>
<TABLE>
<CAPTION>
EARNED PREMIUMS 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Direct $1,949 $2,170 $1,897
Assumed from:
Non-affiliated companies - 1 5
Ceded to:
Affiliated companies (251) (321) (219)
Non-affiliated companies (308) (291) (315)
----------------------------------------------------------------------
Total Net Earned Premiums $1,390 $1,559 $1,368
======================================================================
</TABLE>
Reinsurance recoverables at December 31, 1998 and 1997 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
<TABLE>
<CAPTION>
REINSURANCE RECOVERABLES 1998 1997
-----------------------------------------------------------
<S> <C> <C>
Life and Accident and Health Business:
Non-affiliated companies $1,297 $1,362
Property-Casualty Business:
Affiliated companies 2,090 2,391
-----------------------------------------------------------
Total Reinsurance Recoverables $3,387 $3,753
===========================================================
</TABLE>
Total reinsurance recoverables at December 31, 1998 and 1997 include $640
million and $697 million, respectively, from MetLife in connection with the
sale of the Company's group life and related businesses.
F-14
<PAGE> 57
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. SHAREHOLDER'S EQUITY
Additional Paid-In Capital
Additional paid-in capital increased during 1998 primarily due to the
conversion of Citigroup common stock to Citigroup preferred stock. This
increase in stockholder's equity was offset by a decrease in unrealized
investment gains due to the same transaction. See Note 13.
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 $702 million, $754 million and $656 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
The Company's statutory capital and surplus was $4.95 billion and $4.12
billion at December 31, 1998 and 1997, 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 $504 million is available in 1999 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, 1998 and 1997.
F-15
<PAGE> 58
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCUMULATED OTHER CHANGES IN EQUITY FROM NON-OWNER SOURCES, NET OF TAX
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED FOREIGN CURRENCY ACCUMULATED OTHER
GAIN ON TRANSLATION CHANGES IN EQUITY FROM
INVESTMENT ADJUSTMENTS NON-OWNER SOURCES
(for the year ended December 31, $ in millions) SECURITIES
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Balance, beginning of year $545 $(10) $535
Current-year change 62 1 63
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $607 $(9) $598
==========================================================================================================================
1997
Balance, beginning of year $232 $(9) $223
Current-year change 313 (1) 312
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $545 $(10) $535
==========================================================================================================================
1996
Balance, beginning of year $458 $(9) $449
Current-year change (226) - (226)
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $232 $(9) $223
==========================================================================================================================
</TABLE>
TAX EFFECTS ALLOCATED TO EACH COMPONENT OF OTHER CHANGES IN EQUITY FROM
NON-OWNER SOURCES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Pre-tax Tax expense After-tax
(for the year ended December 31, $ in millions) amount (benefit) amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Unrealized gain on investment securities:
Unrealized holding gains arising during year $ 244 $ 85 $ 159
Less: reclassification adjustment for gains
realized in net income 149 52 97
- ---------------------------------------------------------------------------------------------------------
Net unrealized gain on investment securities 95 33 62
Foreign currency translation adjustments 3 2 1
- ---------------------------------------------------------------------------------------------------------
Other changes in equity from non-owner sources $ 98 $ 35 $ 63
=========================================================================================================
1997
Unrealized gain on investment securities:
Unrealized holding gains arising during year $ 681 $ 239 $ 442
Less: reclassification adjustment for gains
realized in net income 199 70 129
- ---------------------------------------------------------------------------------------------------------
Net unrealized gain on investment securities 482 169 313
Foreign currency translation adjustments (1) - (1)
- ---------------------------------------------------------------------------------------------------------
Other changes in equity from non-owner sources $ 481 $ 169 $ 312
=========================================================================================================
1996
Unrealized gain on investment securities:
Unrealized holding losses arising during year $(283) $ (99) $(184)
Less: reclassification adjustment for gains
realized in net income 65 23 42
- ---------------------------------------------------------------------------------------------------------
Net unrealized loss on investment securities (348) (122) (226)
Foreign currency translation adjustments - - -
- ---------------------------------------------------------------------------------------------------------
Other changes in equity from non-owner sources $(348) $(122) $(226)
=========================================================================================================
</TABLE>
F-16
<PAGE> 59
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, interest rate swaps, options and forward contracts as a means of
hedging exposure to interest rate and foreign currency 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 interest rate swaps, options and forward
contracts, credit risk is limited to the amount that it would cost the
Company to replace the contracts. Financial futures contracts have little
credit risk since organized exchanges are the counterparties. The Company is
a writer of option contracts and as such has no credit risk since the
counterparty has no performance obligation after it has paid a cash premium.
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 which 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, 1998 and 1997, the Company held financial futures contracts
with notional amounts of $459 million and $625 million, respectively. These
financial futures had a deferred gain of $3.3 million and a deferred loss of
$.1 million in 1998 and a deferred gain of $.7 million, and a deferred loss
of $4.1 million in 1997. Total gains of $1.5 million and losses of $5.8
million from financial futures were deferred at December 31, 1998 and 1997,
respectively, relating to anticipated investment purchases and investment
product sales, and are reported as other liabilities. At December 31, 1998
and 1997, the Company's futures contracts had no fair value because these
contracts were marked to market and settled in cash daily.
F-17
<PAGE> 60
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company enters into interest rate swaps in connection with other
financial instruments to provide greater risk diversification and better
match an asset with a corresponding liability. Under interest rate swaps, the
Company agrees with other parties to exchange, at specific intervals, the
difference between fixed-rate and floating-rate interest amounts calculated
by reference to an agreed notional principal amount. The Company also enters
into basis swaps in which both legs of the swap are floating with each based
on a different index. Generally, no cash is exchanged at the outset of the
contract and no principal payments are made by either party. A single net
payment is usually made by one counterparty at each due date. Swap agreements
are not exchange traded and are subject to the risk of default by the
counterparty.
At December 31, 1998 and 1997, the Company held interest rate swap contracts
with notional amounts of $1,077.9 million and $234.7 million, respectively.
The fair value of these financial instruments was $5.6 million (gain
position) and $19.6 million (loss position) at December 31, 1998 and was $.3
million (gain position) and $2.5 million (loss position) at December 31,
1997. The fair values were determined using the discounted cash flow method.
The off-balance sheet risks of options and forward contracts were not
significant at December 31, 1998 and 1997.
The Company purchased a 5-year interest rate cap, with a notional amount of
$200 million, from Travelers Group Inc. in 1995 to hedge against losses that
could result from increasing interest rates. This instrument, which does not
have off-balance sheet risk, gave the Company the right to receive payments
if interest rates exceeded specific levels at specific dates. The premium of
$2 million paid for this instrument was being amortized over its life. The
interest rate cap asset was terminated in 1998. The fair value at December
31, 1997 was $0.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company issues fixed and variable rate
loan commitments and has unfunded commitments to partnerships. The
off-balance sheet risk of these financial instruments was not significant at
December 31, 1998 and 1997.
Fair Value of Certain Financial Instruments
The Company uses various financial instruments in the normal course of its
business. Fair values of financial instruments that are considered insurance
contracts are not required to be disclosed and are not included in the
amounts discussed.
At December 31, 1998 and 1997, investments in fixed maturities had a carrying
value and a fair value of $23.9 billion and $21.5 billion, respectively. See
Notes 1 and 13.
At December 31, 1998 mortgage loans had a carrying value of $2.6 billion and
a fair value of $2.8 billion and in 1997 had a carrying value of $2.9 billion
and a fair value of $3.0 billion. In estimating fair value, the Company used
interest rates reflecting the current real estate financing market.
F-18
<PAGE> 61
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The carrying values of $144 million and $143 million of financial instruments
classified as other assets approximated their fair values at December 31,
1998 and 1997, respectively. The carrying values of $2.3 billion and $2.0
billion of financial instruments classified as other liabilities also
approximated their fair values at December 31, 1998 and 1997, respectively.
Fair value is determined using various methods, including discounted cash
flows, as appropriate for the various financial instruments.
At December 31, 1998, contractholder funds with defined maturities had a
carrying value and a fair value of $3.3 billion, compared with a carrying
value and a fair value of $2.3 billion at December 31, 1997. The fair value
of these contracts is determined by discounting expected cash flows at an
interest rate commensurate with the Company's credit risk and the expected
timing of cash flows. Contractholder funds without defined maturities had a
carrying value of $10.4 billion and a fair value of $10.2 billion at December
31, 1998, compared with a carrying value of $9.7 billion and a fair value of
$9.5 billion at December 31, 1997. 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 $235 million at December 31, 1998, compared with a
carrying value and a fair value of $260 million at December 31, 1997. 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, 1998, compared with a carrying value and a fair value of $209
million and $206 million, respectively, at December 31, 1997.
The carrying values of cash, trading securities and trading securities sold
not yet purchased are carried at fair value. The carrying values of
short-term securities and investment income accrued 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.
F-19
<PAGE> 62
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Litigation
In March 1997, a purported class action entitled Patterman v. The Travelers,
Inc. et al. 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 October 1997,
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.
The plaintiffs appealed the transfer order, and in December 1998 the Court of
Appeals of the State of Georgia reversed the lower court's decision. Later in
December 1998, defendants petitioned the Georgia Supreme Court to hear the
appeal from the decision of the Court of Appeals. Pending appeal, proceedings
in the trial court have been stayed. Defendants intend 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, 1998, the Company believes, based on
information currently available, that the ultimate resolution of these legal
proceedings would not be likely to have a material adverse effect on its
results of operations, financial condition or liquidity.
8. BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by Citigroup. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by TIGI. The Company's share of net expense for the qualified
pension and other postretirement benefit plans was not significant for 1998,
1997 and 1996. 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 1998, 1997 and 1996.
401(k) Savings Plan
Substantially all of the Company's employees are eligible to participate in a
401(k) savings plan sponsored by Citigroup. During 1996, the Company made
matching contributions in an amount equal to the lesser of 100% of the
pre-tax contributions made by the employee or $1,000. Effective January 1,
1997, the Company discontinued matching contributions for the majority of its
employees. The Company's expenses in connection with the 401(k) savings plan
were not significant in 1998, 1997 and 1996.
F-20
<PAGE> 63
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, 1998 and 1997, the
pool totaled approximately $2.3 billion and $2.6 billion, respectively. The
Company's share of the pool amounted to $793 million and $725 million at
December 31, 1998 and 1997, respectively, and is included in short-term
securities in the consolidated balance sheet.
Included in short-term investments is a 90 day variable rate note receivable
from Citigroup issued on August 28, 1998 and renewed on November 25, 1998.
The rate is based upon the AA financial commercial paper rate plus 14 basis
points. The rate at December 31, 1998 is 5.47%. The balance at December 31,
1998 is $500 million. Interest accrued at December 31, 1998 was $2.2 million.
Interest earned during 1998 was $9.4 million. Citigroup repaid this note on
February 25, 1999.
The Company sells structured settlement annuities to the insurance
subsidiaries of TAP in connection with the settlement of certain policyholder
obligations. Such premiums and deposits were $104 million, $88 million, and
$40 million for 1998, 1997 and 1996, respectively. Reserves and
contractholder funds related to these annuities amounted to $787 million and
$795 million in 1998 and 1997, respectively.
The Company markets deferred annuity products and life and health insurance
through its affiliate, Salomon Smith Barney Inc. (SSB). Premiums and
deposits related to these products were $1.3 billion, $1.0 billion, and
$820 million in 1998, 1997 and 1996, respectively.
During the year the Company lent out $78.5 million par of debentures to SSB
for $84.8 million in cash collateral. Loaned debentures totaling $37.6
million with cash collateral of $39.7 million remained outstanding at
December 31, 1998.
The Company sold $27.4 million par of 6.125% U.S. Treasury bonds to SSB for
$31.1 million.
F-21
<PAGE> 64
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company purchased $36 million par of 6.56% Chase Commercial Mortgage
Securities Corp. bonds from SSB for $35.9 million.
Primerica Life has entered into a General Agency Agreement with Primerica
Financial Service, Inc. (Primerica), that provides that Primerica will be
Primerica Life's general agent for marketing all insurance of Primerica Life.
In consideration of such services, Primerica Life agreed to pay Primerica
marketing fees of no less than $10 million based upon U.S. gross direct
premiums received by Primerica Life. In 1998 the fees paid by Primerica Life
were $12.5 million.
In 1998 Primerica became a distributor of products for Travelers Life and
Annuity. During the year Primerica sold $256 million of deferred annuities.
Included in other invested assets is a $987 million investment in Citigroup
preferred stock at December 31, 1998, carried at cost. Also, included in
other invested assets is a $1.15 billion investment in common stock of
Citigroup at December 31, 1997, carried at fair value.
The Company participates in a stock option plan sponsored by Citigroup that
provides for the granting of stock options in Citigroup common stock to
officers and key employees. To further encourage employee stock ownership,
during 1997 Citigroup introduced the WealthBuilder stock option program.
Under this program, all employees meeting certain requirements have been
granted Citigroup stock options.
The Company applies APB 25 and related interpretations in accounting for
stock options. Since stock options under the Citigroup plans are issued at
fair market value on the date of award, no compensation cost has been
recognized for these awards. FAS 123 provides an alternative to APB 25
whereby fair values may be ascribed to options using a valuation model and
amortized to compensation cost over the vesting period of the options.
Had the Company applied FAS 123 in accounting for Citigroup stock options,
net income would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
YEAR ENDING DECEMBER 31, 1998 1997 1996
($ IN MILLIONS)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $902 $839 $659
FAS 123 pro forma adjustments, after tax (13) (9) (3)
-----------------------------------------------------------------------------------------------------
Net income, pro forma $889 $830 $656
</TABLE>
The Company had an interest rate cap agreement with Citigroup. See Note 6.
F-22
<PAGE> 65
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 $18 million, $15
million, and $24 million in 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
---------------------------------------------------
YEAR ENDING DECEMBER 31, MINIMUM OPERATING
($ in millions) RENTAL PAYMENTS
---------------------------------------------------
<S> <C>
1999 $ 47
2000 50
2001 54
2002 44
2003 42
Thereafter 296
---------------------------------------------------
Total Rental Payments $533
===================================================
</TABLE>
Future sublease rental income of approximately $86 million will partially
offset these commitments. Also, the Company will be reimbursed for 50% of the
rental expense for a particular lease totaling $207 million, by an affiliate.
Minimum future capital lease payments are not significant.
The Company is reimbursed for use of furniture and equipment through cost
sharing agreements by its affiliates.
F-23
<PAGE> 66
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. FEDERAL INCOME TAXES
($ in millions)
EFFECTIVE TAX RATE
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Before Federal Income Taxes $1,383 $1,283 $ 975
Statutory Tax Rate 35% 35% 35%
----------------------------------------------------------------------------------
Expected Federal Income Taxes 484 449 341
Tax Effect of:
Non-taxable investment income (5) (4) (3)
Other, net 2 (1) 4
----------------------------------------------------------------------------------
Federal Income Taxes $ 481 $ 444 $ 342
==================================================================================
Effective Tax Rate 35% 35% 35%
----------------------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 418 $ 410 $ 263
Foreign 24 24 21
---------------------------------------------------------------------------------
Total 442 434 284
---------------------------------------------------------------------------------
Deferred:
United States 40 10 57
Foreign (1) - 1
---------------------------------------------------------------------------------
Total 39 10 58
----------------------------------------------------------------------------------
Federal Income Taxes $ 481 $ 444 $ 342
=================================================================================
</TABLE>
Additional tax benefits attributable to employee stock plans allocated
directly to shareholder's equity for the years ended December 31, 1998, 1997
and 1996 were $17 million, $17 million and $8 million, respectively.
F-24
<PAGE> 67
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 1998 and 1997 were comprised
of the tax effects of temporary differences related to the following assets
and liabilities:
<TABLE>
<CAPTION>
($ in millions) 1998 1997
---- ----
<S> <C> <C>
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 616 $ 561
Operating lease reserves 76 80
Other employee benefits 103 102
Other 135 127
----------------------------------------------------------------------------------
Total 930 870
----------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of 673 608
insurance in force
Investments, net 489 484
Other 90 87
----------------------------------------------------------------------------------
Total 1,252 1,179
----------------------------------------------------------------------------------
Net Deferred Tax Liability Before Valuation (322) (309)
Allowance
Valuation Allowance for Deferred Tax Assets (100) (100)
----------------------------------------------------------------------------------
Net Deferred Tax Liability After Valuation Allowance $ (422) $ (409)
----------------------------------------------------------------------------------
</TABLE>
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.
The $100 million valuation allowance is sufficient to cover any capital
losses on investments that may exceed the capital gains able to be generated
in the life insurance group's consolidated federal income tax return based
upon management's best estimate of the character of the reversing temporary
differences. Reversal of the valuation allowance is contingent upon the
recognition of future capital gains or a change in circumstances that causes
the recognition of the benefits to become more likely than not. There was no
change in the valuation allowance during 1998. The initial recognition of any
benefit produced by the reversal of the valuation allowance will be
recognized by reducing goodwill.
At December 31, 1998, the Company had no ordinary or capital loss
carryforwards.
F-25
<PAGE> 68
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The policyholders surplus account, which arose under prior tax law, is
generally that portion of the gain from operations that has not been
subjected to tax, plus certain deductions. The balance of this account is
approximately $932 million. Income taxes are not provided for on this amount
because under current U.S. tax rules such taxes will become payable only to
the extent such amounts are distributed as a dividend to exceed limits
prescribed by federal law. Distributions are not contemplated from this
account. At current rates the maximum amount of such tax would be
approximately $326 million.
12. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
----------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
($ in millions)
----------------------------------------------------------------------
<S> <C> <C> <C>
GROSS INVESTMENT INCOME
Fixed maturities $1,598 $1,460 $1,387
Mortgage loans 295 291 334
Policy loans 131 137 156
Other, including trading 226 238 171
----------------------------------------------------------------------
2,250 2,126 2,048
----------------------------------------------------------------------
Investment expenses 65 89 98
----------------------------------------------------------------------
Net investment income $2,185 $2,037 $1,950
----------------------------------------------------------------------
</TABLE>
13. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
($ in millions)
----------------------------------------------------------------------
<S> <C> <C> <C>
REALIZED INVESTMENT GAINS
Fixed maturities $111 $71 $(63)
Equity securities 6 (9) 47
Mortgage loans 21 59 49
Real estate held for sale 16 67 33
Other (5) 11 (1)
----------------------------------------------------------------------
Total Realized Investment Gains $149 $199 $65
----------------------------------------------------------------------
</TABLE>
F-26
<PAGE> 69
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Changes in net unrealized investment gains (losses) that are reported as
accumulated other changes in equity from non-owner sources or unrealized
gains on Citigroup stock in shareholder's equity were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
------- ------- -------
($ in millions)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNREALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $ 91 $ 446 $ (323)
Equity securities 13 25 (35)
Other (169) 520 220
-------------------------------------------------------------------------------------------------
Total Unrealized Investment Gains (Losses) (65) 991 (138)
-------------------------------------------------------------------------------------------------
Related taxes (20) 350 (43)
-------------------------------------------------------------------------------------------------
Change in unrealized investment gains (45) 641 (95)
(losses)
Transferred to paid in capital, net of tax (585) -- --
Balance beginning of year 1,228 587 682
-------------------------------------------------------------------------------------------------
Balance End of Year $ 598 $ 1,228 $ 587
-------------------------------------------------------------------------------------------------
</TABLE>
Included in Other in 1998 is the unrealized loss on Citigroup common stock of
$167 million prior to the conversion to preferred stock. Also included in
Other were unrealized gains of $506 million and $203 million, which were
reported in 1997 and 1996, respectively, related to appreciation of Citigroup
common stock.
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale were
$13.4 billion, $7.6 billion and $9.1 billion in 1998, 1997 and 1996,
respectively. Gross gains of $314 million, $170 million and $107 million and
gross losses of $203 million, $99 million and $175 million in 1998, 1997 and
1996, respectively, were realized on those sales.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted expected
cash flows using market rates commensurate with the credit quality and
maturity of the investment. The fair value of investments for which a quoted
market price or dealer quote are not available amounted to $4.8 billion and
$5.1 billion at December 31, 1998 and 1997, respectively.
F-27
<PAGE> 70
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of investments in fixed maturities were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 GROSS GROSS
($ 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 $ 4,717 $ 147 $ 11 $ 4,853
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 1,563 186 3 1,746
Obligations of states, municipalities and
political subdivisions 239 18 -- 257
Debt securities issued by foreign governments 634 41 3 672
All other corporate bonds 13,025 532 57 13,500
Other debt securities 2,709 106 38 2,777
Redeemable preferred stock 86 3 1 88
- ---------------------------------------------------------------------------------------------------------
Total Available For Sale $22,973 $ 1,033 $ 113 $23,893
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 GROSS GROSS
($ 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 11,787 459 17 12,229
Other debt securities 2,761 88 7 2,842
Redeemable preferred stock 12 1 -- 13
- --------------------------------------------------------------------------------------------------------------
Total Available For Sale $20,682 $ 860 $ 31 $21,511
- --------------------------------------------------------------------------------------------------------------
</TABLE>
F-28
<PAGE> 71
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1998, by
contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
($ in millions) AMORTIZED FAIR
COST VALUE
- -----------------------------------------------------------------
<S> <C> <C>
MATURITY:
Due in one year or less $ 1,296 $ 1,305
Due after 1 year through 5 years 6,253 6,412
Due after 5 years through 10 years 5,096 5,310
Due after 10 years 5,611 6,013
- -----------------------------------------------------------------
18,256 19,040
- -----------------------------------------------------------------
Mortgage-backed securities 4,717 4,853
- -----------------------------------------------------------------
Total Maturity $22,973 $23,893
- -----------------------------------------------------------------
</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, 1998 and 1997, the Company held CMOs classified as available for
sale with a fair value of $3.4 billion and $2.1 billion, respectively.
Approximately 54% and 72%, respectively, of the Company's CMO holdings are fully
collateralized by GNMA, FNMA or FHLMC securities at December 31, 1998 and 1997.
In addition, the Company held $1.4 billion and $1.9 billion of GNMA, FNMA or
FHLMC mortgage-backed pass-through securities at December 31, 1998 and 1997,
respectively. Virtually all of these securities are rated AAA.
F-29
<PAGE> 72
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Equity Securities
The cost and fair values of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
EQUITY SECURITIES: GROSS UNREALIZED GROSS UNREALIZED FAIR
($ in millions) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Common stocks $129 $ 44 $ 3 $170
Non-redeemable preferred stocks 345 10 7 348
- ------------------------------------------------------------------------------------------------
Total Equity Securities $474 $ 54 $ 10 $518
- ------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
Common stocks $179 $ 34 $ 11 $202
Non-redeemable preferred stocks 301 13 4 310
- ------------------------------------------------------------------------------------------------
Total Equity Securities $480 $ 47 $ 15 $512
- ------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of equity securities were $212 million, $341 million
and $479 million in 1998, 1997 and 1996, respectively. Gross gains of $30
million, $53 million and $64 million and gross losses of $24 million, $62
million and $11 million in 1998, 1997 and 1996, respectively, were realized
on those sales.
Mortgage Loans and Real Estate Held For Sale
At December 31, 1998 and 1997, the Company's mortgage loan and real estate
held for sale portfolios consisted of the following ($ in millions):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Current Mortgage Loans $2,370 $2,866
Underperforming Mortgage Loans 236 3
- ------------------------------------------------------------------------------------
Total Mortgage Loans 2,606 2,869
- ------------------------------------------------------------------------------------
Real Estate Held For Sale - Foreclosed 112 117
Real Estate Held For Sale - Investment 31 17
- ------------------------------------------------------------------------------------
Total Real Estate 143 134
- ------------------------------------------------------------------------------------
Total Mortgage Loans and Real Estate Held for Sale $2,749 $3,003
====================================================================================
</TABLE>
Underperforming mortgage loans include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest rates
below market.
F-30
<PAGE> 73
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
YEAR ENDING DECEMBER 31,
($ in millions)
- -----------------------------------------------------------------------
<S> <C>
Past Maturity $ 186
1999 188
2000 196
2001 260
2002 118
2003 206
Thereafter 1,452
- -----------------------------------------------------------------------
Total $2,606
=======================================================================
</TABLE>
Joint Venture
In October 1997, the Company and Tishman Speyer Properties (Tishman), a
worldwide real estate owner, developer and manager, formed a real estate
joint venture with an initial equity commitment of $792 million. The
Company and certain of its affiliates originally committed $420 million in
real estate equity and $100 million in cash while Tishman originally
committed $272 million in properties and cash. Both companies are serving
as general partners for the venture and Tishman is primarily responsible
for the venture's real estate acquisition and development efforts. The
Company's carrying value of this investment was $252.4 million and $204.8
million at December 31, 1998 and 1997, respectively.
Trading Securities
Trading securities of the Company are held in a subsidiary that is a
broker/dealer, Tribeca Investments L.L.C.
<TABLE>
<CAPTION>
($ in millions)
- -------------------------------------------------------------------------------------
TRADING SECURITIES OWNED 1998 1997
------ ------
<S> <C> <C>
Convertible bond arbitrage $ 754 $ 370
Merger arbitrage 427 352
Other 5 78
- -------------------------------------------------------------------------------------
Total $1,186 $ 800
- -------------------------------------------------------------------------------------
TRADING SECURITIES SOLD NOT YET PURCHASED
Convertible bond arbitrage $ 521 $ 249
Merger arbitrage 352 213
- -------------------------------------------------------------------------------------
Total $ 873 $ 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-31
<PAGE> 74
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Concentrations
At December 31, 1998 and 1997, the Company had no concentration of credit
risk in a single investee exceeding 10% of consolidated shareholder's
equity.
The Company maintains a short-term investment pool for its insurance
affiliates in which the Company also participates. See Note 9.
Included in fixed maturities are below investment grade assets totaling
$2.1 billion and $1.4 billion at December 31, 1998 and 1997, respectively.
The Company defines its below investment grade assets as those securities
rated "Ba1" or below by external rating agencies, or the equivalent by
internal analysts when a public rating does not exist. Such assets include
publicly traded below investment grade bonds and certain other privately
issued bonds that are classified as below investment grade.
The Company had concentrations of investments, primarily fixed maturities,
in the following industries:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
($ in millions) 1998 1997
-----------------------------------------------------------------------
<S> <C> <C>
Banking $2,131 $2,215
Electric Utilities 1,513 1,377
Finance 1,346 1,556
Asset-Backed Credit Cards 1,013 778
-----------------------------------------------------------------------
</TABLE>
Below investment grade assets included in the preceding table were not
significant.
At December 31, 1998 and 1997, concentrations of mortgage loans of $751
million and $794 million, respectively, were for properties located in
highly populated areas in the state of California.
Other mortgage loan investments are relatively evenly dispersed throughout
the United States, with no significant holdings in any one state.
Significant concentrations of mortgage loans by property type at December
31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
($ in millions) 1998 1997
------------------------------------------------------------------------
<S> <C> <C>
Office $1,185 $1,382
Agricultural 887 771
------------------------------------------------------------------------
</TABLE>
F-32
<PAGE> 75
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 at December 31, 1998 and 1997. The balances of the
restructured investments were insignificant. 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 was insignificant in 1998 and in 1997.
Interest on these assets, included in net investment income was
insignificant in 1998 and 1997.
14. DEPOSIT FUNDS AND RESERVES
At December 31, 1998, the Company had $25.7 billion of life and annuity
deposit funds and reserves. Of that total, $13.8 billion is not subject to
discretionary withdrawal based on contract terms. The remaining $11.9
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 $2.4 billion of liabilities that are
surrenderable with market value adjustments. Also included are an
additional $5.1 billion of life insurance and individual annuity
liabilities which are subject to discretionary withdrawals, and have an
average surrender charge of 4.7%. In the payout phase, these funds are
credited at significantly reduced interest rates. The remaining $4.4
billion of liabilities are surrenderable without charge. More than 14.2% of
these relate to individual life products. These risks would have to be
underwritten again if transferred to another carrier, which is considered a
significant deterrent against withdrawal by long-term policyholders.
Insurance liabilities that are surrendered or withdrawn are reduced by
outstanding policy loans and related accrued interest prior to payout.
F-33
<PAGE> 76
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
($ in millions)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income From Continuing Operations $902 $839 $633
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized gains (149) (199) (65)
Deferred federal income taxes 39 10 58
Amortization of deferred policy acquisition costs and
value of insurance in force 311 293 281
Additions to deferred policy acquisition costs (566) (471) (350)
Investment income accrued (55) 14 2
Premium balances receivable 7 3 (6)
Insurance reserves and accrued expenses 335 131 (1)
Other 51 206 255
--------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 875 826 807
Net cash used in discontinued operations - - (350)
Net cash provided by operations $875 $826 $457
--------------------------------------------------------------------------------------------------------------
</TABLE>
16. NON-CASH INVESTING AND FINANCING ACTIVITIES
Significant non-cash investing and financing activities include the
transfer of Citigroup common stock to Citigroup preferred stock valued at
$987 million in 1998 and the conversion of $119 million of real estate held
for sale to other invested assets as a joint venture in 1997.
F-34
<PAGE> 77
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
17. OPERATING SEGMENTS
The Company has two reportable business segments that are separately managed due
to differences in products, services, marketing strategy and resource
management. The business of each segment is maintained and reported through
separate legal entities within the Company. The management groups of each
segment report separately to the common ultimate parent, Citigroup Inc.
The TRAVELERS LIFE AND ANNUITY business segment consolidates primarily the
business of Travelers Insurance Company and The Travelers Life and Annuity
Company. The Travelers Life and Annuity business segment 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.
The PRIMERICA LIFE business segment consolidates primarily the business of
Primerica Life Insurance Company and National Benefit Life Insurance Company.
The Primerica Life business segment offers individual life products, primarily
term insurance, to customers through a nationwide sales force of approximately
80,000 full and part-time licensed Personal Financial Analysts.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1), except that management
also includes receipts on long-duration contracts (universal life-type and
investment contracts) as deposits along with premiums in measuring business
volume.
BUSINESS SEGMENT INFORMATION:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TRAVELERS LIFE AND PRIMERICA LIFE
1998 ($ IN MILLIONS) ANNUITY INSURANCE TOTAL
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Volume:
Premiums $ 683 $ 1,057 $ 1,740
Deposits 7,693 -- 7,693
------- ------- -------
Total business volume $ 8,376 $ 1,057 $ 9,433
Net investment income 1,965 220 2,185
Interest credited to contractholders 876 -- 876
Amortization of deferred acquisition costs and value of
insurance in force 115 196 311
Federal income taxes on Operating Income 260 170 430
Operating Income (excludes realized gains or losses and
the related FIT) $ 493 $ 312 $ 805
Segment Assets $49,646 $ 6,902 $56,548
</TABLE>
F-35
<PAGE> 78
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TRAVELERS LIFE AND PRIMERICA LIFE
1997 ($ IN MILLIONS) ANNUITY INSURANCE TOTAL
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Volume
Premiums $ 548 $ 1,035 $ 1,583
Deposits 5,276 -- 5,276
------- ------- -------
Total business volume $ 5,824 $ 1,035 $ 6,859
Net investment income 1,836 201 2,037
Interest credited to contractholders 829 -- 829
Amortization of deferred acquisition costs and value of
insurance in force 96 197 293
Federal income taxes on Operating Income 221 153 374
Operating Income (excludes realized gains or losses and
the related FIT) $ 427 $ 283 $ 710
Segment Assets $42,330 $ 7,110 $49,440
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TRAVELERS LIFE AND PRIMERICA LIFE
1996 ($ IN MILLIONS) ANNUITY INSURANCE TOTAL
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Volume:
Premiums $ 357 $ 1,030 $ 1,387
Deposits 3,502 -- 3,502
------- ------- -------
Total business volume $ 3,859 $ 1,030 $ 4,889
Net investment income 1,775 175 1,950
Interest credited to contractholders 863 -- 863
Amortization of deferred acquisition costs and value of
insurance in force 83 198 281
Federal income taxes on Operating Income 189 130 319
Operating Income (excludes realized gains or losses and
the related FIT) $ 356 $ 235 $ 591
Segment Assets $37,564 $ 5,409 $42,973
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of investments in equity method investees and total expenditures for
additions to long-lived assets other than financial instruments, long-term
customer relationships of a financial institution, mortgage and other servicing
rights, deferred policy acquisition costs, and deferred tax assets, were not
material.
F-36
<PAGE> 79
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
BUSINESS SEGMENT RECONCILIATION:
($ in millions)
<TABLE>
<CAPTION>
REVENUES 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total business volume $ 9,433 $ 6,859 $ 4,889
Net investment income 2,185 2,037 1,950
Realized investment gains 149 199 65
Other revenues 440 354 284
Elimination of deposits (7,693) (5,276) (3,502)
- -------------------------------------------------------------------------------
Total revenues $ 4,514 $ 4,173 $ 3,686
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total operating income of business segments $805 $710 $591
Realized investment gains net of tax 97 129 42
- --------------------------------------------------------------------------------
Income from continuing operations $902 $839 $633
================================================================================
</TABLE>
<TABLE>
<CAPTION>
ASSETS 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets of business segments $56,548 $49,440 $42,973
================================================================================
</TABLE>
<TABLE>
<CAPTION>
REVENUE BY PRODUCTS 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Annuities $ 4,198 $ 3,303 $ 2,635
Group and Payout Annuities 5,326 3,737 2,194
Individual Life & Health Insurance 2,270 2,102 1,956
Other (a) 413 307 403
Elimination of deposits (7,693) (5,276) (3,502)
- --------------------------------------------------------------------------------
Total Revenue $ 4,514 $ 4,173 $ 3,686
================================================================================
</TABLE>
(a) Other represents revenue attributable to unallocated capital and run-off
business.
The Company's revenue was derived almost entirely from U.S. domestic business.
Revenue attributable to foreign countries was insignificant.
The Company had no transactions with a single customer representing 10% or more
of its revenue.
F-37
<PAGE> 80
STATEMENT OF ADDITIONAL INFORMATION
SEPARATE ACCOUNT SEVEN
Individual Variable Annuity Contract
issued by
The Travelers Insurance Company
One Tower Square
Hartford, Connecticut 06183
May, 1999
L-21258S
<PAGE> 81
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 Prospectus. The consolidated financial statements of The
Travelers Insurance Company and Subsidiaries include:
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Changes in Retained Earnings and
Accumulated Other Changes in Equity from Non-Owner Sources for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
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 30, 1998.)
2. Not Applicable.
3(a). Form of Distribution and Principal Underwriting Agreement among the
Registrant, The Travelers Insurance Company and CFBDS, Inc. (Incorporated
herein by reference to Exhibit 3(a) to Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-4, File No. 333-60227 filed November
9, 1998)
3(b). Form of Selling Agreement. (Incorporated herein by reference to
Exhibit 3(b) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-4, File No. 333-60227 filed November 9, 1998)
4. Variable Annuity Contract. (Incorporated herein by reference to Exhibit 4
to Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-4, File No. 333-60227 filed November 9, 1998)
5. Application. (Incorporated herein by reference to Exhibit 5 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-4,
File No. 333-60227 filed November 9, 1998)
6(a). Charter of The Travelers Insurance Company, as amended on October 19,
1994. (Incorporated herein by reference to Exhibit 6(a) to the
Registration Statement on Form N-4, File No. 333-40193, filed November 13,
1998.)
<PAGE> 82
6(b). By-Laws of The Travelers Insurance Company, as amended on October 20,
1994. (Incorporated herein by reference to Exhibit 6(b) to the
Registration Statement on Form N-4, File No. 333-40193, filed November 13,
1998.)
9. Opinion of Counsel as to the legality of securities being registered.
(Incorporated herein by reference to Exhibit 3(a) to the Registration
Statement on Form N-4, filed July 30, 1998.).
10. Consent of KPMG LLP, Independent Certified Public Accountants.
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, File No. 333-60227 filed November 9, 1998)
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 30,
1998.).
15(b).Powers of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as
signatory for J. Eric Daniels and Jay S. Benet.
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
J. Eric Daniels* President and Chief Executive Officer
Jay S. Benet* Director, Senior Vice President
Chief Financial Officer, Chief
Accounting Officer and Controller
George C. Kokulis* Director and Senior Vice President
Robert I. Lipp* Director
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
Kathleen Preston* Senior Vice President
David A. Tyson* Senior Vice President
F. Denney Voss* Senior Vice President
Ambrose J. Murphy* Deputy General Counsel
Virginia M. Meany* Vice President
</TABLE>
<PAGE> 83
<TABLE>
<S> <C>
Selig Ehrlich* Vice President and Actuary
Donald R. Munson, Jr.* Second Vice President
Anthony Cocolla Second Vice President
Scott R. Hansen Second Vice President
Ernest J. Wright* Vice President and Secretary
Kathleen A. McGah* Assistant Secretary and Counsel
</TABLE>
Principal Business Address:
* The Travelers Insurance Company ** Citigroup Inc.
One Tower Square 388 Greenwich Street
Hartford, CT 06183 New York, N.Y. 10013
*** Travelers Portfolio Group
1345 Avenue of the Americas
New York, NY 10105
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant
Incorporated herein by reference to Exhibit 16 to Post-Effective Amendment
No. 2 to the Registration Statement on Form N-4, File No. 333-27689, filed April
16, 1999.
Item 27. Number of Contract Owners
Not applicable.
Item 28. Indemnification
Sections 33-770 to 33-778, inclusive of the Connecticut General Statutes
("C.G.S.") regarding indemnification of directors and officers of Connecticut
corporations provides in general that Connecticut corporations shall indemnify
their officers, directors and certain other defined individuals against
judgments, fines, penalties, amounts paid in settlement and reasonable expenses
actually incurred in connection with proceedings against the corporation. The
corporation's obligation to provide such indemnification generally does not
apply unless (1) the individual is wholly successful on the merits in the
defense of any such proceeding; or (2) a determination is made (by persons
specified in the statute) that the individual acted in good faith and in the
best interests of the corporation and in all other cases, his conduct was at
least not opposed to the best interests of the corporation, and in a criminal
case he had no reasonable cause to believe his conduct was unlawful; or (3) the
court, upon application by the individual, determines in view of all of the
circumstances that such person is fairly and reasonably entitled to be
indemnified, and then for such amount as the court shall determine. With respect
to proceedings brought by or in the right of the corporation, the statute
provides that the corporation shall indemnify its officers, directors and
certain other defined individuals, against reasonable expenses actually incurred
by them in connection with such proceedings, subject to certain limitations.
Citigroup Inc. also provides liability insurance for its directors and officers
and the directors and officers of its subsidiaries, including the Registrant.
This insurance provides for coverage against loss from claims made against
directors and officers in their capacity as such, including, subject to certain
exceptions, liabilities under the federal securities laws.
<PAGE> 84
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 liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 29. Principal Underwriter
(a) CFBDS, Inc.
21 Milk Street
Boston, MA 02109
CFBDS, Inc. also serves as principal underwriter for the following :
(a) CFBDS, the Registrant's Distributor, is also the distributor for
CitiFunds(SM) International Growth & Income Portfolio, CitiFunds(SM)
International Growth Portfolio, CitiFunds(SM) U.S. Treasury Reserves,
CitiFunds(SM) Cash Reserves, CitiFunds(SM) Premium U.S. Treasury Reserves,
CitiFunds(SM) Premium Liquid Reserves, CitiFunds(SM) Institutional U.S. Treasury
Reserves, CitiFunds(SM) Institutional Liquid Reserves, CitiFunds(SM)
Institutional Cash Reserves, CitiFunds(SM) Tax Free Reserves, CitiFunds(SM)
Institutional Tax Free Reserves, CitiFunds(SM) California Tax Free Reserves,
CitiFunds(SM) Connecticut Tax Free Reserves, CitiFunds(SM) New York Tax Free
Reserves, CitiFunds(SM) New York Tax Free Income Portfolio, CitiFunds(SM)
National Tax Free Income Portfolio, CitiFunds(SM) California Tax Free Income
Portfolio, CitiFunds(SM) Intermediate Income Portfolio, CitiFunds(SM) Balanced
Portfolio, CitiFunds(SM) all Cap Value Portfolio, CitiFunds(SM) Growth & Income
Portfolio, CitiFunds(SM) Large Cap Growth Portfolio, CitiFunds(SM) Small Cap
Growth Portfolio, CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect
VIP Folio 400, CitiSelect VIP Folio 500, CitiFunds(SM) all Cap Growth VIP
Portfolio, CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect Folio 400, and
CitiSelect Folio 500. CFBDS is also the placement agent for Large Cap Value
Portfolio, Small Cap Value Portfolio, International Portfolio, Foreign Bond
Portfolio, Intermediate Income Portfolio, Short-Term Portfolio, Growth & Income
Portfolio, U.S. Fixed Income Portfolio, Large Cap Growth Portfolio, Small Cap
Growth Portfolio, International Equity Portfolio, Balanced Portfolio, Government
Income Portfolio, Tax Free Reserves Portfolio, Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio. CFBDS also serves as the distributor for the
following funds: 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 II for Variable Annuities, The Travelers Separate Account PF
for Variable Annuities, The Travelers Separate Account PF II for Variable
Annuities, The Travelers Separate Account QP for Variable Annuities, The
Travelers Separate Account TM for Variable Annuities, The Travelers Separate
Account TM II for Variable Annuities, The Travelers Separate Account Five for
Variable Annuities, The Travelers Separate Account Six for Variable Annuities,
The Travelers Separate Account Seven for Variable Annuities, The Travelers
Separate Account Eight for Variable Annuities, The Travelers Fund UL for
Variable Life Insurance, The Travelers Fund UL II for Variable Life Insurance,
The Travelers Fund UL III for Variable Life Insurance, The Travelers Variable
Life Insurance Separate Account One, The Travelers Variable Life Insurance
Separate Account Two, The
<PAGE> 85
Travelers Variable Life Insurance Separate Account Three, The Travelers Variable
Life Insurance Separate Account Four, The Travelers Separate Account MGA, The
Travelers Separate Account MGA II, 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, Emerging Growth Fund, Government Fund, Growth
and Income Fund, International Equity Fund, Municipal Fund, Balanced
Investments, Emerging Markets Equity Investments, Government Money Investments,
High Yield Investments, Intermediate Fixed Income Investments, International
Equity Investments, International Fixed Income Investments, Large Capitalization
Growth Investments, Large Capitalization Value Equity Investments, Long-Term
Bond Investments, Mortgage Backed Investments, Municipal Bond Investments, Small
Capitalization Growth Investments, Small Capitalization Value Equity
Investments, Appreciation Portfolio, Diversified Strategic Income Portfolio,
Emerging Growth Portfolio, Equity Income Portfolio, Equity Index Portfolio,
Growth & Income Portfolio, Intermediate High Grade Portfolio, International
Equity Portfolio, Money Market Portfolio, Total Return Portfolio, Smith Barney
Adjustable Rate Government Income Fund, Smith Barney Aggressive Growth Fund
Inc., Smith Barney Appreciation Fund, Smith Barney Arizona Municipals Fund Inc.,
Smith Barney California Municipals Fund Inc., Balanced Portfolio, Conservative
Portfolio, Growth Portfolio, High Growth Portfolio, Income Portfolio, Global
Portfolio, Select Balanced Portfolio, Select Conservative Portfolio, Select
Growth Portfolio, Select High Growth Portfolio, Select Income Portfolio, Concert
Social Awareness Fund, Smith Barney Large Cap Blend Fund, Smith Barney
Fundamental Value Fund Inc., Large Cap Value Fund, Short-Term High Grade Bond
Fund, U.S. Government Securities Fund, Smith Barney Balanced Fund, Smith Barney
Convertible Fund, Smith Barney Diversified Strategic Income Fund, Smith Barney
Exchange Reserve Fund, Smith Barney High Income Fund, Smith Barney Municipal
High Income Fund, Smith Barney Premium Total Return Fund, Smith Barney Total
Return Bond Fund, Cash Portfolio, Government Portfolio, Municipal Portfolio,
Concert Peachtree Growth Fund, Smith Barney Contrarian Fund, Smith Barney
Government Securities Fund, Smith Barney Hansberger Global Small Cap Value Fund,
Smith Barney Hansberger Global Value Fund, Smith Barney Investment Grade Bond
Fund, Smith Barney Special Equities Fund, Smith Barney Intermediate Maturity
California Municipals Fund, Smith Barney Intermediate Maturity New York
Municipals Fund, Smith Barney Large Capitalization Growth Fund, Smith Barney S&P
500 Index Fund, Smith Barney Mid Cap Blend Fund, Smith Barney Managed
Governments Fund Inc., Smith Barney Managed Municipals Fund Inc., Smith Barney
Massachusetts Municipals Fund, Cash Portfolio, Government Portfolio, Retirement
Portfolio, California Money Market Portfolio, Florida Portfolio, Georgia
Portfolio, Limited Term Portfolio, New York Money Market Portfolio, New York
Portfolio, Pennsylvania Portfolio, Smith Barney Municipal Money Market Fund,
Inc., Smith Barney Natural Resources Fund Inc., Smith Barney New Jersey
Municipals Fund Inc., Smith Barney Oregon Municipals Fund, Zeros Plus Emerging
Growth Series 2000, Smith Barney Security and Growth Fund, Smith Barney Small
Cap Blend Fund, Inc., Smith Barney Telecommunications Income Fund, Income and
Growth Portfolio, Reserve Account Portfolio, U.S. Government/High Quality
Securities Portfolio, Emerging Markets Portfolio, European Portfolio, Global
Government Bond Portfolio, International Balanced Portfolio, International
Equity Portfolio, Pacific Portfolio, AIM Capital Appreciation Portfolio,
Alliance Growth Portfolio, GT Global Strategic Income Portfolio, MFS Total
Return Portfolio, Putnam Diversified Income Portfolio, Smith Barney High Income
Portfolio, Smith Barney Large Cap Value Portfolio, Smith Barney International
Equity Portfolio, Smith Barney Large Capitalization Growth Portfolio, Smith
Barney Money Market Portfolio, Smith Barney Pacific Basin Portfolio, TBC Managed
Income Portfolio, Van Kampen American Capital Enterprise Portfolio, Centurion
Tax-Managed U.S. Equity Fund, Centurion Tax-Managed International Equity Fund,
Centurion U.S. Protection Fund, Centurion International Protection Fund, Global
High-Yield Bond Fund, International Equity Fund, Emerging Opportunities Fund,
Core Equity Fund, Long-Term Bond Fund, Global Dimensions Fund L.P., Citicorp
Private Equity L.P., AIM V.I. Capital Appreciation Fund, AIM V.I. Government
Series Fund, AIM V.I. Growth Fund, AIM V.I. International Equity Fund, AIM V.I.
Value Fund, Fidelity VIP Growth Portfolio, Fidelity VIP High Income
<PAGE> 86
Portfolio, Fidelity VIP Equity Income Portfolio, Fidelity VIP Overseas
Portfolio, Fidelity VIP II Contrafund Portfolio, Fidelity VIP II Index 500
Portfolio, MFS World Government Series, MFS Money Market Series, MFS Bond
Series, MFS Total Return Series, MFS Research Series, MFS Emerging Growth
Series, Salomon Brothers Institutional Money Market Fund, Salomon Brothers Cash
Management Fund, Salomon Brothers New York Municipal Money Market Fund, Salomon
Brothers National Intermediate Municipal Fund, Salomon Brothers U.S. Government
Income Fund, Salomon Brothers High Yield Bond Fund, Salomon Brothers Strategic
Bond Fund, Salomon Brothers Total Return Fund, Salomon Brothers Asia Growth
Fund, Salomon Brothers Capital Fund Inc, Salomon Brothers Investors Fund Inc,
Salomon Brothers Opportunity Fund Inc, Salomon Brothers Institutional High Yield
Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund, Salomon
Brothers Variable Investors Fund, Salomon Brothers Variable Capital Fund,
Salomon Brothers Variable Total Return Fund, Salomon Brothers Variable High
Yield Bond Fund, Salomon Brothers Variable Strategic Bond Fund, Salomon Brothers
Variable U.S. Government Income Fund, and Salomon Brothers Variable Asia Growth
Fund.
(b) The information required by this Item 29 with respect to each director and
officer of CFBDS, Inc. is incorporated by reference to Schedule A of Form BD
filed by CFBDS pursuant to the Securities and Exchange Act of 1934 (File No.
8-32417).
(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> 87
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 30th day of
April, 1999.
THE TRAVELERS SEPARATE ACCOUNT SEVEN FOR VARIABLE ANNUITIES
(Registrant)
THE TRAVELERS INSURANCE COMPANY
(Depositor)
By: *JAY S. BENET
------------------------------------
Jay S. Benet
Senior Vice President,
Chief Financial Officer
Chief Accounting Officer and Controller
As required by the Securities Act of 1933, this post-effective amendment to this
registration statement has been signed by the following persons in the
capacities indicated on the 30th day of April 1999.
<TABLE>
<S> <C>
*MICHAEL A. CARPENTER Director and Chairman of the Board
- ---------------------------------
(Michael A. Carpenter)
*J. ERIC DANIELS Director, President and Chief Executive Officer
- ---------------------------------
(J. Eric Daniels)
*JAY S. BENET Director, Senior Vice President, Chief
- --------------------------------- Financial Officer, Chief Accounting Officer
(Jay S. Benet) and Controller
*GEORGE C. KOKULIS Director
- ---------------------------------
(George C. Kokulis
*ROBERT I. LIPP Director
- ---------------------------------
(Robert I. Lipp)
*KATHERINE M. SULLIVAN Director, Senior Vice President and
- --------------------------------- General Counsel
(Katherine M. Sullivan)
*MARC P. WEILL Director
- ---------------------------------
(Marc P. Weill)
</TABLE>
*By: /s/Ernest J. Wright, Attorney-in-Fact
<PAGE> 88
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- --- ----------- ----------------
<S> <C> <C>
10. Consent of KPMG LLP, Independent Electronically
Certified Public Accountants.
15(b). Powers of Attorney authorizing Electronically
Ernest J. Wright or Kathleen A.
McGah as signatory for J. Eric
Daniels and Jay S. Benet
</TABLE>
<PAGE> 1
Consent of Independent Certified Public Accountants
---------------------------------------------------
The Board of Directors
The Travelers Insurance Company:
We consent to the use of our report included herein and to the reference to our
firm as experts under the heading "Independent Accountants."
KPMG LLP
Hartford, Connecticut
April 30, 1999
<PAGE> 1
THE TRAVELERS SEPARATE ACCOUNT SEVEN FOR VARIABLE ANNUITIES
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, J. ERIC DANIELS of Farmington, Connecticut, Director, President
and Chief Executive Officer of The Travelers Insurance Company (hereafter the
"Company"), do hereby make, constitute and appoint ERNEST J. WRIGHT, Secretary
of said Company, and KATHLEEN A. McGAH, Assistant Secretary of said Company, or
either one of them acting alone, my true and lawful attorney-in-fact, for me,
and in my name, place and stead, to sign registration statements on behalf of
said Company on Form N-4 or other appropriate form under the Securities Act of
1933 and the Investment Company Act of 1940 for The Travelers Separate Account
Seven for Variable Annuities, a separate account of the Company dedicated
specifically to the funding of variable annuity contracts to be offered by said
Company, and further, to sign any and all amendments thereto, including
post-effective amendments, that may be filed by the Company on behalf of said
registrant.
IN WITNESS WHEREOF, I have hereunto set my hand this 15th day of January
1999.
/s/ J. Eric Daniels
Director, President and Chief Executive Officer
The Travelers Insurance Company
<PAGE> 2
THE TRAVELERS SEPARATE ACCOUNT SEVEN FOR VARIABLE ANNUITIES
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, JAY S. BENET of West Hartford, Connecticut, Director, Senior Vice
President and Chief Financial Officer, Chief Accounting Officer and Controller
of The Travelers Insurance Company (hereafter the "Company"), do hereby make,
constitute and appoint ERNEST J. WRIGHT, Secretary of said Company, and KATHLEEN
A. McGAH, Assistant Secretary of said Company, or either one of them acting
alone, my true and lawful attorney-in-fact, for me, and in my name, place and
stead, to sign registration statements on behalf of said Company on Form N-4 or
other appropriate form under the Securities Act of 1933 and the Investment
Company Act of 1940 for The Travelers Separate Account Seven for Variable
Annuities, a separate account of the Company dedicated specifically to the
funding of variable annuity contracts to be offered by said Company, and
further, to sign any and all amendments thereto, including post-effective
amendments, that may be filed by the Company on behalf of said registrant.
IN WITNESS WHEREOF, I have hereunto set my hand this 15th day of January
1999.
/s/ Jay S. Benet
Director, Senior Vice President
Chief Financial Officer,
Chief Accounting Officer and
Controller
The Travelers Insurance Company
