<PAGE> 1
Registration No. 33-88576
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 4
to
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
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A. Exact Name of Trust: THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
B. Name of Depositor: THE TRAVELERS INSURANCE COMPANY
C. Complete Address of Depositor's
Principal Executive Offices:
One Tower Square,
Hartford, Connecticut 06183
D. Name and Complete Address of Agent
for Service:
Ernest J. Wright, Secretary
The Travelers Insurance Company
One Tower Square
Hartford, Connecticut 06183
</TABLE>
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b)
X on May 1, 1999 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
on __________ pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following box:
this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Check the box if it is proposed that this filing will become effective
on ____ at ___ pursuant to Rule 487. ______
<PAGE> 2
RECONCILIATION AND TIE BETWEEN
FORM N-8B-2 AND PROSPECTUS
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Item No. of
Form N-8B-2 CAPTION IN PROSPECTUS
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1 Cover page
2 Cover page
3 Safekeeping of the Separate Account's Assets
4 Distribution of the Policy
5 The Separate Account
6 The Separate Account
7 Not applicable
8 Not applicable
9 Legal Proceedings and Opinion
10 Prospectus Summary; The Insurance Company; The Separate
Account; The Investment Options; The Policy; Transfers of Cash
Value; Policy Surrenders and Cash Surrender Value; Voting
Rights; Dividends
11 The Separate Account; The Investment Options
12 The Investment Options
13 Charges and Deductions; Distribution of the Policies
14 The Policy
15 The Policy
16 The Separate Account; The Investment Options; Allocation of
Premium Payments
17 Prospectus Summary; Right to Cancel Period; Policy Surrenders
and Cash Surrender Value; Policy Loans; Exchange Rights
18 The Investment Options; Charges and Deductions; Federal Tax
Considerations
19 Reports to Policy Owners
20 The Insurance Company
21 Policy Loans
22 Not applicable
23 Not applicable
24 Not applicable
25 The Insurance Company
26 Not applicable
27 The Insurance Company
28 The Insurance Company; Management
29 The Insurance Company
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 Distribution of the Policy
36 Not applicable
37 Not applicable
38 Distribution of the Policy
39 Distribution of the Policy
40 Not applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Item No. of
Form N-8B-2 CAPTION IN PROSPECTUS
<S> <C>
41 Distribution of the Policy
42 Not applicable
43 Not applicable
44 Valuation of the Separate Account
45 Not applicable
46 The Policy; Valuation of the Separate Account; Transfers of
Cash Value; Policy Surrenders and Cash Surrender Value
47 The Separate Account; The Investment Options
48 The Insurance Company
49 Safekeeping of the Separate Account's Assets
50 Not applicable
51 Prospectus Summary; The Insurance Company; The Policy; Death
Benefits; Policy Lapse and Reinstatement
52 The Separate Account; The Investment Options; Investment
Managers
53 Federal Tax Considerations
54 Not applicable
55 Not applicable
56 Not applicable
57 Not applicable
58 Not applicable
59 Financial Statements
</TABLE>
<PAGE> 4
VINTAGELIFE
INDIVIDUAL VARIABLE LIFE INSURANCE POLICY
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<S> <C>
PROSPECTUSES
THE TRAVELERS SEPARATE ACCOUNT THREE
TRAVELERS SERIES TRUST MAY 1, 1999
</TABLE>
<PAGE> 5
PROSPECTUS
This Prospectus describes VintageLife, a modified single premium individual
variable life insurance policy (the "Policy") offered by The Travelers Insurance
Company (the "Company") and funded by The Travelers Variable Life Insurance
Separate Account Three ("Separate Account Three"). Separate Account Three
invests in certain mutual funds that are referred to in this Prospectus as
"Investment Options." Although the Policy can operate as a single premium
policy, additional premium payments may be made under certain circumstances
provided there are no outstanding policy loans. The minimum Initial Premium
required to issue a Policy is $25,000.
During the Policy's Right to Cancel Period, the Applicant may return the Policy
to the Company for a refund. The Right to Cancel Period expires on the latest of
ten days after you receive the Policy, ten days after we mail or deliver to you
a written Notice of Right to Cancel, or 45 days after the applicant signs the
application for insurance (or later, if state law requires).
There is no guaranteed minimum Cash Value for a Policy. The Cash Value of the
Policy will vary to reflect the investment performance of the Investment Options
to which you have directed your premium payments. You bear the investment risk
under the policy. The Cash Value is reduced by the various fees and charges
assessed under the Policy, as described in this Prospectus. The Policy will
remain in effect for as long as the Cash Surrender Value can pay the monthly
Policy charges, subject to the Grace Period provision.
We offer two death benefits under the Policy -- the "Level Option" and the
"Variable Option." Under either option, the death benefit will never be less
than the Amount Insured (less any outstanding Policy loans or Monthly Deduction
Amounts due and unpaid). You choose one at the time you apply for the Policy,
however, you may change the death benefit option, subject to certain conditions.
Because the Policy is designed to operate generally as a single premium policy,
in all but very limited circumstances the Policy will be treated as a modified
endowment contract for federal income tax purposes. Policy surrender or loan may
result in adverse tax consequences or penalties.
REPLACING EXISTING INSURANCE WITH THIS POLICY MAY NOT BE TO YOUR ADVANTAGE.
EACH OF THE INVESTMENT OPTION PROSPECTUSES ARE INCLUDED WITH THE PACKAGE
CONTAINING THIS PROSPECTUS. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR
FUTURE REFERENCE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
VARIABLE LIFE INSURANCE POLICIES ARE NOT DEPOSITS OF ANY BANK AND ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY OTHER
GOVERNMENT AGENCY.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1999.
<PAGE> 6
TABLE OF CONTENTS
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Glossary Of Special Terms.................. 3
Prospectus Summary......................... 5
General Description........................ 10
How The Policy Works....................... 10
Payments Made Under the Policy......... 10
Applying Premium Payments.............. 11
The Investment Options..................... 12
Policy Benefits and Rights................. 14
Transfers of Cash Values................. 14
Telephone Transfers...................... 14
Automated Transfers...................... 14
Lapse and Reinstatement.................. 14
Exchange Rights.......................... 15
Right to Cancel.......................... 15
Access to Cash Value....................... 15
Policy Loans........................... 15
Cash Value and Cash Surrender Value.... 16
Death Benefit.............................. 17
Payment of Proceeds.................... 18
Payment Options........................ 19
Maturity Benefits.......................... 19
Maturity Extension Rider................. 19
Charges and Deductions..................... 20
Monthly Deduction Amount................... 20
Cost of Insurance Charge............... 20
State Premium Tax Charge............... 20
Charges for Supplemental Benefit
Provisions........................... 20
Charges Against the Separate Account
Provisions............................. 20
Mortality and Expense Risk Charge...... 20
Administrative Expense Risk Charge..... 20
Underlying Fund Fees..................... 20
Surrender Charges........................ 21
Partial Surrenders..................... 21
Free Withdrawal Allowance.............. 21
Transfer Charge.......................... 21
Reduction or Elimination of Charges...... 21
The Separate Account and Valuation......... 22
The Travelers Variable Life Insurance
Separate Account Three................. 22
How the Cash Value Varies.............. 22
Accumulation Unit Value................ 22
Net Investment Factor.................. 23
Changes To The Policy...................... 23
General................................ 23
Changes in Stated Amount............... 23
Changes in Death Benefit Option........ 24
Additional Policy Provisions............... 24
Assignment............................... 24
Limit on Right to Contest and Suicide
Exclusion.............................. 24
Misstatement as to Sex and Age........... 24
Voting Rights............................ 24
Disregard of Voting Instructions......... 24
Other Matters.............................. 25
Statements to Policy Owners.............. 25
Suspension of Valuation.................. 25
Dividends................................ 25
Mixed and Shared Funding................. 25
Distribution............................. 26
Legal Proceedings and Opinion............ 26
Independent Accountants.................. 26
Federal Tax Considerations................. 26
General.................................. 26
Tax Status of the Policy................. 27
Definition of Life Insurance........... 27
Diversification........................ 27
Investor Control....................... 27
Tax Treatment of Policy Benefits......... 28
In General............................. 28
Modified Endowment Contracts........... 28
Exchanges.............................. 29
Aggregation of Modified Endowment
Contracts............................ 29
Policies which are not Modified
Endowment Contracts.................. 29
Treatment of Loan Interest............. 30
The Company's Income Taxes............. 30
The Company................................ 30
IMSA..................................... 30
Year 2000 Compliance..................... 31
Management................................. 31
Directors of The Travelers Insurance
Company................................ 31
Senior Officers of The Travelers
Insurance Company...................... 32
Illustrations.............................. 33
Appendix A-Performance Information......... 39
Appendix B-Representative Stated Amounts... 41
Financial Statements of the Separate
Account..................................
Financial Statements of the Company
</TABLE>
2
<PAGE> 7
GLOSSARY OF SPECIAL TERMS
- --------------------------------------------------------------------------------
The following terms are used throughout the Prospectus and have the indicated
meanings:
ACCUMULATION UNIT -- a standard of measurement used to calculate the values
allocated to the Investment Options.
AVERAGE NET GROWTH RATE -- an annual measurement of growth, used to determine
the next year's mortality and expense risk charge. For each Policy Owner, the
rate is determined each Policy Year as follows: total daily earnings of the
Investment Option(s) you select, divided by the average amount you allocated
during the Policy Year. The daily earnings are measured using the net asset
value per share of the Investment Options.
BENEFICIARY(IES) -- the person(s) named to receive the Death Benefit following
the Insured's death.
CASH SURRENDER VALUE -- the Cash Value less any outstanding policy loan and
surrender charges.
CASH VALUE -- the current value of Accumulation Units credited to each of the
Investment Options available under the Policy, plus the value of the Loan
Account.
COMPANY'S HOME OFFICE -- the principal executive offices of The Travelers
Insurance Company located at One Tower Square, Hartford, Connecticut 06183.
COVERAGE AMOUNT -- an amount equal to the Death Benefit minus the Cash Value.
DEATH BENEFIT -- the amount payable to the Beneficiary if the Insured dies while
the Policy is in force.
DEDUCTION DATE -- the day in each Policy Month on which the Monthly Deduction
Amount is deducted from the Policy's Cash Value.
GRACE PERIOD -- the period during which the Policy remains in force after the
Company has given notice to the Policy Owner that the Cash Surrender Value of
the Policy is insufficient to pay the Monthly Deduction Amount due.
INITIAL PREMIUM -- the Premium Payment made in connection with the issuance of a
Policy.
INSURED -- the person on whose life the Policy is issued.
INVESTMENT OPTIONS -- the open-end management investment companies or portfolios
thereof to which you may allocate premiums and Cash Value under Separate Account
Three.
ISSUE DATE -- the date on which the Policy is issued by the Company for delivery
to the Policy Owner.
LOAN ACCOUNT -- an account in the Company's general account to which we transfer
the amount of any policy loan, and to which we credit and charge a fixed rate of
interest.
LOAN ACCOUNT VALUE -- the amount of any policy loan, plus capitalized loan
interest, plus the net rate of return credited to the Loan Account.
MATURITY DATE -- the anniversary of the Policy Date on which the Insured is age
100.
MINIMUM AMOUNT INSURED -- a percentage of Cash Value required to qualify this
Policy as life insurance under federal tax law.
MONTHLY DEDUCTION AMOUNT -- a monthly charge, deducted from the Policy's Cash
Value, which is comprised of the Cost of Insurance charge, the deduction for
premium tax, any administrative charge, and any charge for supplemental
benefits.
POLICY DATE -- the date on which the Policy becomes effective, which date is
used to determine all future cyclical transactions under the Policy (i.e.,
Deduction Dates, Policy Months, Policy Years).
POLICY MONTH -- monthly periods computed from the Policy Date.
POLICY OWNER (YOU, YOUR OR OWNER) -- the person(s) having rights to benefits
under the Policy during the lifetime of the Insured; the Policy Owner may or may
not be the Insured.
POLICY YEARS -- annual periods computed from the Policy Date.
3
<PAGE> 8
SEPARATE ACCOUNT THREE -- The Travelers Variable Life Insurance Separate Account
Three, a separate account established by The Travelers Insurance Company for the
purpose of funding this Policy.
STATED AMOUNT -- the amount used to determine the Death Benefit under the
Policy.
VALUATION DATE -- a day on which Accumulation Units are valued. A Valuation Date
is any day on which the New York Stock Exchange is open for trading. The value
of Accumulation Units will be determined as of the close of trading on the New
York Stock Exchange.
VALUATION PERIOD -- the period between the close of business on successive
Valuation Dates.
4
<PAGE> 9
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
WHAT IS VARIABLE LIFE INSURANCE?
The Modified single premium individual variable life insurance policy is
designed to provide insurance protection on the life of the Insured and to build
Cash Value. Like other life insurance it provides an income tax free death
benefit that is payable to the Beneficiary upon the Insured's death. Unlike
traditional fixed-premium life insurance, the Policy allows you, as the owner,
to allocate your premium, or transfer Cash Value to various Investment Options.
These Investment Options include equity, bond, money market and other types of
portfolios. Your Cash Value may increase or decrease daily, depending on
investment return. There is no minimum amount guaranteed as it would be in a
traditional life insurance policy.
The Policy has a Death Benefit, Cash Surrender Value and other features
traditionally associated with a fixed benefit whole life insurance policy. The
Policy is "variable" because unlike the fixed benefits of an ordinary whole life
insurance contract, the Cash Value and, under certain circumstances, the Death
Benefit of the Policy may increase or decrease depending on the investment
experience of the Investment Options to which the premium payment(s) and cash
value have been allocated. The Cash Value will also vary to reflect partial cash
surrenders and Monthly Deduction Amounts. In accordance with the Continuation of
Insurance provision of the Policy, the Policy will remain in effect until the
Cash Surrender Value is insufficient to cover the Monthly Deduction Amount and
loan interest due but not paid. There is no minimum guaranteed Cash Value or
Cash Surrender Value and the Policy Owner bears the investment risk associated
with an investment in the Investment Options. (See "Valuation of the Separate
Account.")
SUMMARY OF VINTAGELIFE FEATURES
INVESTMENT OPTIONS: The Policy is funded by The Travelers Variable Life
Insurance Separate Account Three ("Separate Account Three"), a registered unit
investment trust separate account established by The Travelers Insurance Company
(the "Company"). A Policy Owner allocates premium payments to one or more of the
Investment Options available to Separate Account Three. You have the ability to
choose from a wide variety of well-known Investment Options. These
professionally managed stock, bond and money market funding options cover a
broad spectrum of investment objectives and risk tolerance. The following
Investment Options are currently available under the Policy:
GREENWICH STREET SERIES FUND
Total Return Portfolio
SMITH BARNEY CONCERT ALLOCATION SERIES, INC.
Concert Select Balanced Portfolio
Concert Select Conservative Portfolio
Concert Select Growth Portfolio
Concert Select High Growth Portfolio
Concert Select Income Portfolio
TRAVELERS SERIES FUND, INC.
AIM Capital Appreciation Portfolio
Alliance Growth Portfolio
MFS Total Return Portfolio
Putnam Diversified Income Portfolio
Smith Barney High Income Portfolio
Smith Barney International Equity Portfolio
Smith Barney Large Cap Value Portfolio
Smith Barney Money Market Portfolio
The Travelers Managed Income Portfolio
Van Kampen Enterprise Portfolio
TRAVELERS SERIES TRUST
MFS Emerging Growth Portfolio
Zero Coupon Bond Portfolio 2000
Zero Coupon Bond Portfolio 2005
Additional Portfolios may be added from time to time. For more information see
"The Investment Options." Refer to each Investment Option's prospectus for a
complete description of the investment objectives, restrictions and other
material information.
PREMIUMS: The minimum Initial Premium is $25,000. Although the Policy can
operate as a single premium policy, you can make additional payments under
certain circumstances, provided there
5
<PAGE> 10
are no outstanding policy loans. If there are any outstanding loans, any payment
received will be treated first as a repayment of the loan rather than an
additional premium payment. (See "Additional Premium Payments.") No premiums can
be accepted if they would disqualify the Policy as life insurance under federal
tax law.
You indicate on your application what percentage of each Net Premium you would
like allocated to the Investment Options. You may change your allocations by
writing to the Company or by calling 1-800-334-4298.
After the Policy Date and until the applicant's right to cancel has expired, the
Initial Premium will be allocated to the Smith Barney Money Market Portfolio.
After the expiration of the Right to Cancel Period, the cash value will be
distributed to each Investment Options in the percentages indicated on your
application.
RIGHT TO EXAMINE POLICY: You may return your Policy for any reason and receive
a full refund of your premium by mailing us the Policy and a written request for
cancellation within a specified period.
DEATH BENEFITS: At time of application, you select a death benefit option.
Under certain conditions you may be able to change the death benefit option at a
later date. The options available are:
- LEVEL OPTION (OPTION 1): the death benefit will be equal to the greater
of the Stated Amount or the Minimum Amount Insured.
- VARIABLE OPTION (OPTION 2): the death benefit will be equal to the
greater of the Stated Amount plus the Cash Value or the Minimum Amount
Insured.
POLICY VALUES: As with other types of insurance policies, VintageLife will
accumulate a Cash Value. The Cash Value of the Policy will increase or decrease
to reflect the investment experience of the Investment Options. Monthly charges
and any partial surrenders taken will also decrease the Cash Value. There is no
minimum guaranteed Cash Value.
- ACCESS TO POLICY VALUES: You may borrow against your Policy's Cash
Surrender Value. The maximum loan amount allowable is 90% of the Cash
Surrender Value, subject to state approval. The Company will charge
interest on the outstanding amounts of the loan, which interest must be
paid by you in advance.
You may cancel all or a portion of your Policy while the Insured is living and
receive all or a portion of the Cash Surrender Value. Depending on the amount of
time the Policy has been in force, there may be a charge for the partial or full
surrender.
TRANSFERS OF POLICY VALUES: You may transfer all or a portion of your Cash
Value among the Investment Options. You may do this by writing to the Company or
calling 1-800-334-4298.
GRACE PERIOD: If the Cash Surrender Value of your Policy becomes less than the
amount needed to pay the Monthly Deduction Amount, you will have 61 days to pay
a premium that is sufficient to cover the Monthly Deduction Amount. If the
premium is not paid, your Policy will lapse.
EXCHANGE RIGHTS: During the first two Policy Years, you can exchange this
Policy for one that provides benefits that do not vary with the investment
return of the Investment Options.
TAX CONSEQUENCES: Currently, the federal tax law excludes all Death Benefit
payments from the gross income of the Beneficiary. In almost all cases, the
Policy will be a modified endowment contract ("MEC"). A MEC has an income-first
taxation of all loans, pledges, collateral assignments or partial surrenders. A
10% penalty tax may be imposed on such income distributed before the Policy
Owner attains age 59 1/2. Policies which are not MECs receive preferential tax
treatment with respect to certain distributions.
CHARGES AND DEDUCTIONS: Your Policy is subject to the following charges, which
compensate the Company for administering and distributing the Policy, as well as
paying Policy benefits and assuming related risks. These charges are summarized
below, and explained in detail under "Charges and Deductions."
6
<PAGE> 11
POLICY CHARGES:
- MONTHLY DEDUCTION -- deductions taken from the value of your Policy each
month to cover cost of insurance charges, the deduction for premium tax
and any charges for optional benefits.
- FULL SURRENDER CHARGE -- applies if you surrender your Policy for its
full Cash Value or the Policy lapses, during the first 9 years and for 9
years after requesting an increase in coverage. The surrender charge
consists of a percent of premium charge and a per thousand of face amount
charge.
- PARTIAL SURRENDER CHARGE -- applies if you surrender part of the value of
your Policy.
ASSET-BASED CHARGES:
- MORTALITY AND EXPENSE RISK CHARGE -- applies to the assets of the
Investment Options on a daily basis which equals an annual rate of .90%.
This rate is reduced to .75% for the current policy year if the Average
Net Growth Rate is 6.5% or greater during the previous policy year.
- ADMINISTRATIVE EXPENSE CHARGE -- applies to the assets of the Investment
Options on a daily basis which equals an annual rate of .40%.
- UNDERLYING FUND FEES -- the separate account purchases shares of the
Underlying Funds on a net asset value basis. The shares purchased already
reflect the deduction of investment advisory fees and other expenses.
These fees are shown below as a percentage of average daily net assets of
each Investment Option as of December 31,1998 unless noted otherwise.
7
<PAGE> 12
VINTAGELIFE
1999 FUND EXPENSES
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MANAGEMENT OTHER TOTAL
FUND NAME FEE EXPENSES EXPENSES
- ------------------------------------------------------------ ---- ---- -----
GREENWICH STREET SERIES FUND:
- ----------------------------------------------------------------------------------------------
Total Return Portfolio 0.75% 0.04% 0.79%
- ----------------------------------------------------------------------------------------------
SMITH BARNEY CONCERT ALLOCATION SERIES, INC.:
- ----------------------------------------------------------------------------------------------
Concert Select Balanced Portfolio(1) 0.00% 0.35% 0.35%
- ----------------------------------------------------------------------------------------------
Concert Select Conservative Portfolio(1) 0.00% 0.35% 0.35%
- ----------------------------------------------------------------------------------------------
Concert Select Growth Portfolio(1) 0.00% 0.35% 0.35%
- ----------------------------------------------------------------------------------------------
Concert Select High Growth Portfolio(1) 0.00% 0.35% 0.35%
- ----------------------------------------------------------------------------------------------
Concert Select Income Portfolio(1) 0.00% 0.35% 0.35%
- ----------------------------------------------------------------------------------------------
TRAVELERS SERIES FUND, INC.:
- ----------------------------------------------------------------------------------------------
AIM Capital Appreciation Portfolio(2) 0.80% 0.05% 0.85%
- ----------------------------------------------------------------------------------------------
Alliance Growth Portfolio(2) 0.80% 0.02% 0.82%
- ----------------------------------------------------------------------------------------------
MFS Total Return Portfolio(2) 0.80% 0.04% 0.84%
- ----------------------------------------------------------------------------------------------
Putnam Diversified Income Portfolio(2) 0.75% 0.12% 0.87%
- ----------------------------------------------------------------------------------------------
Smith Barney High Income Portfolio(2) 0.60% 0.07% 0.67%
- ----------------------------------------------------------------------------------------------
Smith Barney International Equity Portfolio(2) 0.90% 0.10% 1.00%
- ----------------------------------------------------------------------------------------------
Smith Barney Large Cap Value Portfolio(2) 0.65% 0.03% 0.68%
- ----------------------------------------------------------------------------------------------
Smith Barney Money Market Portfolio(2) 0.50% 0.14% 0.64%
- ----------------------------------------------------------------------------------------------
Travelers Managed Income Portfolio(2) 0.65% 0.19% 0.84%
- ----------------------------------------------------------------------------------------------
Van Kampen Enterprise Portfolio(2) 0.70% 0.03% 0.73%
- ----------------------------------------------------------------------------------------------
TRAVELERS SERIES TRUST:
- ----------------------------------------------------------------------------------------------
MFS Emerging Growth Portfolio 0.75% 0.14% 0.89%
- ----------------------------------------------------------------------------------------------
Zero Coupon Bond Fund Portfolio (Series 2000) 0.10% 0.05% 0.15%
- ----------------------------------------------------------------------------------------------
Zero Coupon Bond Fund Portfolio (Series 2005) 0.10% 0.05% 0.15%
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) The Concert Allocation Series Select Portfolios (a "fund of funds") invest
in the shares of other mutual funds. Other Expenses are 0.35% and there are
no management fees for these funds. See the Fund prospectus for information
regarding the equity/fixed income (including money market) investment target
and range for each portfolio, and for the expense ratios for the underlying
funds. Such ratios range from 0.50% to 1.29%.
(2) Expenses are as of October 31, 1998 (the Fund's fiscal year end). There were
no fees waived or expenses reimbursed for these funds in 1998.
8
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[THIS PAGE INTENTIONALLY LEFT BLANK.]
9
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GENERAL DESCRIPTION
- --------------------------------------------------------------------------------
This prospectus describes a modified single premium individual variable life
insurance Policy offered by The Travelers Insurance Company ("Company"). The
policy offers:
- A selection of investment options
- A choice of two death benefit options
- Loans and partial withdrawal privileges
- The ability to increase or decrease the Policy's face amount of insurance
This Policy is both an insurance product and a security. The Policy is first and
foremost a life insurance Policy with death benefits, Cash Values and other
features traditionally associated with life insurance. The Policy is a security
because the Cash Value and, under certain circumstances, the Amount Insured, and
Death Benefit may increase or decrease depending on the investment experience of
the Investment Options chosen.
THE APPLICATION. In order to become a policy owner, you must submit an
application to the Company. You must provide evidence of insurability. On the
application, you will also indicate:
- the amount of initial premium you plan to pay; minimum of $25,000
- your choice of the two death benefit options
- the beneficiary(ies), and whether or not the beneficiary is irrevocable
- your choice of investment options.
Our underwriting staff will review the application, and, if approved, we will
issue the Policy.
HOW THE POLICY WORKS
- --------------------------------------------------------------------------------
You make one premium payment and direct it to one or more of the available
investment options. (Under certain circumstances, you may be allowed to make
additional purchase payments). The policy's cash value will increase or decrease
depending on the performance of the investment options you select. In the case
of death benefit option 2, the death benefit will also vary based on the
investment options' performance.
If your Policy is in effect when the insured dies, we will pay your beneficiary
the death benefit (less any outstanding loan account balance and any monthly
deduction amount due but not paid). Your Policy will stay in effect as long as
the policy's cash surrender value can pay the policy's monthly charges.
Your Policy becomes effective once our underwriting staff has approved the
application and once the first premium payment has been made. The Policy Date is
the date we use to determine all future transactions on the policy, for example,
the deduction dates, policy months, policy years. The Policy Date may be before
or the same date as the Issue Date (the date the policy was issued). During the
underwriting period, any premium paid will be held in a non-interest bearing
account.
PAYMENTS MADE UNDER THE POLICY
INITIAL PREMIUM. The Initial Premium is due on or before the Policy Date and is
payable in full at the Company's Home Office. The Initial Premium is the
guideline single premium for the life insurance coverage provided under the
Policy, as determined in accordance with the Internal Revenue Code of 1986, as
amended (the "Code"). The minimum Initial Premium is $25,000. Additional Premium
Payments may be made under the Policy, as described below. However, if there are
any outstanding policy loans, any payment received will be treated first as
repayment of loans rather than as an additional Premium Payment.
10
<PAGE> 15
The Initial Premium purchases a Death Benefit equal to the Policy's Stated
Amount (if Option 1 is selected), or to the Policy's Stated Amount plus the Cash
Value (if Option 2 is selected). The relationship between the Initial Premium
and the Stated Amount depends on the age, sex (where permitted by state law) and
risk class of the Insured. Generally, the same Initial Premium will purchase a
higher Stated Amount for a younger insured than for an older insured. Likewise,
the same Initial Premium will purchase a slightly higher Stated Amount for a
female insured than for a male insured of the same age. Also, the same Initial
Premium will purchase a higher Stated Amount for a standard Insured than for a
substandard Insured. Representative Stated Amounts per dollar of Initial Premium
are set forth in Appendix B.
ADDITIONAL PREMIUM PAYMENTS. The circumstances under which additional Premium
Payments can be made under the Policy are as follows:
1. INCREASES IN STATED AMOUNT -- You may request an increase in Stated
Amount at any time. If your request is approved, the Company will
require you to make an additional Premium Payment in order for an
increase in Stated Amount to become effective. The minimum additional
Premium Payment permitted by the Company in connection with an increase
in Stated Amount is $1,000. (See "Changes in Stated Amount.")
2. TO PREVENT LAPSE -- If the Cash Surrender Value on any Deduction Day is
insufficient to cover the Monthly Deduction Amount or loan interest due
but not paid, then you must make an additional Premium Payment during
the Grace Period sufficient to cover the Monthly Deduction Amount and
loan interest due in order to prevent lapse. The minimum amount of any
payment that may be required to be made in this circumstance will be
stated in the notice mailed to you in accordance with the Policy;
payments in excess of the amount required to prevent lapse will be
considered a payment "at your discretion" and consequently subject to
the rules described below. If you do not make a sufficient payment, the
Policy will lapse and terminate without value. (See "Lapse and
Reinstatement.")
3. AT YOUR DISCRETION -- Additional Premium Payments may be made at your
discretion so long as the payment plus the total of all premiums
previously paid does not exceed the maximum premium limitation derived
from the guideline premium test for life insurance prescribed by the
Code. Because of the test, the maximum premium limitation will
ordinarily equal the Initial Premium for a number of years after the
Policy has been issued. Therefore, discretionary additional Premium
Payments normally will not be permitted during the early years of the
Policy. Discretionary additional Premium Payments must be at least $250,
and may not be paid on or after the Maturity Date.
Any Additional Premium Payments made under the Policy may be subject to new
evidence of insurability. Payments received in excess of any Loan Account Value
will be treated as an additional Premium Payment.
APPLYING PREMIUM PAYMENTS
We apply the first premium on the later of the Policy Date or the date we
receive it at our Home Office. During the Right to Cancel Period, we allocate
net premiums to the Smith Barney Money Market Portfolio. At the end of the Right
to Cancel Period, we direct the net premiums to the investment option(s)
selected on the application, unless you give us other directions.
The investment options are segments of the separate account. They correspond to
underlying funds with the same names. The available investment options are
listed below.
We credit your policy with accumulation units of the investment option(s) you
have selected. We calculate the number of accumulation units by dividing your
net premium payment by each investment option's accumulation unit value computed
after we receive your payment.
11
<PAGE> 16
THE INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
You may allocate Premium Payments to one or more of the available Investment
Options. The Investment Options currently available under the Policy may be
added, withdrawn or substituted as permitted by applicable state or federal law.
We would notify you before making such a change. Please read carefully the
complete risk disclosure in each Portfolio's prospectus before investing. For
more detailed information on the investment advisers and their services and
fees, please refer to the prospectuses for the Investment Options.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GREENWICH STREET SERIES FUND
Total Return Portfolio An equity portfolio that seeks to provide SSBC Fund Management Inc.
total return, consisting of long-term ("SSBC")
capital appreciation and income. The
Portfolio will invest primarily in a
diversified portfolio of dividend-paying
common stocks
SMITH BARNEY CONCERT ALLOCATION
SERIES, INC.
Concert Select Balanced Seeks a balance of growth of capital and Travelers Investment Adviser
Portfolio income by investing in a select group of ("TIA")
mutual funds.
Concert Select Conservative Seeks income and, secondarily, long-term TIA
Portfolio growth of capital by investing in a select
group of mutual funds.
Concert Select Growth Seeks long-term growth of capital by TIA
Portfolio investing in a select group of mutual funds.
Concert Select High Growth Seeks capital appreciation by investing in a TIA
Portfolio select group of mutual funds.
Concert Select Income Seeks high current income by investing in a TIA
Portfolio select group of mutual funds.
TRAVELERS SERIES FUND, INC.
AIM Capital Appreciation Seeks capital appreciation by investing TIA
Portfolio principally in common stock, with emphasis Subadviser: AIM Capital
on medium-sized and smaller emerging growth Management Inc.
companies.
Alliance Growth Portfolio Seeks long-term growth of capital by TIA
investing predominantly in equity securities Subadviser: Alliance Capital
of companies with a favorable outlook for Management L.P.
earnings and whose rate of growth is
expected to exceed that of the U.S. economy
over time. Current income is only an
incidental consideration.
MFS Total Return Portfolio Seeks to obtain above-average income TIA
(compared to a portfolio entirely invested Subadviser: MFS
in equity securities) consistent with the
prudent employment of capital. Generally, at
least 40% of the Portfolio's assets will be
invested in equity securities.
Putnam Diversified Income Seeks high current income consistent with TIA
Portfolio preservation of capital. The Portfolio will Subadviser:
allocate its investments among the U.S. Putnam Investment Management,
Government Sector, the High Yield Sector, Inc.
and the International Sector of the fixed
income securities markets.
Smith Barney High Income Seeks high current income. Capital SSBC
Portfolio appreciation is a secondary objective. The
Portfolio will invest at least 65% of its
assets in high-yielding corporate debt
obligations and preferred stock.
</TABLE>
12
<PAGE> 17
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPTION INVESTMENT OBJECTIVE INVESTMENT ADVISER/SUBADVISER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRAVELERS SERIES FUND, INC.
(CONT'D)
Smith Barney International Seeks total return on assets from growth of SSBC
Equity Portfolio capital and income by investing at least 65%
of its assets in a diversified portfolio of
equity securities of established non-U.S.
issuers.
Smith Barney Large Cap Value Seeks current income and long-term growth of SSBC
Portfolio income and capital by investing primarily,
but not exclusively, in common stocks.
Smith Barney Money Market Seeks maximum current income and SSBC
Portfolio preservation of capital by investing in high
quality, short-term money market
instruments. An investment in this fund is
neither insured nor guaranteed by the U.S.
Government, and there is no assurance that a
stable $1 value per share will be
maintained.
The Travelers Managed Income Seeks high current income consistent with TIA
Portfolio prudent risk of capital through investments
in corporate debt obligations, preferred
stocks, and obligations issued or guaranteed
by the U.S. Government or its agencies or
instrumentalities.
Van Kampen Enterprise Seeks capital appreciation through SSBC
Portfolio investment in securities believed to have Subadviser: Van Kampen Asset
above-average potential for capital Management, Inc
appreciation. Any income received on such
securities is incidental to the objective of
capital appreciation.
THE TRAVELERS SERIES TRUST
MFS Emerging Growth Portfolio Seeks long-term growth of capital. Dividend Travelers Asset Management
and interest income from portfolio investment Company ("TAMIC")
securities, if any, is incidental. Subadviser:
MFS
Zero Coupon Bond Fund Seeks to provide as high an investment TAMIC
Portfolio (Series 2000) return as consistent with the preservation
of capital investing in primarily zero
coupon securities that pay cash income but
are acquired by the Portfolio at substantial
discounts from their values at maturity. The
Zero Coupon Bond Fund Portfolios may not be
appropriate for Policy Owners who do not
plan to have their premiums invested in
shares of the Portfolios for the long term
or until maturity
Zero Coupon Bond Fund Seeks to provide as high an investment TAMIC
Portfolio (Series 2005) return as consistent with the preservation
of capital investing in primarily zero
coupon securities that pay cash income but
are acquired by the Portfolio at substantial
discounts from their values at maturity. The
Zero Coupon Bond Fund Portfolios may not be
appropriate for Policy Owners who do not
plan to have their premiums invested in
shares of the Portfolios for the long term
or until maturity
</TABLE>
13
<PAGE> 18
POLICY BENEFITS AND RIGHTS
- --------------------------------------------------------------------------------
TRANSFERS OF CASH VALUE
As long as the Policy remains in effect, you may make transfers of Cash Value
between Investment Options. We reserve the right to restrict the number of free
transfers to four times in any Policy Year and to charge $10 for each additional
transfer; however, there is currently no charge for transfers.
The number of Accumulation Units credited to the investment option as a result
of the transfer will be determined by dividing the transferred amount by the
Accumulation Unit Value of that investment option. The Accumulation Unit Value
will be determined on the Valuation Date on which the Company receives the
written request for a transfer.
TELEPHONE TRANSFERS
The Policy Owner may make the request in writing by mailing such request to the
Company at its Home Office, or by telephone (if an authorization form is on
file) by calling 1-800-334-4298. The Company will take reasonable steps to
ensure that telephone transfer requests are genuine. These steps may include
seeking proper authorization and identification prior to processing telephone
requests. Additionally, the Company will confirm telephone transfers. Any
failure to take such measures may result in the Company's liability for any
losses due to fraudulent telephone transfer requests.
AUTOMATED TRANSFERS
DOLLAR-COST AVERAGING
You may establish automated transfers of Policy Values on a monthly or quarterly
basis from any Investment Option(s) to any other Investment Option(s) through
written request or other method acceptable to the Company. You must have a
minimum total Policy Value of $5,000 to enroll in the Dollar-Cost Averaging
program. The minimum total automated transfer amount is $100.
You may start or stop participation in the Dollar-Cost Averaging program at any
time, but you must give the Company at least 30 days' notice to change any
automated transfer instructions that are currently in place. Automated transfers
are subject to all of the other provisions and terms of the Policy. The Company
reserves the right to suspend or modify transfer privileges at any time and to
assess a processing fee for this service.
Before transferring any part of the Policy Value, Policy Owners should consider
the risks involved in switching between investments available under this Policy.
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.
PORTFOLIO REBALANCING
You may elect to have the Company periodically reallocate values in your policy
to match your original (or your latest) funding option allocation request.
LAPSE AND REINSTATEMENT
The Policy will remain in effect until the Cash Surrender Value of the Policy
can no longer cover the Monthly Deduction Amount or loan interest due but not
paid. If this happens we will notify you in writing that if the amount shown in
the notice is not paid within 61 days (the "Grace Period"), the Policy may
lapse. The amount shown will be enough to pay the deduction amount due. The
Policy will continue through the Grace Period, but if no payment is received by
us, it will terminate at the end of the Grace Period. If the person Insured
under the Policy dies during the Grace Period, the Death Benefit payable will be
reduced by the Monthly Deduction Amount due plus the amount of any outstanding
loan and unpaid loan interest. (See "Death Benefit," below.)
14
<PAGE> 19
If the Policy lapses, you may reinstate the Policy by paying the reinstatement
premium (and any applicable charges) shown in the Policy. You may request
reinstatement within three years of lapse (unless a different period is required
under applicable state law). Upon reinstatement, the Policy's Cash Value will
equal the Net Premium. In addition, the Company reserves the right to require
satisfactory evidence of insurability.
EXCHANGE RIGHTS
Once the Policy is in effect, it may be exchanged during the first 24 months for
a general account life insurance policy issued by the Company (or an affiliated
company) on the life of the Insured. Benefits under the new life insurance
policy will be as described in that policy. No evidence of insurability will be
required. You have the right to select the same Death Benefit or Net Amount At
Risk as the former Policy at the time of exchange. Cost of insurance rates will
be based on the same risk classification as those of the former Policy. Any
outstanding Policy loan must be repaid before we will make an exchange. In
addition, there may be an adjustment for the difference in Cash Value between
the two Policies.
RIGHT TO CANCEL
An Applicant may cancel the Policy by returning it via mail or personal delivery
to the Company or to the agent who sold the Policy. The Policy must be returned
by the latest of:
(1) 10 days after delivery of the Policy to you
(2) 45 days of completion of the Policy application
(3) 10 days after the Notice of Right to Cancel has been mailed or
delivered to the Applicant whichever is latest, or
(4) later if required by state law.
We will refund the greater of all premium payments or the sum of:
(1) the difference between the premium paid, including any fees or charges,
and the amounts allocated to the Investment Option(s),
(2) the value of the amounts allocated to the Investment Option(s) on the
date on which the Company receives the returned Policy, and
(3) any fees and other charges imposed on amounts allocated to the
Investment Option(s).
We will make the refund within seven days after we receive your returned policy.
ACCESS TO CASH VALUES
- --------------------------------------------------------------------------------
POLICY LOANS
A Policy Owner may obtain a cash loan from the Company secured by the Policy not
to exceed 90% of the Policy's Cash Value (determined on the day on which the
Company receives the written loan request), less any surrender penalties (See
"Surrender Charges"). Subject to state law, no loan requests may be made for
amounts of less than $500.
If there is a loan outstanding at the time a subsequent loan request is made,
the amount of the outstanding loan will be added to the new loan request. The
Company will charge interest on the outstanding amounts of the loan, which
interest must be paid in advance by the Policy Owner. Loans made during the
first ten Policy Years will be made at a 2% net cost on principal, and a 1% net
cost on earnings. Loans made after the tenth Policy Year will be made at 2% net
cost on principal and 0% net cost on earnings. Additionally, loans may be taken
at any time at 0% net cost for the purchase of a Travelers long-term care
policy, where permitted by state law.
Loans will be taken from earnings first, and then from premium.
15
<PAGE> 20
For these purposes, "earnings" represents any unloaned Cash Value, minus the
total premiums paid under the Policy. Loans taken against earnings will be
charged an interest rate of 4.75% during the first ten Policy Years, and 3.85%
for Policy Year 11 and thereafter. Loans taken against premium will be charged
an interest rate of 5.65% in all Policy Years. Amounts in the Loan Account will
be credited by the Company with a fixed annual rate of return of 4%, and will
not be affected by the investment performance of the Investment Options. The
rate of return credited to amounts held in the Loan Account will be transferred
back to the Investment Options on a pro rata basis after each Policy Year. The
Policy's "Loan Account Value" is equal to amounts transferred from the
Investment Options to the Loan Account when a loan is taken, plus capitalized
loan interest, plus the net rate of return credited to the Loan Account that has
not yet been transferred back to the Investment Options. Loan repayments reduce
the Loan Account Value, and increase the Cash Value in the Investment Options.
The amount of the loan will be transferred as of the date the loan is made on a
pro rata basis from each of the Investment Options attributable to the Policy
(unless the Policy Owner states otherwise) to another account (the "Loan
Account"). Amounts in the Loan Account will be credited by the Company with a
fixed annual rate of return of 4% (6% in New York and Massachusetts) and will
not be affected by the investment performance of the Investment Options. When
loan repayments are made, the amount of the repayment will be deducted from the
Loan Account and will be reallocated based upon premium allocation percentages
among the Investment Options applicable to the Policy (unless the Policy Owner
states otherwise). The Company will make the loan to the Policy Owner within
seven days after receipt of the written loan request.
An outstanding loan amount decreases the Cash Surrender Value. If a maximum loan
is taken or a loan is not repaid, it permanently decreases the Cash Surrender
Value, which could cause the Policy to lapse (see "Lapse and Reinstatement").
For example, if a Policy has a Cash Surrender Value of $10,000, the Policy Owner
may take a loan of 90% or $9,000, leaving a new Cash Surrender Value of $1,000.
In addition, the Death Benefit actually payable would be decreased because of
the outstanding loan. Furthermore, even if the loan is repaid, the Death Benefit
and Cash Surrender Value may be permanently affected since the Policy Owner was
not credited with the investment experience of an Investment Option on the
amount in the Loan Account while the loan was outstanding. All or any part of a
loan secured by a Policy may be repaid while the Policy is still in effect.
CASH VALUE AND CASH SURRENDER VALUE
The Cash Value of a Policy changes on a daily basis and will be computed on each
Valuation Date. The Cash Value will vary to reflect the investment experience of
the Investment Options, as well as any partial Cash Surrenders, Monthly
Deduction Amount, daily Separate Account charges, and any additional premium
payments. There is no minimum guaranteed Cash Value.
The Cash Value of a particular Policy is related to the net asset value of the
Investment Options to which premium payments on the Policy have been allocated.
The Cash Value on any Valuation Date is calculated by multiplying the number of
Accumulation Units credited to the Policy in each Investment Options as of the
Valuation Date by the current Accumulation Unit Value of that Investment Option,
then adding the collective result for each of the Investment Options credited to
the Policy, and finally adding the value (if any) of the Loan Account. A Policy
Owner may withdraw Cash Value from the Policy, or transfer Cash Value among the
Investment Options, on any day that the Company is open for business.
As long as the Policy is in effect, a Policy Owner may elect, without the
consent of the Beneficiary (provided the designation of Beneficiary is not
irrevocable), to surrender the Policy and receive its "Cash Surrender Value";
i.e., the Cash Value of the Policy determined as of the day the Company receives
the Policy Owner's written request, less any outstanding Policy loan, and less
any applicable Surrender Charges. For full surrenders, the Company will pay the
Cash Surrender Value
16
<PAGE> 21
of the Policy within seven days following its receipt of the written request, or
on the date requested by the Policy Owner, whichever is later. The Policy will
terminate on the Deduction Date next following the Company's receipt of the
written request, or on the Deduction Date next following the date on which the
Policy Owner requests the surrender to become effective, whichever is later.
In the case of partial surrenders, the Cash Surrender Value will be equal to the
amount requested to be surrendered minus any applicable Surrender Charges. The
deduction from Cash Value for a partial surrender will be made on a pro rata
basis against the Cash Value of each of the Investment Options attributable to
the Policy (unless the Policy Owner states otherwise in writing).
In addition to reducing the Cash Value of the Policy, partial cash surrenders
will reduce the Death Benefit payable under the Policy. Under Option 1, the
Stated Amount of the Policy will be reduced by the amount of the partial cash
surrender. Under Option 2, the Cash Value, which is part of the Death Benefit,
will be reduced by the amount of the partial cash surrender. The Company may
require return of the Policy to record such reduction.
DEATH BENEFIT
- --------------------------------------------------------------------------------
The Death Benefit under the Policy is the amount paid to the Beneficiary upon
the Insured's death. The Death Benefit will be reduced by any outstanding
charges, fees and Policy loans. All or part of the Death Benefit may be paid in
cash or applied to one or more of the payment options described in the following
pages.
You may elect one of two Death Benefit options. As long as the Policy remains in
effect, the Company guarantees that the Death Benefit under either option will
be at least the current Stated Amount of the Policy less any outstanding Policy
loan and unpaid Deduction Amount due. The Death Benefit under either option may
vary with the Cash Value of the Policy. Under Option 1 (the "Level Option"), the
Death Benefit will be equal to the Stated Amount of the Policy or, if greater, a
specified multiple of Cash Value (the "Minimum Amount Insured"). Under Option 2
(the "Variable Option"), the Death Benefit will be equal to the Stated Amount of
the Policy plus the Cash Value (determined as of the date of the Insured's
death) or, if greater, the Minimum Amount Insured.
The Minimum Amount Insured is the amount required to qualify the Policy as a
life insurance Policy under the current federal tax law. Under that law, the
Minimum Amount Insured equals a stated percentage of the Policy's Cash Value
determined as of the first day of each Policy Month. The percentages differ
according to the attained age of the Insured. The Minimum Amount Insured is set
forth in the Policy and may change as federal income tax laws or regulations
change. The following is a schedule of the applicable percentages. For attained
ages not shown, the applicable percentages will decrease evenly:
<TABLE>
<CAPTION>
ATTAINED AGE PERCENTAGE
- ------------ ----------
<S> <C>
0-40 250
45 215
50 185
55 150
60 130
65 120
70 115
75 105
95+ 100
</TABLE>
Federal tax law imposes another cash funding limitation on cash value life
insurance Policies that may increase the Minimum Amount Insured shown above.
This limitation known as the "guideline
17
<PAGE> 22
premium limitation," generally applies during the early years of variable
universal life insurance Policies.
The following examples demonstrate the relationship between the Death Benefit,
the Cash Surrender Value and the Minimum Amount Insured under Options 1 and 2 of
the Policy. The examples assume an Insured of age 40, a Minimum Amount Insured
of 250% of Cash Value (assuming the preceding table is controlling as to Minimum
Amount Insured), and no outstanding Policy loan.
OPTION 1 -- "LEVEL" DEATH BENEFIT
STATED AMOUNT: $50,000
In the following examples of an Option 1 "Level" Death Benefit, the Death
Benefit under the Policy is generally equal to the Stated Amount of $50,000.
Since the Policy is designed to qualify as a life insurance Policy, the Death
Benefit cannot be less than the Minimum Amount Insured (or, in this example,
250% of the Cash Value).
EXAMPLE ONE. If the Cash Value of the Policy equals $10,000, the Minimum Amount
Insured would be $25,000 ($10,000 x 250%). Since the Death Benefit in the Policy
is the greater of the Stated Amount ($50,000) or the Minimum Amount Insured
($25,000), the Death Benefit would be $50,000.
EXAMPLE TWO. If the Cash Value of the Policy equals $40,000, the Minimum Amount
Insured would be $100,000 ($40,000 x 250%). The resulting Death Benefit would be
$100,000 since the Death Benefit is the greater of the Stated Amount ($50,000)
or the Minimum Amount Insured ($100,000).
OPTION 2 -- "VARIABLE" DEATH BENEFIT
STATED AMOUNT: $50,000
In the following examples of an Option 2 "Variable" Death Benefit, the Death
Benefit varies with the investment experience of the applicable Investment
Options and will generally be equal to the Stated Amount plus the Cash Value of
the Policy (determined on the date of the Insured's death). The Death Benefit
cannot, however, be less than the Minimum Amount Insured (or, in this example,
250% of the Cash Value).
EXAMPLE ONE. If the Cash Value of the Policy equals $10,000, the Minimum Amount
Insured would be $25,000 ($10,000 x 250%). The Death Benefit ($60,000) would be
equal to the Stated Amount ($50,000) plus the Cash Value ($10,000), unless the
Minimum Amount Insured ($25,000) was greater.
EXAMPLE TWO. If the Cash Value of the Policy equals $60,000, then the Minimum
Amount Insured would be $150,000 ($60,000 x 250%). The resulting Death Benefit
would be $150,000 because the Minimum Amount Insured ($150,000) is greater than
the Stated Amount plus the Cash Value ($50,000 + $60,000 = $110,000).
PAYMENT OF PROCEEDS
Death Benefits are payable within seven days after we receive satisfactory proof
of the Insured's death. The amount of Death Benefit paid may be adjusted to
reflect any Policy loan, any material misstatements in the Policy application as
to age or sex of the Insured, and any amounts payable to an assignee under a
collateral assignment of the Policy. (See "Assignment".)
Subject to state law, if the Insured commits suicide within two years following
the Issue Date limits on the amount of Death Benefit paid will apply. (See
"Limit on Right to Contest and Suicide Exclusion,") In addition, if the Insured
dies during the 61-day period after the Company gives notice to the Policy Owner
that the Cash Surrender Value of the Policy is insufficient to meet the Monthly
Deduction Amount due against the Cash Value of the Policy, then the Death
Benefit actually paid to the Policy Owner's Beneficiary will be reduced by the
amount of the Deduction Amount that is due and unpaid. (See "Cash Value and Cash
Surrender Value," for effects of partial surrenders on Death Benefits.)
18
<PAGE> 23
PAYMENT OPTIONS
We will pay policy proceeds in a lump sum, unless you or the Beneficiary select
one of the Company's payment options. We may defer payment of proceeds which
exceed the Death Benefit for up to six months from the date of the request for
the payment. A combination of options may be used. The minimum amount that may
be placed under a payment option is $5,000 unless we consent to a lesser amount.
Proceeds applied under an option will no longer be affected by the investment
experience of the Investment Options.
The following payment options are available under the Policy:
OPTION 1 -- Payments of a Fixed Amount
OPTION 2 -- Payments for a Fixed Period
OPTION 3 -- Amounts Held at Interest
OPTION 4 -- Monthly Life Income
OPTION 5 -- Joint and Survivor Level Amount Monthly Life Income
OPTION 6 -- Joint and Survivor Monthly Life Income-Two-thirds to Survivor
OPTION 7 -- Joint and Last Survivor Monthly Life Income-Monthly Payment
Reduces on Death of First Person Named
OPTION 8 -- Other Options
We will make any other arrangements for periodic payments as may be agreed upon.
If any periodic payment due any payee is less than $100, we may make payments
less often. If we have declared a higher rate under an option on the date the
first payment under an option is due, we will base the payments on the higher
rate.
MATURITY BENEFITS
- --------------------------------------------------------------------------------
MATURITY EXTENSION RIDER
If the Insured is living on the Maturity Date, the Company will pay you the
Policy's Cash Value less any outstanding Policy loan or unpaid Deduction Amount.
You must surrender the Policy to us before we make a payment, at which point the
Policy will terminate and we will have no further obligations under the Policy.
When the Insured reaches age 99, and at any time during the twelve months
thereafter, you may request that coverage be extended beyond the Maturity Date
(the "Maturity Extension Benefit"). This Maturity Extension Benefit may not be
available in all jurisdictions. If we receive such request before the Maturity
Date, the Policy will continue until the earlier of the death of the Insured or
the date on which the Policy Owner requests that the Policy terminate. When the
Maturity Extension Benefit ends, a Death Benefit consisting of the Cash Value
less any Loan Account Value will be paid. The Death Benefit is based on the
experience of the Investment Options selected and is not guaranteed. After the
Maturity Date, periodic Deduction Amounts will no longer be charged against the
Cash Value and additional premiums will not be accepted.
We intend that the Policy and the Maturity Extension Benefit will be considered
life insurance for tax purposes. The Death Benefit is designed to comply with
Section 7702 of the Internal Revenue Code of 1986, as amended, or other
equivalent section of the Code. However, we do not give tax advice, and cannot
guarantee that the Death Benefit and Cash Value will be exempt from any future
tax liability. The tax results of any benefits under the Maturity Extension
provision depend upon interpretation of the Internal Revenue Code. You should
consult your own personal tax adviser prior to the exercise of the Maturity
Extension Benefit to assess any potential tax liability.
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<PAGE> 24
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
MONTHLY DEDUCTION AMOUNT
We will deduct a Monthly Deduction Amount to cover certain charges and expenses
incurred in connection with the Policy. The Monthly Deduction Amount is deducted
pro rata from each of the Investment Options' values attributable to the Policy.
The amount is deducted on the first day of each Policy Month (the "Deduction
Date"), beginning on the Policy Date. The dollar amount of the Deduction Amount
will vary from month to month. The Monthly Deduction Amount consists of the Cost
of Insurance Charge, deduction for premium tax and any Charges for Supplemental
Benefit Provisions. These are described below:
COST OF INSURANCE CHARGE
The amount of the Cost of Insurance deduction depends on the amount of insurance
coverage on the date of the deduction and the current cost per dollar for
insurance coverage. The cost per dollar of insurance coverage varies annually
and is based on age, sex and risk class of the Insured.
STATE PREMIUM TAX CHARGES
Premium tax charges are not deducted at the time that a premium is made,
although the Company does pay state premium taxes attributable to a particular
Policy when those taxes are incurred. To reimburse the Company for payment of
such taxes, during the first ten years following a premium payment made before
the 10th Policy Anniversary, a premium tax charge of 0.20% per year will apply.
Premium taxes vary from state to state and currently range from 0.75% to 3.5%.
Because there is a range of premium tax rates, you may pay premium tax charges
in total that are higher or lower than the premium tax actually assessed in your
jurisdiction.
CHARGES FOR SUPPLEMENTAL BENEFIT PROVISIONS
If you elect any supplemental benefits for which there is a charge, the Company
will include a supplemental benefits charge in the Monthly Deduction Amount. The
amount of this charge will vary depending upon the actual supplemental benefits
selected.
CHARGES AGAINST THE SEPARATE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge for mortality and expense risks. This charge is at an
annual rate of 0.90%. The annual rate will be reduced to 0.75% for the current
Policy Year if the Average net Growth Rate is 6.5% or greater during the
previous Policy Year. This determination is made on an annual basis. The
mortality risk assumed is that the cost of insurance charge specified in the
Policy may not be enough to meet actual claims. The expense risk assumed is that
expenses incurred in issuing and administering the Policies will exceed the
administrative charges set forth in the Policy.
ADMINISTRATIVE EXPENSE CHARGE
We deduct a daily charge for administrative expenses incurred by us. The charge
is set at an annual rate of to 0.40% of the assets in the Investment Options.
UNDERLYING FUND FEES
Separate Account Three purchases shares of the Underlying Funds at net asset
value. The net asset value reflects investment advisory fees and other expenses
already deducted. The investment advisory fees and other expenses paid by each
of the Underlying Funds are described in the individual Fund prospectuses for
the Investment Options.
20
<PAGE> 25
SURRENDER CHARGES
A percent of premium surrender charge will be imposed upon full surrenders of
the Policy that occur within nine (9) years after the Company has received any
Premium Payments under the Policy. For partial surrenders a percentage of amount
surrendered will be charged. This charge is intended to cover certain expenses
relating to the sale of the Policy, including commissions to registered
representatives and other promotional expenses. To the extent that the surrender
charges assessed under the Policy are less than the sales commissions paid with
respect to the Policy, the Company will pay the shortfall from its general
account assets, which will include any profits it may derive from charges
imposed under the Policy. (See also "Cash Value and Cash Surrender Value.")
Surrenders charges are determined as follows:
<TABLE>
<CAPTION>
YEARS SINCE FULL SURRENDERS PARTIAL SURRENDERS
PREMIUM PAYMENT MADE (% OF PREMIUM) (% OF AMOUNT SURRENDERED)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
up to 2 years 7.5% 7.5%
3 or 4 7% 7%
5 6.5% 6.5%
6 6% 6%
7 5% 5%
8 4% 4%
9 3% 3%
Year 10 and Thereafter 0% 0%
</TABLE>
PARTIAL SURRENDERS. The Company will impose a surrender charge equal to a
percentage of the amount surrendered for partial surrenders in excess of the
free withdrawal amount described below. The surrender charge will be limited so
that the total charge for partial surrenders will not exceed the charge that
would apply to a full surrender of the Policy.
For purposes of determining the surrender charge percentage that will apply to a
partial surrender, surrender charges are calculated on a "last-in, first-out
basis." This means that any partial withdrawal in excess of the free withdrawal
amount will be taken against premiums in the reverse order in which they were
made, if more than one premium was paid under the Policy. Surrender charges will
be assessed only against that portion of the partial withdrawal taken from
premium payment(s).
FREE WITHDRAWAL ALLOWANCE. The Company will permit partial surrenders of the
Policy's earnings in an amount of up to 10% of the Policy's Cash Value each year
(beginning with the Second Policy Year) without the imposition of a surrender
charge. The amount of Cash Value available for free withdrawal will be
determined on the Policy Anniversary on or immediately prior to the date that
the partial surrender request is received. The amount of earnings available for
withdrawal will be determined on the date the request for such withdrawal is
received by the Company.
TRANSFER CHARGE
There is currently no charge for transfers. The Company reserves the right to
limit free transfers of Cash Value from one Investment Option to another by the
Policy Owner to four times in any Policy Year, (twelve times for policies issued
in the state of New York), and to charge $10 for any additional transfers.
REDUCTION OR ELIMINATION OF CHARGES
We may offer the Policy in arrangements where an employer or trustee will own a
group of policies on the lives of certain employees, or in other situations
where groups of policies will be purchased at one time. We may reduce or
eliminate the mortality and expense risk charge, surrender charges and
administrative charges in such arrangements to reflect the reduced sales
expenses, administrative costs and/or mortality and expense risks expected as a
result of sales to a particular group.
We will not reduce or eliminate the withdrawal charge, mortality and expense
risk charge or the administrative charge if the reduction or elimination will be
unfairly discriminatory to any person.
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THE SEPARATE ACCOUNT AND VALUATION
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THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE (SEPARATE ACCOUNT
THREE)
The Travelers Variable Life Insurance Separate Account Three was established on
September 23, 1994 under the insurance laws of the state of Connecticut. It is
registered with the Securities and Exchange Commission ("SEC") as a unit
investment trust under the Investment Company Act of 1940. A Registration
Statement has been filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended. This Prospectus does not contain all
information set forth in the Registration Statement, its amendments and
exhibits. You may access the SEC's website (http://www.sec.gov) to view the
entire Registration Statement. This registration does not mean that the SEC
supervises the management or the investment practices or policies of the
Separate Account.
The assets of Separate Account Three are invested exclusively in shares of the
Investment Options. The operations of Separate Account Three are also subject to
the provisions of Section 38a-433 of the Connecticut General Statutes which
authorizes the Connecticut Insurance Commissioner to adopt regulations under it.
Under Connecticut law, the assets of Separate Account Three will be held for the
exclusive benefit of Policy Owners and the persons entitled to payments under
the Policy. The assets held in Separate Account Three are not chargeable with
liabilities arising out of any other business which the Company may conduct. Any
obligations arising under the Policy are general corporate obligations of the
Company.
All investment income and other distributions of the Investment Options are
payable to Separate Account Three. All such income and/or distributions are
reinvested in shares of the respective underlying fund at net asset value shares
of the underlying funds are currently sold only to life insurance company
separate accounts to fund variable annuity and variable life insurance
contracts.
HOW THE CASH VALUE VARIES. We calculate the Policy's Cash Value each day the
New York Stock Exchange is open for trading (a "valuation date"). A Policy's
Cash Value reflects a number of factors, including Premium Payments, partial
withdrawals, loans, Policy charges, and the investment experience of the
Investment Option(s) chosen. The Policy's Cash Value on a valuation date equals
the sum of all accumulation units for each Investment Option chosen, plus the
Loan Account Value.
The Separate Account purchases shares of the underlying funds at net asset value
(i.e., without a sales charge). The Separate Account receives all dividends and
capital gains distributions from each underlying fund, and reinvests in
additional shares of that fund. The Accumulation Unit Value reflects the
reinvestment of any dividends or capital gains distributions declared by the
underlying fund. The Separate Account will redeem underlying fund shares at
their net asset value, to the extent necessary to make payments under the
Policy.
In order to determine Cash Value, Cash Surrender Value, policy loans and the
number of Accumulation Units to be credited, we use the values calculated as of
the close of business on each valuation date we receive the written request, or
payment in good order, at our Home Office.
ACCUMULATION UNIT VALUE. Accumulation Units measure the value of the Investment
Options. The value for each Investment Option's Accumulation Unit is calculated
on each valuation date. The value equals the Accumulation Unit value for the
preceding valuation period multiplied by the underlying fund's Net Investment
Factor during the next Valuation Period. (For example, to calculate Monday's
valuation date price, we would multiply Friday's Accumulation Unit Value by
Monday's net investment factor.)
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<PAGE> 27
The Accumulation Unit Value may increase or decrease. The number of Accumulation
Units credited to your Policy will not change as a result of the Investment
Option's investment experience.
NET INVESTMENT FACTOR. For each Investment Option, the value of its
Accumulation Unit depends of the net rate of return for the corresponding
underlying fund. We determine the net rate of return at the end of each
Valuation Period (that is, the period of time beginning at the close of the New
York Stock Exchange, and ending at its close of business on the next Valuation
Date). The net rate of return reflects the investment performance of the
investment option, includes any dividends or capital gains distributed, and is
net of the Separate Account charges.
CHANGES TO THE POLICY
- --------------------------------------------------------------------------------
GENERAL
Once the policy is issued, you may make certain changes. Some of these changes
will not require additional underwriting approval; some changes will. Certain
requests must be made in writing, as indicated below:
WRITTEN CHANGES REQUIRING UNDERWRITING APPROVAL:
- increases in the stated amount of insurance;
- changing the death benefit from Option 1 to Option 2
WRITTEN CHANGES NOT REQUIRING UNDERWRITING APPROVAL:
- decreases in the stated amount of insurance
- changing the death benefit from Option 2 to Option 1
- changes to the way your premiums are allocated (Note: you can also make
these changes by telephone)
- changing the beneficiary (unless irrevocably named)
Written requests for changes should be sent to the Company's Home Office at One
Tower Square, Hartford, Connecticut, 06183. The Company's telephone number is
(860) 277-0111.
CHANGES IN STATED AMOUNT
You may request in writing an increase or decrease in the Policy's Stated
Amount, provided that the Stated Amount after any decrease may not be less than
the minimum amount of $25,000. For purposes of determining the cost of insurance
charge, a decrease in the Stated Amount will reduce the Stated Amount in the
following order:
1) against the most recent increase in the Stated Amount;
2) to other increases in the reverse order in which they occurred;
3) to the initial Stated Amount.
A decrease in Stated Amount in a substantially funded Policy may cause a cash
distribution that is includable in the gross income of the Policy Owner.
For increases in the Stated Amount, we may require a new application and
evidence of insurability as well as an additional premium payment. The effective
date of any increase will be shown on the new Policy Summary which we will send.
The effective date of any increase in the Stated Amount will generally be the
Deduction Date next following either the date of a new application or, if
different, the date requested by the Applicant. There is no additional charge
for a decrease in Stated Amount.
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<PAGE> 28
CHANGES IN DEATH BENEFIT OPTION
You may change the Death Benefit option by sending a written request to the
Company. There is no direct tax consequence of changing a Death Benefit option,
except as described under "Tax Treatment of Policy Benefits." However, the
change could affect future values of Net Amount At Risk, and with some Option 2
to Option 1 changes involving substantially funded Policies, there may be a cash
distribution which is included in your gross income. The cost of insurance
charge which is based on the Net Amount At Risk may be different in the future.
A change from Option 1 to Option 2 will not be permitted if the change results
in a Stated Amount of less than $25,000. A charge from Option 1 to Option 2 also
subject to underwriting. Contact your registered representative for more
information.
ADDITIONAL POLICY PROVISIONS
- --------------------------------------------------------------------------------
ASSIGNMENT
The Policy may be assigned as collateral for a loan or other obligation. The
Company is not responsible for any payment made or action taken before receipt
of written notice of such assignment. Proof of interest must be filed with any
claim under a collateral assignment.
LIMIT ON RIGHT TO CONTEST AND SUICIDE EXCLUSION
We may not contest the validity of the Policy after it has been in effect during
the Insured's lifetime for two years from the Issue Date. Subject to state law,
if the Policy is reinstated, the two-year period will be measured from the date
of reinstatement. Each requested increase in Stated Amount is contestable for
two years from its effective date (subject to state law). In addition, if the
Insured commits suicide during the two-year period following issue, subject to
state law, the Death Benefit will be limited to the premiums paid less (i) the
amount of any partial surrender, (ii) the amount of any outstanding Policy loan,
and (iii) the amount of any unpaid Deduction Amount due. During the two-year
period following an increase, the portion of the Death Benefit attributable to
the increase in the case of suicide will be limited to an amount equal to the
premium paid for such increase (subject to state law).
MISSTATEMENT AS TO SEX AND AGE
If there has been a misstatement with regard to sex or age, benefits payable
will be adjusted to what the Policy would have provided with the correct
information. A misstatement with regard to sex or age in a substantially funded
Policy may cause a cash distribution that is includable in whole or in part in
the gross income of the Policy Owner.
VOTING RIGHTS
The Company is the legal owner of the underlying fund shares. However, we
believe that when an underlying fund solicits proxies, we are required to obtain
from policy owners who have chosen those investment options 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. If we determine that we no longer need to
comply with this voting method, we will vote on the shares in our own right.
DISREGARD OF VOTING INSTRUCTIONS
When permitted by state insurance regulatory authorities, we may disregard
voting instructions if the instructions would cause a change in the investment
objective or policies of the Separate Account or an Investment Option, or if it
would cause the approval or disapproval of an investment advisory Policy of an
Investment Option. In addition, we may disregard voting instructions in favor of
changes in the investment policies or the investment adviser of any Investment
Options which are initiated by a Policy Owner if we reasonably disapprove of
such changes. A change would be disapproved only if the proposed change is
contrary to state law or
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<PAGE> 29
prohibited by state regulatory authorities, or if we determine that the change
would have an adverse effect on our general account (i.e., if the proposed
investment policy for an Investment Option may result in overly speculative or
unsound investments.) If we do disregard voting instructions, a summary of that
action and the reasons for such action would be included in the next annual
report to Policy Owners.
OTHER MATTERS
- --------------------------------------------------------------------------------
STATEMENTS TO POLICY OWNERS
We will maintain all records relating to the Separate Account and the Investment
Options. At least once each Policy Year, we will send you a statement containing
the following information:
- the Stated Amount and the Cash Value of the Policy (indicating the number
of Accumulation Units credited to the Policy in each Investment Option
and the corresponding Accumulation Unit Value);
- the date and amount of each premium payment;
- the date and amount of each Monthly Deduction;
- the amount of any outstanding Policy loan as of the date of the
statement, and the amount of any loan interest charged on the Loan
Account;
- the date and amount of any partial cash surrenders and the amount of any
partial surrender charges;
- the annualized cost of any supplemental benefits purchased under the
Policy; and
- a reconciliation since the last report of any change in Cash Value and
Cash Surrender Value.
We will also send any other reports required by any applicable state or federal
laws or regulations.
SUSPENSION OF VALUATION
We reserve the right to suspend or postpone the date of any payment of any
benefit or values for any Valuation Period (1) when the New York Stock Exchange
("Exchange") is closed; (2) when trading on the Exchange is restricted; (3) when
the SEC determines so that disposal of the securities held in the Underlying
Funds is not reasonably practicable or the value of the Investment Option's net
assets cannot be determined; or (4) during any other period when the SEC, by
order, so permits for the protection of security holders.
DIVIDENDS
No dividends will be paid under the Policy.
MIXED AND SHARED FUNDING
It is conceivable that in the future it may not be advantageous for variable
life insurance and variable annuity Separate Accounts to invest in the
Investment Options simultaneously. This is called mixed funding. Certain funds
may be available to variable products of other companies not affiliated with
Travelers. This is called "shared funding." Although we -- and the funds -- do
not anticipate any disadvantages either to variable life insurance or to
variable annuity Policy Owners, the Investment Options' Boards of Directors
intend to monitor events to identify any material conflicts that may arise and
to determine what action, if any, should be taken. If any of the Investment
Options' Boards of Directors conclude that separate mutual funds should be
established for variable life insurance and variable annuity Separate Accounts,
the Company will bear the attendant expenses, but variable life insurance and
variable annuity Policy Owners would no longer have the economies of scale
resulting from a larger combined fund. Please consult the prospectuses of the
Investment Options for additional information.
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<PAGE> 30
DISTRIBUTION
The Company intends to sell the Policies in all jurisdictions where it is
licensed to do business and where the Policy is approved. The Policies will be
sold by life insurance sales representatives who are registered representatives
of the Company or certain other registered broker-dealers. The maximum
commission payable by the Company for distribution will be 6.50% of premiums.
Any sales representative or employee will have been qualified to sell variable
life insurance Policies under applicable federal and state laws. Each
broker/dealer is registered with the Securities and Exchange Commission under
the Securities Exchange Act of 1934 and all are members of the National
Association of Securities Dealers, Inc. CFBDS, Inc. serves as principal
underwriter of the Policies.
LEGAL PROCEEDINGS AND OPINION
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 federal laws and regulations affecting the
issue and sale of the Policy described in this Prospectus and the organization
of the Company, its authority to issue the Policy under Connecticut law and the
validity of the forms of the Policy under Connecticut law have been passed on by
the General Counsel of the Company.
INDEPENDENT ACCOUNTANTS
The financial statements as of and for the year ended December 31, 1998 of
Separate Account Three, included in the registration statement have been
included herein in reliance on the report of KPMG LLP, independent certified
public accountants, upon the authority of said firm as experts in accounting and
auditing.
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 and in the
registration statement 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.
FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
GENERAL
The following is a general discussion of the federal income tax considerations
relating to the Policies. This discussion is based upon the Company's
understanding of the federal income tax laws as they are currently interpreted
by the Internal Revenue Service ("IRS"). These laws are complex, and tax results
may vary among individuals. A person contemplating the purchase of or the
exercise of elections under a Policy should seek competent tax advice.
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<PAGE> 31
IT SHOULD BE UNDERSTOOD THAT THIS IS NOT AN EXHAUSTIVE DISCUSSION OF ALL TAX
QUESTIONS THAT MIGHT ARISE UNDER THE POLICIES. NO ATTEMPT HAS BEEN MADE TO
ADDRESS ANY FEDERAL ESTATE TAX OR STATE AND LOCAL TAX CONSIDERATIONS WHICH MAY
ARISE IN CONNECTION WITH A POLICY. FOR COMPLETE INFORMATION, A QUALIFIED TAX
ADVISOR SHOULD BE CONSULTED.
THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF ANY POLICY AND THE FOLLOWING
TAX DISCUSSION IS BASED ON THE COMPANY'S UNDERSTANDING OF FEDERAL INCOME TAX
LAWS AS THEY ARE CURRENTLY INTERPRETED. THE COMPANY CANNOT GUARANTEE THAT THOSE
LAWS OR INTERPRETATIONS WILL REMAIN UNCHANGED.
TAX STATUS OF THE POLICY
DEFINITION OF LIFE INSURANCE
Section 7702 of the Code sets forth a definition of a life insurance contract
for federal tax purposes. Guidance as to how Section 7702 is to be applied,
however, is limited. Although the Secretary of the Treasury (the "Treasury") is
authorized to prescribe regulations implementing Section 7702, and while
proposed regulations and other limited, interim guidance has been issued, final
regulations have not been adopted. If a Policy were determined not to be a life
insurance contract for purposes of Section 7702, such Policy would not provide
the tax advantages normally provided by a life insurance policy.
With respect to a Policy issued on the basis of a standard rate class, the
Company believes (largely in reliance on IRS Notice 88-128 and the proposed
regulations under Section 7702) that such a Policy should meet the Section 7702
definition of a life insurance contract. There is less guidance on the
application of the rules with respect to a Policy that is issued on a
substandard basis (i.e., a premium class involving higher than standard
mortality risk). Thus, it is not clear whether such a Policy would satisfy
Section 7702, particularly if the Policy Owner pays the full amount of premiums
permitted under the Policy.
The Company reserves the right to make changes in the Policy if such changes are
deemed necessary to attempt to assure its qualification as a life insurance
contract for tax purposes.
DIVERSIFICATION
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund, the shares of which are owned by separate accounts
of insurance companies) underlying the Policy must be "adequately diversified"
in accordance with Treasury regulations in order for the Policy to qualify as
life insurance. The Treasury Department has issued regulations prescribing the
diversification requirements in connection with variable contracts. The Separate
Account, through the Investment Options, intends to comply with these
requirements. Although the Company does not control the Investment Options, it
intends to monitor the investments of the Investment Options to ensure
compliance with the diversification requirements prescribed by the Treasury
Department.
INVESTOR CONTROL
In certain circumstances, owners of variable life insurance contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contract. In those circumstances, income
and gains from the separate account assets would be includable in the variable
contract owner's gross income each year. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
has also announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the Policy Owner), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which
27
<PAGE> 32
policyholders may direct their investments to particular Investment Options
without being treated as owners of the underlying assets." As of the date of
this prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in certain
respects from, those described by the IRS in rulings in which it determined that
the policy owners received the desired tax benefits because they were not owners
of separate account assets. For example, a Policy Owner of this Policy has
additional flexibility in allocating payments and cash values. These differences
could result in the Policy Owner being treated as the owner of the assets of the
Separate Account. In addition, the Company does not know what standard will be
set forth in the regulations or rulings which the Treasury is expected to issue,
nor does the Company know if such guidance will be issued. The Company therefore
reserves the right to modify the Policy as necessary to attempt to prevent the
Policy Owner from being considered the owner of a pro rata share of the assets
of the Separate Account.
The remaining tax discussion assumes that the Policy qualifies as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL
The Company believes that the proceeds and cash value increases of a Policy
should be treated in a manner consistent with a fixed-benefit life insurance
policy for federal income tax purposes. Thus, the Death Benefit under the Policy
should be excludable from the gross income of the Beneficiary.
In addition, the Policy Owner will generally not be deemed to be in constructive
receipt of the Cash Value, including increments thereof, until there is a
distribution. The tax consequences of distribution from, and loans taken from or
secured by, a Policy depend on whether the Policy is classified as a "Modified
Endowment Contract." However, whether a Policy is or is not a Modified Endowment
Contract, upon a complete surrender or lapse of a Policy or when benefits are
paid at a Policy's maturity date, if the amount received plus the amount of
indebtedness exceeds the total investment in the Policy, the excess will
generally be treated as ordinary income subject to tax.
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's Death Benefit Option, a Policy loan, a partial withdrawal, a surrender,
a change in ownership, or an assignment of the Policy may have federal income
tax consequences. In addition, federal, state and local transfer, and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Owner or beneficiary. Therefore, it is important to check
with a tax adviser prior to the purchase of a policy.
MODIFIED ENDOWMENT CONTRACTS
A modified endowment contract is defined under tax law as any policy that
satisfies the present legal definition of a life insurance contract but which
fails to satisfy a 7-pay test. This failure could occur with contracts entered
into after June 21, 1988, or with certain older contracts materially changed
after that date. A Section 1035 exchange of an older contract into a contract
after that date will not by itself cause the new contract to be a modified
endowment contract if the older contract had not become one prior to the
exchange. However, the new contract must be re-tested under the 7-pay test
rules.
A contract fails to satisfy the 7-pay test if the cumulative amount of premiums
paid under the contract at any time during the first seven contract years
exceeds the sum of the net level premiums that would have been paid on or before
such time had the contract provided for paid-up future benefits after the
payment of seven level annual premiums. If a material change in the contract
occurs either during the first seven contract years, or later, a new seven-year
testing period is begun. A decrease to Stated Amount made in the first seven
years will cause a retest of the cumulative amount of premiums. Decreases made
after the first seven contract years are not considered a material change,
provided no other material changes have occurred prior. Tax
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regulations or other guidance will be needed to fully define those transactions
which are material changes. The Company has established safeguards for
monitoring whether a contract may become a modified endowment contract.
Loans and partial withdrawals from, as well as collateral assignments of,
Policies that are modified endowment contracts will be treated as distributions
to the Policy Owner for tax purposes. All pre-death distributions (including
loans, partial withdrawals and collateral assignments) from these Policies will
be included in gross income on an income-first basis to the extent of any income
in the Policy (the cash value less the Policy Owner's investment in the Policy)
immediately before the distribution.
The law also imposes a 10% penalty tax on pre-death distributions (including
loans, collateral assignments, partial withdrawals and complete surrenders) from
modified endowment contracts to the extent they are included in income, unless a
specific exception to the penalty applies. The penalty does not apply to amounts
which are distributed on or after the date on which the taxpayer attains age
59 1/2, because the taxpayer is disabled, or as substantially equal periodic
payments over the taxpayer's life (or life expectancy) or over the joint lives
(or joint life expectancies) of the taxpayer and his or her beneficiary.
Furthermore, if the loan interest is capitalized by adding the amount due to the
balance of the loan, the amount of the capitalized interest will be treated as
an additional distribution subject to income tax as well as the 10% penalty tax,
if applicable, to the extent of income in the Policy.
The Death Benefit of a modified endowment contract remains excludable from the
gross income of the Beneficiary to the extent described above in "Tax
Consequences of Life Insurance Contracts." Furthermore, no part of the
investment growth of the Cash Value of a modified endowment contract is
includable in the gross income of the Contract Owner unless the contract
matures, is distributed or partially surrendered, is pledged, collaterally
assigned, or borrowed against, or otherwise terminates with income in the
contract prior to death. A full surrender of the contract after age 59 1/2 will
have the same tax consequences as noted above in "Tax Treatment of Policy
Benefits."
EXCHANGES
Any Policy issued in exchange for a modified endowment contract will be subject
to the tax treatment accorded to modified endowment contracts. However, the
Company believes that any Policy received in exchange for a life insurance
contract that is not a modified endowment contract will generally not be treated
as a modified endowment contract if the face amount of the Policy is greater
than or equal to the death benefit of the policy being exchanged. The payment of
any premiums at the time of or after the exchange may, however, cause the Policy
to become a modified endowment contract. A prospective purchaser should consult
a qualified tax advisor before authorizing the exchange of his or her current
life insurance contract for a Policy.
AGGREGATION OF MODIFIED ENDOWMENT CONTRACTS
In the case of a pre-death distribution (including a loan, partial withdrawal,
collateral assignment or complete surrender) from a Policy that is treated as a
modified endowment contract, a special aggregation requirement may apply for
purposes of determining the amount of the income on the Policy. Specifically, if
the Company or any of its affiliates issues to the same Policy Owner more than
one modified endowment contract within a calendar year, then for purposes of
measuring the income on the Policy with respect to a distribution from any of
those Policies, the income on the Policy for all those Policies will be
aggregated and attributed to that distribution.
POLICIES WHICH ARE NOT MODIFIED ENDOWMENT CONTRACTS
Unlike loans from modified endowment contracts, a loan from a Policy that is not
a modified endowment contract will be considered indebtedness of the Owner and
no part of a loan will constitute income to the Owner. However, the treatment of
loans taken on earnings after the 10th Policy Year, or of loans taken to acquire
a Travelers long-term care policy is unclear; such loans might be considered a
withdrawal instead of indebtedness for federal tax purposes.
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<PAGE> 34
Pre-death distributions from a Policy that is not a modified endowment contract
will generally not be included in gross income to the extent that the amount
received does not exceed the Policy Owner's investment in the Policy. (An
exception to this general rule may occur in the case of a decrease or change
that reduces the benefits provided under a Policy in the first 15 years after
the Policy is issued and that results in a cash distribution to the Policy
Owner. Such a cash distribution may be taxed in whole or in part as ordinary
income to the extent of any gain in the Policy.) Further, the 10% penalty tax on
pre-death distributions does not apply to Policies that are not modified
endowment contracts.
Certain changes to Policies that are not modified endowment contracts may cause
such Policies to be treated as modified endowment contracts. A Policy Owner
should therefore consult a tax advisor before effecting any change to a Policy
that is not a modified endowment contract.
TREATMENT OF LOAN INTEREST
If there is any borrowing against the Policy, the interest paid on loans may not
be tax deductible.
THE COMPANY'S INCOME TAXES
The Company is taxed as a life insurance company under federal income tax law.
Presently, the Company does not expect to incur any income tax on the earnings
or the realized capital gains attributable to Separate Account Three. However,
the Company may assess a charge against the Investment Options for federal
income taxes attributable to those accounts in the event that the Company incurs
income or capital gains or other tax liability attributable to Separate Account
Three under future tax law.
THE COMPANY
- --------------------------------------------------------------------------------
The Travelers Insurance Company (the "Company") is a stock insurance company
which has been continuously engaged in the insurance business since its
incorporation in the state of Connecticut in 1864. The Company writes individual
life insurance and individual and group annuity contracts on a non-participating
basis, and acts as depositor for Separate Account Three. 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 obligations as depositor for Separate Account Three
may not be transferred without notice to and consent of Policy Owners.
The Company is an indirect wholly owned subsidiary of Citigroup Inc. The
Company's principal executive offices are located at One Tower Square, Hartford,
Connecticut 06183, telephone number (860) 277-0111.
The Company is subject to Connecticut law governing insurance companies and is
regulated and supervised by the Connecticut Commissioner of Insurance. An annual
statement in a prescribed form must be filed with the Commissioner on or before
March 1 in each year covering the operations of the Company for the preceding
year and its financial condition on December 31 of such year. The Company's
books and assets are subject to review or examination by the Commissioner, and a
full examination of its operations is conducted at least once every four years.
In addition, the Company is subject to the insurance laws and regulations of any
jurisdiction in which it sells its insurance Policies, as well as to various
federal and state securities laws and regulations.
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
30
<PAGE> 35
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.
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.
MANAGEMENT
- --------------------------------------------------------------------------------
DIRECTORS OF THE TRAVELERS INSURANCE COMPANY
The following are the Directors and Executive Officers of The Travelers
Insurance Company. Unless otherwise indicated, the principal business address
for all individuals is the Company's Home Office at One Tower Square, Hartford,
Connecticut 06183. References to Citigroup include, prior to December 31, 1993,
Primerica Corporation or its predecessors, and prior to October 8, 1998,
Travelers Group, Inc.
<TABLE>
<CAPTION>
DIRECTOR
NAME AND POSITION SINCE PRINCIPAL BUSINESS
----------------- -------- ------------------
<S> <C> <C>
Jay S. Benet................... 1996 Senior Vice President since February 1994; Chief
Director Financial Officer, Chief Accounting Officer, and
Controller since January, 1999 and Vice President
(1990-1994) of The Travelers Insurance Company; Partner
(1986-1990) of PricewaterhouseCoopers LLP.
</TABLE>
31
<PAGE> 36
<TABLE>
<CAPTION>
DIRECTOR
NAME AND POSITION SINCE PRINCIPAL BUSINESS
----------------- -------- ------------------
<S> <C> <C>
Katherine M. Sullivan.......... 1996 Senior Vice President and General Counsel since May
Director 1996 of The Travelers Insurance Company; Senior Vice
President and General Counsel (1994-1996) Connecticut
Mutual; Special Counsel & Chief of Staff (1988-1994)
Aetna Life & Casualty.
George C. Kokulis.............. 1996 Senior Vice President since September 1995, Vice
Director President (1993-1995) of The Travelers Insurance
Company.
Michael A. Carpenter........... 1995 Co-chairman, Salomon Smith Barney since October 1998;
Director Chairman since June 1996 and President and Chief
Executive Officer June 1995-1998 of The Travelers
Insurance Company; Vice Chairman since February 1998;
Executive Vice President (1995-1998) of Citigroup Inc.;
Chairman, President and Chief Executive Officer
(1989-1994), Kidder Peabody Group Inc.
Robert I. Lipp................. 1992 Chairman, President and Chief Executive Officer since
Director April 1996 of Travelers Property Casualty Corp.; Chief
Executive Officer and Director since December 1993 of
The Travelers Insurance Group Inc.; Vice Chairman and
Director of Citigroup Inc. since 1991; Chairman and
Chief Executive Officer of Commercial Credit Company
(1991-1993); Executive Vice President (1986-1991),
Primerica Corporation.
Marc P. Weill*................. 1994 Senior Vice President-Investments since 1993 and Chief
Director Investment Officer since 1995 of The Travelers
Insurance Group Inc.; Senior Vice President and Chief
Investment Officer of Citigroup Inc. since 1992; Vice
President (1990-1992), Primerica Corporation; Vice
President (1989-1990), Smith Barney Inc.
J. Eric Daniels................ 1998 President and Chief Executive Officer since December
Director 1998 of The Travelers Insurance Company; Chief
Operating Officer of Global Consumer Bank of Citibank;
Vice President of Citibank since 1993.
</TABLE>
- ---------------
* Principal business address: Citigroup Inc., 153 East 53rd St., New York, New
York 10043
SENIOR OFFICERS OF THE TRAVELERS INSURANCE COMPANY
The following are the Senior Officers of The Travelers Insurance Company, other
than the Directors listed above, as of the date of this Prospectus. Unless
otherwise indicated, the principal business address for all individuals listed
is One Tower Square, Hartford, Connecticut 06183.
<TABLE>
<CAPTION>
NAME POSITION WITH INSURANCE COMPANY
---- -------------------------------
<S> <C>
Stuart Baritz................ Senior Vice President
Barry Jacobson............... Senior Vice President
Russell H. Johnson........... Senior Vice President
Warren H. May................ Senior Vice President
Jay S. Fishman............... Senior Vice President
David A. Tyson............... Senior Vice President
F. Denney Voss............... Senior Vice President
Elizabeth C. Senior Vice President
Georgakopoulos.............
Christine M. Modie........... Senior Vice President
Kathleen Preston............. Senior Vice President
</TABLE>
Information relating to the management of the underlying funds is contained in
the applicable prospectuses.
32
<PAGE> 37
ILLUSTRATIONS
- --------------------------------------------------------------------------------
The following pages are intended to illustrate hypothetically how the Cash
Value, Cash Surrender Value and Death Benefit can change over time for Policies
issued to a 45-year old male. The difference between the Cash Value and the Cash
Surrender Value in these illustrations reflects the Surrender Charge that would
be incurred upon a full surrender of the Policy.
Two pages of values are shown for each Death Benefit Option (Level and
Variable). One page illustrates the assumption that the maximum Guaranteed Cost
of Insurance Rates allowable under the Policy are charged in all years. The
other page illustrates the assumption that the current scale of Cost of
Insurance Rates are charged in all years. The Cost of Insurance Rates charged
vary by age, sex (where permitted by state law) and underwriting classification.
The illustrations also reflect a monthly deduction of 0.016667% for the first
ten years following the Initial Premium for premium taxes.
The values shown in these illustrations vary according to assumptions used for
charges, and gross rates of investment returns. The charges consist of 0.90% for
mortality and expense risks, 0.40% for administrative expenses, and 0.61% for
Investment Option expenses. The 12% illustration will assume that the mortality
and expense risk charge has been reduced to 0.75% in the second policy year and
thereafter. The charge for Investment Option expenses reflected in the
illustrations assumes that Cash Value is allocated equally among all Investment
Options and that no Policy Loans are outstanding, and is an average of the
investment advisory fees and other expenses charged by each of the Investment
Options during 1998. After deduction of these amounts, the illustrated gross
annual investment rates of return of 0% and 6% correspond to approximate net
annual rates of -1.91% and 4.09%, respectively. The illustrated gross annual
investment rate of return of 12% corresponds to an approximate net annual rate
of return of 10.09% in the first Policy Year, and 10.24% thereafter. The actual
charges under a Policy for expenses of the Investment Options will depend on the
actual allocation of Cash Value and may be higher or lower than those
illustrated.
As stated above, the examples illustrate values that would result based upon
hypothetical uniform gross investment rates of return of 0%, 6% and 12%. The
values would be different from those shown if the gross rates averaged 0%, 6%,
and 12% over a period of years, but fluctuated above and below those averages.
The illustrations also assume that premiums are paid as indicated, no policy
loans are made, no increases or decreases to the Stated Amount are requested, no
partial surrenders are made, and no charges for transfers between funds are
incurred.
The illustrations do not reflect any charges for federal income taxes against
Separate Account Three, since the Company is not currently deducting such
charges from Separate Account Three. However, such charges may be made in the
future, and in that event, the gross annual investment rates of return would
have to exceed 0%, 6% and 12% by an amount sufficient to cover the tax charges
in order to produce the Death Benefits, Cash Values and Cash Surrender Values
illustrated.
The second column of each Illustration shows the amount that would accumulate if
an amount equal to the Premium Payment was invested to earn interest (after
taxes) at 5%, compounded annually.
Upon request, the Company will provide a comparable personalized illustration
based upon the proposed Insured's age, sex, underwriting classification, the
specified insurance benefits, and the premium requested. The illustration will
show average fund expenses or, if requested, actual fund expenses. The
hypothetical gross annual investment return assumed in such an illustration will
not exceed 12%.
33
<PAGE> 38
THIS PAGE INTENTIONALLY LEFT BLANK.
34
<PAGE> 39
VINTAGE LIFE
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
LEVEL DEATH BENEFIT OPTION
ILLUSTRATED WITH CURRENT COST OF INSURANCE CHARGES
Male, Issue Age 45 Face Amount: $106,918
Non-Smoker Single Premium: $25,000
<TABLE>
<CAPTION>
TOTAL
PREMIUMS DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
WITH 5% --------------------------- ------------------------- -------------------------
YEAR INTEREST 0% 6% 12% 0% 6% 12% 0% 6% 12%
- ---- -------- ------- ------- ------- ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 106,918 106,918 106,918 24,239 25,730 27,222 22,364 23,855 25,347
2 27,563 106,918 106,918 106,918 23,472 26,472 29,691 21,597 24,597 27,816
3 28,941 106,918 106,918 106,918 22,699 27,224 32,396 20,949 25,474 30,646
4 30,388 106,918 106,918 106,918 21,916 27,986 35,362 20,166 26,236 33,612
5 31,907 106,918 106,918 106,918 21,122 28,756 38,614 19,497 27,131 36,989
6 33,502 106,918 106,918 106,918 20,314 29,533 42,183 18,814 28,033 40,683
7 35,178 106,918 106,918 106,918 19,486 30,314 46,101 18,236 29,064 44,851
8 36,936 106,918 106,918 106,918 18,633 31,095 50,405 17,633 30,095 49,405
9 38,783 106,918 106,918 106,918 17,760 31,879 55,142 17,010 31,129 54,392
10 40,722 106,918 106,918 106,918 16,853 32,658 60,354 16,853 32,658 60,354
15 51,973 106,918 106,918 129,429 12,016 36,955 96,589 12,016 36,955 96,589
20 66,332 106,918 106,918 189,133 5,611 40,939 155,027 5,611 40,939 155,027
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6%, or 12%
over a period of years but fluctuated above or below the average for individual
contract years. No representations can be made that these rates of return can be
achieved for any one year or sustained over a period of time.
35
<PAGE> 40
VINTAGE LIFE
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
LEVEL DEATH BENEFIT OPTION
ILLUSTRATED WITH GUARANTEED COST OF INSURANCE CHARGES
Male, Issue Age 45 Face Amount: $106,918
Non-Smoker Single Premium: $25,000
<TABLE>
<CAPTION>
TOTAL
PREMIUMS DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
WITH 5% --------------------------- ------------------------- -------------------------
YEAR INTEREST 0% 6% 12% 0% 6% 12% 0% 6% 12%
- ---- -------- ------- ------- ------- ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 106,918 106,918 106,918 24,089 25,576 27,064 22,214 23,701 25,189
2 27,563 106,918 106,918 106,918 23,161 26,146 29,352 21,286 24,271 27,477
3 28,941 106,918 106,918 106,918 22,213 26,707 31,848 20,463 24,957 30,098
4 30,388 106,918 106,918 106,918 21,243 27,256 34,574 19,493 25,506 32,824
5 31,907 106,918 106,918 106,918 20,245 27,791 37,556 18,620 26,166 35,931
6 33,502 106,918 106,918 106,918 19,216 28,306 40,818 17,716 26,806 39,318
7 35,178 106,918 106,918 106,918 18,145 28,794 44,390 16,895 27,544 43,140
8 36,936 106,918 106,918 106,918 17,027 29,249 48,304 16,027 28,249 47,304
9 38,783 106,918 106,918 106,918 15,851 29,662 52,599 15,101 28,912 51,849
10 40,722 106,918 106,918 106,918 14,608 30,024 57,319 14,608 30,024 57,319
15 51,973 106,918 106,918 120,936 7,225 31,172 90,251 7,225 31,172 90,251
20 66,332 0* 106,918 174,681 0* 29,499 143,181 0* 29,499 143,181
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6%, or 12%
over a period of years but fluctuated above or below the average for individual
contract years. No representations can be made that these rates of return can be
achieved for any one year or sustained over a period of time.
* Insufficient cash value would be developed to continue the contract without
additional premium payments.
36
<PAGE> 41
VINTAGE LIFE
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
VARIABLE DEATH BENEFIT OPTION
ILLUSTRATED WITH CURRENT COST OF INSURANCE CHARGES
Male, Issue Age 45 Face Amount: $106,918
Non-Smoker Single Premium: $25,000
<TABLE>
<CAPTION>
TOTAL
PREMIUMS DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
WITH 5% --------------------------- ------------------------- -------------------------
YEAR INTEREST 0% 6% 12% 0% 6% 12% 0% 6% 12%
- ---- -------- ------- ------- ------- ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 131,086 132,573 134,061 24,168 25,655 27,143 22,293 23,780 25,268
2 27,563 130,248 133,229 136,429 23,330 26,311 29,511 21,455 24,436 27,636
3 28,941 129,400 133,882 139,006 22,482 26,964 32,088 20,732 25,214 30,338
4 30,388 128,541 134,531 141,811 21,623 27,613 34,893 19,873 25,863 33,143
5 31,907 127,669 135,173 144,863 20,751 28,255 37,945 19,126 26,630 36,320
6 33,502 126,781 135,803 148,183 19,863 28,885 41,265 18,363 27,385 39,765
7 35,178 125,870 136,416 151,794 18,952 29,498 44,876 17,702 28,248 43,626
8 36,936 124,933 137,006 155,717 18,015 30,088 48,799 17,015 29,088 47,799
9 38,783 123,974 137,575 159,988 17,056 30,657 53,070 16,306 29,907 52,320
10 40,722 122,978 138,108 164,628 16,060 31,190 57,710 16,060 31,190 57,710
15 51,973 117,704 140,648 195,811 10,786 33,730 88,893 10,786 33,730 88,893
20 66,332 110,942 141,486 243,974 4,024 34,568 137,056 4,024 34,568 137,056
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6%, or 12%
over a period of years but fluctuated above or below the average for individual
contract years. No representations can be made that these rates of return can be
achieved for any one year or sustained over a period of time.
37
<PAGE> 42
VINTAGE LIFE
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
VARIABLE DEATH BENEFIT OPTION
ILLUSTRATED WITH GUARANTEED COST OF INSURANCE CHARGES
Male, Issue Age 45 Face Amount: $106,918
Non-Smoker Single Premium: $25,000
<TABLE>
<CAPTION>
TOTAL
PREMIUMS DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
WITH 5% --------------------------- ------------------------- -------------------------
YEAR INTEREST 0% 6% 12% 0% 6% 12% 0% 6% 12%
- ---- -------- ------- ------- ------- ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 130,891 132,372 133,853 23,973 25,454 26,935 22,098 23,579 25,060
2 27,563 129,846 132,802 135,976 22,928 25,884 29,058 21,053 24,009 27,183
3 28,941 128,779 133,203 138,265 21,861 26,285 31,347 20,111 24,535 29,597
4 30,388 127,687 133,572 140,733 20,769 26,654 33,815 19,019 24,904 32,065
5 31,907 126,567 133,902 143,393 19,649 26,984 36,475 18,024 25,359 34,850
6 33,502 125,413 134,185 146,259 18,495 27,267 39,341 16,995 25,767 37,841
7 35,178 124,217 134,410 149,341 17,299 27,492 42,423 16,049 26,242 41,173
8 36,936 122,971 134,567 152,653 16,053 27,649 45,735 15,053 26,649 44,735
9 38,783 121,667 134,642 156,205 14,749 27,724 49,287 13,999 26,974 48,537
10 40,722 120,296 134,624 160,014 13,378 27,706 53,096 13,378 27,706 53,096
15 51,973 112,348 133,028 184,421 5,430 26,110 77,503 5,430 26,110 77,503
20 66,332 0* 126,785 219,209 0* 19,867 112,291 0* 19,867 112,291
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6%, or 12%
over a period of years but fluctuated above or below the average for individual
contract years. No representations can be made that these rates of return can be
achieved for any one year or sustained over a period of time.
* Insufficient cash value would be developed to continue the contract without
additional premium payments.
38
<PAGE> 43
APPENDIX A
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, Separate Account Three's Investment Options may show the
percentage change in the value of an Accumulation Unit based on the performance
of the Investment Option over a period of time, determined by dividing the
increase (decrease) in value for that unit by the Accumulation Unit Value at the
beginning of the period. Separate Account Three commenced operations on
September 5, 1995. All Investment Options of Separate Account Three invest in
Investment Options that were in existence prior to the date on which the
Investment Options became available under the Policy. Average annual rates of
return include periods prior to the inception of the Investment Option, and are
calculated by adjusting the actual returns of the Investment Options to reflect
the charges that would have been assessed under the Investment Options had the
Investment Option been available under Separate Account Three during the period
shown.
The following performance information represents the percentage change in the
value of an Accumulation Unit of the Investment Options for the periods
indicated, and reflects all expenses of the Investment Options, as well as the
0.90% mortality and expense risk charge and the 0.40% administrative expense
charge assessed against the Investment Options. The rates of return do not
reflect surrender charges or Monthly Deduction Amounts (which are depicted in
the Example following the Rates of Return), nor do they reflect a reduction in
mortality and expense risk charges which may apply under certain circumstances.
For information about the Charges assessed under the Policy, see "Charges and
Deductions." For illustrations of how these charges affect Cash Values and Death
Benefits, see "Illustrations."
AVERAGE RATES OF RETURN (SINCE INCEPTION)
FOR PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
INVESTMENT OPTION 1 YEAR 3 YEARS INCEPTION DATE
----------------- ------ ------- --------------
<S> <C> <C> <C>
Smith Barney Large Cap Value Portfolio............ 8.42% 17.01% 6/20/94
Alliance Growth Portfolio......................... 27.42% 27.49% 6/20/94
Van Kampen Enterprise Portfolio................... 23.54% 23.91% 6/21/94
Smith Barney International Equity Portfolio....... 5.12% 7.38% 6/20/94
The Travelers Managed Income Portfolio............ 3.72% 4.53% 6/28/94
Putnam Diversified Income Portfolio............... -0.63% 4.11% 6/20/94
Smith Barney High Income Portfolio................ -0.86% 7.56% 6/22/94
MFS Total Return Portfolio........................ 10.24% 14.23% 6/20/94
Smith Barney Money Market Portfolio............... 3.70% 3.68% 6/20/94
AIM Capital Appreciation Portfolio................ 15.72% 13.26% 10/10/95
Total Return Portfolio............................ 3.61% 13.95% 11/21/94
Zero Coupon Bond Fund Portfolio 2000.............. 6.20% 4.48% 10/11/95
Zero Coupon Bond Fund Portfolio 2005.............. 1.87% 6.95% 10/11/95
MFS Emerging Growth Portfolio..................... 32.63% -- 8/30/96
Concert Select High Growth Portfolio.............. 14.05% -- 2/5/97
Concert Select Growth Portfolio................... 12.52% -- 2/5/97
Concert Select Balanced Portfolio................. 8.11% -- 2/5/97
Concert Select Conservative Portfolio............. 4.65% -- 2/5/97
Concert Select Income Portfolio................... 3.96% -- 2/5/97
</TABLE>
* Formerly known as Van Kampen American Capital Enterprise Portfolio
** Formerly known as TBC Managed Income Portfolio
39
<PAGE> 44
EXAMPLE OF POLICY CHARGES
- --------------------------------------------------------------------------------
The following chart illustrates the surrender charges and Monthly Deduction
Amounts (including the Cost of Insurance charges and the deduction for premium
tax) that would apply under a Policy based on the assumptions listed below.
Surrender charges and Monthly Deduction Amounts generally will be higher for an
Insured who is older than the assumed Insured, and lower for an Insured who is
younger (assuming the Insureds have the same risk classification). Cost of
insurance rates increase each year as the Insured becomes a year older.
<TABLE>
<S> <C>
Male, Age 35, Non-Smoker Face Amount: $167,193
$25,000 Single Premium Level Death Benefit Option
Hypothetical Gross Annual Investment Rate of Return: 10%* Current Charges
</TABLE>
<TABLE>
<CAPTION>
MONTHLY DEDUCTION AMOUNTS
SURRENDER CHARGE ---------------------------
POLICY CUMULATIVE AS % OF CUM. COST OF INSURANCE PREMIUM
YEAR PREMIUMS PREM. CHARGES TAX
- ------ ---------- ---------------- ----------------- -------
<S> <C> <C> <C> <C>
1 $25,000 7.5% $215.00 $52.00
2 $25,000 7.5% $223.00 $55.00
3 $25,000 7.0% $233.00 $59.00
5 $25,000 6.5% $255.00 $68.00
10 $25,000 0% $323.00 $95.00
</TABLE>
* Hypothetical investment results shown above are illustrative only and should
not be deemed a representation of past or future investment results. Actual
investment results may be more or less than those shown. Hypothetical
investment results may be different from those shown if the actual rates of
return averaged 10%, but fluctuated above or below that average for individual
policy years. No representations can be made that the hypothetical rates
assumed can be achieved for any one year or sustained over any period of time.
40
<PAGE> 45
APPENDIX B
REPRESENTATIVE STATED AMOUNTS
- --------------------------------------------------------------------------------
The following table represents the Single Premium Factors for the determination
of the Stated Amount per dollar of Gross Premium, varying by Male and Female
(applicable to standard lives).
<TABLE>
<CAPTION>
MALE FEMALE
- ---------------------------- ----------------------------
AGE SP FAC AGE SP FAC AGE SP FAC AGE SP FAC
- --- -------- --- ------- --- -------- --- -------
<S> <C> <C> <C> <C> <C> <C> <C>
20 12.65742 51 3.32670 20 16.15463 51 4.13678
21 12.20773 52 3.19482 21 15.48558 52 3.97060
22 11.76323 53 3.06987 22 14.83810 53 3.81237
23 11.32222 54 2.95167 23 14.21155 54 3.66170
24 10.88482 55 2.83985 24 13.60662 55 3.51803
25 10.45123 56 2.73405 25 13.02272 56 3.38078
26 10.02300 57 2.63380 26 12.45932 57 3.24928
27 9.60257 58 2.53865 27 11.91653 58 3.12290
28 9.19198 59 2.44827 28 11.39430 59 3.00125
29 8.79287 60 2.36238 29 10.89240 60 2.88420
30 8.40647 61 2.28087 30 10.41067 61 2.77188
31 8.03383 62 2.20360 31 9.94865 62 2.66457
32 7.67547 63 2.13053 32 9.50535 63 2.56258
33 7.33157 64 2.06153 33 9.08002 64 2.46607
34 7.00238 65 1.99645 34 8.67288 65 2.37482
35 6.68772 66 1.93500 35 8.28367 66 2.28843
36 6.38750 67 1.87688 36 7.91217 67 2.20637
37 6.10155 68 1.82180 37 7.55883 68 2.12805
38 5.82963 69 1.76950 38 7.22327 69 2.05307
39 5.57132 70 1.71990 39 6.90517 70 1.98132
40 5.32610 71 1.67297 40 6.60400 71 1.91287
41 5.09358 72 1.62875 41 6.31898 72 1.84795
42 4.87303 73 1.58733 42 6.04912 73 1.78683
43 4.66378 74 1.54873 43 5.79305 74 1.72965
44 4.46520 75 1.51285 44 5.54958 75 1.67632
45 4.27672 76 1.47945 45 5.31792 76 1.62663
46 4.09775 77 1.44823 46 5.09715 77 1.58023
47 3.92765 78 1.41890 47 4.88652 78 1.53675
48 3.76588 79 1.39115 48 4.68553 79 1.49587
49 3.61205 80 1.36485 49 4.49387 80 1.45742
50 2.46573 50 4.31108
</TABLE>
41
<PAGE> 46
THIS PAGE INTENTIONALLY LEFT BLANK.
<PAGE> 47
THIS PAGE INTENTIONALLY LEFT BLANK.
<PAGE> 48
VINTAGELIFE
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
INDIVIDUAL VARIABLE LIFE INSURANCE POLICIES
ISSUED BY
THE TRAVELERS INSURANCE COMPANY HARTFORD, CONNECTICUT
L-12430 May, 1999
<PAGE> 49
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments in eligible funds at market value:
Greenwich Street Series Fund, 129,109 shares (cost $2,200,095) ........... $ 2,265,856
Smith Barney Concert Allocation Series Inc., 16,202 shares (cost $196,699) 196,806
The Travelers Series Trust, 67,242 shares (cost $761,785) ................ 826,735
Travelers Series Fund Inc., 3,668,029 shares (cost $20,629,557) .......... 23,426,120
-----------
Total Investments (cost $23,788,136) ................................... $26,715,517
Receivables:
Dividends .................................................................. 34,044
-----------
Total Assets ........................................................... 26,749,561
-----------
LIABILITIES:
Payables:
Insurance charges ........................................................ 4,837
Administrative fees ...................................................... 2,315
Accrued liabilities ........................................................ 19
-----------
Total Liabilities ........................................................ 7,171
-----------
NET ASSETS: .................................................................. $26,742,390
===========
</TABLE>
See Notes to Financial Statements
-1-
<PAGE> 50
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends ............................................................. $ 983,611
EXPENSES:
Insurance charges ..................................................... $ 187,268
Administrative fees ................................................... 90,563
----------
Total expenses ...................................................... 277,831
----------
Net investment income ............................................. 705,780
----------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold ...................................... 9,513,348
Cost of investments sold ............................................ 9,159,876
----------
Net realized gain (loss) .......................................... 353,472
Change in unrealized gain (loss) on investments:
Unrealized gain at December 31, 1997 ................................ 1,623,358
Unrealized gain at December 31, 1998 ................................ 2,927,381
----------
Net change in unrealized gain (loss) for the year ................. 1,304,023
----------
Net realized gain (loss) and change in unrealized gain (loss) ..... 1,657,495
----------
Net increase in net assets resulting from operations .................... $2,363,275
==========
</TABLE>
See Notes to Financial Statements
-2-
<PAGE> 51
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
OPERATIONS:
<S> <C> <C>
Net investment income ....................................... $ 705,780 $ 57,855
Net realized gain (loss) from investment transactions ....... 353,472 198,491
Net change in unrealized gain (loss) on investments ......... 1,304,023 1,339,147
------------ ------------
Net increase in net assets resulting from operations ...... 2,363,275 1,595,493
------------ ------------
UNIT TRANSACTIONS:
Participant premium payments
(applicable to 8,130,176 and 9,499,785 units, respectively) 8,920,352 10,072,788
Participant transfers from other Travelers accounts
(applicable to 6,758,795 and 5,814,161 units, respectively) 9,841,235 7,483,363
Growth rate intra-fund transfers in
(applicable to 5,722,722 and 5,507,303 units, respectively) 8,383,600 7,198,001
Contract surrenders
(applicable to 454,917 and 318,674 units, respectively) ... (627,508) (403,189)
Participant transfers to other Travelers accounts
(applicable to 9,228,749 and 8,564,026 units, respectively) (10,278,808) (9,195,127)
Growth rate intra-fund transfers out
(applicable to 5,729,503 and 5,520,915 units, respectively) (8,383,600) (7,198,001)
------------ ------------
Net increase in net assets resulting from unit transactions ... 7,855,271 7,957,835
------------ ------------
Net increase in net assets .................................. 10,218,546 9,553,328
NET ASSETS:
Beginning of year ........................................... 16,523,844 6,970,516
------------ ------------
End of year ................................................. $ 26,742,390 $ 16,523,844
============ ============
</TABLE>
See Notes to Financial Statements
-3-
<PAGE> 52
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Variable Life Insurance Separate Account Three ("Separate Account
Three") is a separate account of The Travelers Insurance Company ("The
Travelers"), an indirect wholly owned subsidiary of Citigroup Inc. (formerly
Travelers Group Inc.), and is available for funding certain variable life
insurance contracts issued by The Travelers. Separate Account Three is
registered under the Investment Company Act of 1940, as amended, as a unit
investment trust.
Participant premium payments applied to Separate Account Three are invested in
one or more eligible funds in accordance with the selection made by the contract
owner. As of December 31, 1998, the eligible funds available under Separate
Account Three were: Zero Coupon Bond Fund Portfolio Series 2000, Zero Coupon
Bond Fund Portfolio Series 2005 and MFS Emerging Growth Portfolio of The
Travelers Series Trust; Alliance Growth Portfolio, Van Kampen Enterprise
Portfolio (formerly Van Kampen American Capital Enterprise Portfolio), TBC
Managed Income Portfolio, Smith Barney High Income Portfolio, Smith Barney
International Equity Portfolio, Smith Barney Large Cap Value Portfolio (formerly
Smith Barney Income and Growth Portfolio), Smith Barney Money Market Portfolio,
Putnam Diversified Income Portfolio, MFS Total Return Portfolio and AIM Capital
Appreciation Portfolio of Travelers Series Fund Inc.; Total Return Portfolio of
Greenwich Street Series Fund; and Select High Growth Portfolio, Select Growth
Portfolio, Select Balanced Portfolio, Select Conservative Portfolio and Select
Income Portfolio of Smith Barney Concert Allocation Series Inc. The Travelers
Series Trust and Greenwich Street Series Fund are registered as Massachusetts
business trusts. Travelers Series Fund Inc. and Smith Barney Concert Allocation
Series Inc. are incorporated under Maryland law. All eligible funds are managed
by affiliates of The Travelers. Not all funds may be available in all states or
to all contract owners.
Effective December 18, 1998, the Zero Coupon Bond Fund Portfolio Series 1998 of
The Travelers Series Trust was fully liquidated.
The following is a summary of significant accounting policies consistently
followed by Separate Account Three in the preparation of its financial
statements.
SECURITY VALUATION. Investments are valued daily at the net asset values per
share of the underlying funds.
SECURITY TRANSACTIONS. Security transactions are accounted for on the trade
date. Dividend income is recorded on the ex-dividend date.
FEDERAL INCOME TAXES. The operations of Separate Account Three form a part of
the total operations of The Travelers and are not taxed separately. The
Travelers is taxed as a life insurance company under the Internal Revenue Code
of 1986, as amended (the "Code"). Under existing federal income tax law, no
taxes are payable on the investment income of Separate Account Three. Separate
Account Three is not taxed as a "regulated investment company" under Subchapter
M of the Code.
OTHER. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments were
$18,051,860 and $9,513,348, respectively, for the year ended December 31, 1998.
Realized gains and losses from investment transactions are reported on an
identified cost basis. The cost of investments in eligible funds was $23,788,136
at December 31, 1998. Gross unrealized appreciation for all investments at
December 31, 1998 was $2,973,645. Gross unrealized depreciation for all
investments at December 31, 1998 was $46,264.
-4-
<PAGE> 53
NOTES TO FINANCIAL STATEMENTS - CONTINUED
3. CONTRACT CHARGES
Insurance charges are paid for the mortality and expense risks assumed by The
Travelers. These charges are equivalent to 0.90% of the average net assets of
Separate Account Three on an annual basis. (Contracts in this category are
identified as Price 1 in Note 4.) For any contract year that follows a contract
year in which the participant's average net fund growth rate (as described in
the prospectus) is 6.5% or greater, these charges will be reduced to 0.75%.
(Contracts in this category are identified as Price 2 in Note 4.)
Administrative fees are paid for administrative expenses incurred by The
Travelers. This charge is equivalent to 0.40% of the average net assets of
Separate Account Three on an annual basis.
Travelers Life receives contingent surrender charges on full or partial contract
surrenders. Such charges are computed by applying various percentages to
premiums and/or stated contract amounts (as described in the prospectus).
Travelers Life received $15,869 in satisfaction of such contingent surrender
charges for the year ended December 31, 1998. No contingent surrender charges
were received for the year ended December 31, 1997.
4. NET CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
UNIT NET
UNITS VALUE ASSETS
----------- --------- ------------
<S> <C> <C> <C>
Greenwich Street Series Fund
Total Return Portfolio
Price 1 ............................... 784,945 $1.545 $1,212,749
Price 2 ............................... 677,997 1.552 1,052,503
Smith Barney Concert Allocation Series Inc.
Select Balanced Portfolio
Price 1 ............................... 105,397 1.057 111,442
Select Conservative Portfolio
Price 2 ............................... 5,744 1.042 5,986
Select Growth Portfolio
Price 1 ............................... 69,854 1.136 79,323
The Travelers Series Trust
MFS Emerging Growth Portfolio
Price 1 ............................... 82,740 1.515 125,379
Price 2 ............................... 70,886 1.519 107,671
Zero Coupon Bond Fund Portfolio Series 2000
Price 1 ............................... 27,032 1.139 30,784
Price 2 ............................... 48,307 1.144 55,261
Zero Coupon Bond Fund Portfolio Series 2005
Price 1 ............................... 197,135 1.215 239,439
Price 2 ............................... 244,036 1.220 297,733
</TABLE>
-5-
<PAGE> 54
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. NET CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------
UNIT NET
UNITS VALUE ASSETS
---------- --------- --------------
<S> <C> <C> <C>
Travelers Series Fund Inc.
AIM Capital Appreciation Portfolio
Price 1 ................................. 917,451 $1.483 $ 1,360,232
Price 2 ................................. 907,038 1.489 1,350,961
Alliance Growth Portfolio
Price 1 ................................. 1,189,163 2.138 2,542,991
Price 2 ................................. 1,323,768 2.149 2,844,371
MFS Total Return Portfolio
Price 1 ................................. 1,487,860 1.502 2,234,145
Price 2 ................................. 1,181,502 1.509 1,782,319
Putnam Diversified Income Portfolio
Price 1 ................................. 559,849 1.126 630,614
Price 2 ................................. 347,000 1.131 392,610
Smith Barney International Equity Portfolio
Price 1 ................................. 887,532 1.274 1,130,565
Price 2 ................................. 807,884 1.280 1,033,787
Smith Barney Money Market Portfolio
Price 1 ................................. 1,933,615 1.124 2,173,012
Price 2 ................................. 291,581 1.129 329,267
Smith Barney High Income Portfolio
Price 1 ................................. 496,847 1.279 635,280
Price 2 ................................. 315,096 1.285 404,804
Smith Barney Large Cap Value Portfolio
Price 1 ................................. 570,415 1.597 910,893
Price 2 ................................. 484,666 1.604 777,535
TBC Managed Income Portfolio
Price 1 ................................. 128,191 1.135 145,436
Price 2 ................................. 131,866 1.139 150,254
Van Kampen Enterprise Portfolio
Price 1 ................................. 682,741 1.927 1,315,586
Price 2 ................................. 660,966 1.936 1,279,458
-----------
Net Contract Owners' Equity ................. $26,742,390
===========
</TABLE>
-6-
<PAGE> 55
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
INVESTMENT OPTIONS NO. OF MARKET
SHARES VALUE
----------- -----------
<S> <C> <C>
GREENWICH STREET SERIES FUND (8.5%)
Total Return Portfolio
Total (Cost $2,200,095) ................................... 129,109 $ 2,265,856
----------- -----------
SMITH BARNEY CONCERT ALLOCATION SERIES INC. (0.7%)
Select Balanced Portfolio (Cost $111,762) ................... 9,344 111,473
Select Conservative Portfolio (Cost $5,846) ................. 515 5,987
Select Growth Portfolio (Cost $79,091) ...................... 6,343 79,346
----------- -----------
Total (Cost $196,699) ..................................... 16,202 196,806
----------- -----------
THE TRAVELERS SERIES TRUST (3.1%)
MFS Emerging Growth Portfolio (Cost $190,094) ............... 13,818 233,112
Zero Coupon Bond Fund Portfolio Series 2000 (Cost $82,635) .. 7,933 81,394
Zero Coupon Bond Fund Portfolio Series 2005 (Cost $489,056) . 45,491 512,229
----------- -----------
Total (Cost $761,785) ..................................... 67,242 826,735
----------- -----------
TRAVELERS SERIES FUND INC. (87.7%)
AIM Capital Appreciation Portfolio (Cost $2,266,251) ........ 187,286 2,711,899
Alliance Growth Portfolio (Cost $4,072,852) ................. 204,819 5,388,785
MFS Total Return Portfolio (Cost $3,664,815) ................ 235,910 4,017,546
Putnam Diversified Income Portfolio (Cost $1,043,326) ....... 85,292 1,023,502
Smith Barney International Equity Portfolio (Cost $2,114,489) 157,564 2,164,934
Smith Barney Money Market Portfolio (Cost $2,498,712) ....... 2,498,712 2,498,712
Smith Barney High Income Portfolio (Cost $1,065,276) ........ 82,177 1,040,366
Smith Barney Large Cap Value Portfolio (Cost $1,503,178) .... 83,567 1,688,882
TBC Managed Income Portfolio (Cost $286,245) ................ 25,129 295,769
Van Kampen Enterprise Portfolio (Cost $2,114,413) ........... 107,573 2,595,725
----------- -----------
Total (Cost $20,629,557) .................................. 3,668,029 23,426,120
----------- -----------
TOTAL INVESTMENT OPTIONS (100%)
(COST $23,788,136) ............................................ $26,715,517
===========
</TABLE>
-7-
<PAGE> 56
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF SEPARATE ACCOUNT THREE OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TOTAL RETURN SELECT BALANCED SELECT CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
<S> <C> <C> <C> <C> <C> <C>
Dividends ......................................... $ 109,725 $ 61,473 $ 2,762 $ -- $ 136 $ --
----------- ----------- ----------- ----- ----------- -----
EXPENSES:
Insurance charges ................................. 16,528 9,145 601 -- 41 --
Administrative fees ............................... 8,096 4,287 267 -- 21 --
----------- ----------- ----------- ----- ----------- -----
Net investment income (loss) .................... 85,101 48,041 1,894 -- 74 --
----------- ----------- ----------- ----- ----------- -----
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold .................. 106,311 140,410 2,065 -- 373 --
Cost of investments sold ........................ 82,668 112,153 2,141 -- 363 --
----------- ----------- ----------- ----- ----------- -----
Net realized gain (loss) ...................... 23,643 28,257 (76) -- 10 --
----------- ----------- ----------- ----- ----------- -----
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of year ........ 129,670 46,648 -- -- -- --
Unrealized gain (loss) end of year .............. 65,761 129,670 (289) -- 141 --
----------- ----------- ----------- ----- ----------- -----
Net change in unrealized gain (loss) for the year . (63,909) 83,022 (289) -- 141 --
----------- ----------- ----------- ----- ----------- -----
Net increase (decrease) in net assets
resulting from operations ....................... 44,835 159,320 1,529 -- 225 --
----------- ----------- ----------- ----- ----------- -----
UNIT TRANSACTIONS:
Participant premium payments ...................... 2,106 -- (1) -- 1 --
Participant transfers from other Travelers accounts 756,221 917,596 111,141 -- 5,854 --
Growth rate intra-fund transfers in ............... 1,159,660 699,667 -- -- 17,044 --
Contract surrenders ............................... (48,984) (61,941) (1,227) -- (94) --
Participant transfers to other Travelers accounts . (34,171) (30,242) -- -- -- --
Growth rate intra-fund transfers out .............. (1,159,660) (699,667) -- -- (17,044) --
----------- ----------- ----------- ----- ----------- -----
Net increase (decrease) in net assets
resulting from unit transactions .............. 675,172 825,413 109,913 -- 5,761 --
----------- ----------- ----------- ----- ----------- -----
Net increase (decrease) in net assets ......... 720,007 984,733 111,442 -- 5,986 --
NET ASSETS:
Beginning of year ............................... 1,545,245 560,512 -- -- -- --
----------- ----------- ----------- ----- ----------- -----
End of year ..................................... $ 2,265,252 $ 1,545,245 $ 111,442 $ -- $ 5,986 $ --
=========== =========== =========== ===== =========== =====
</TABLE>
-8-
<PAGE> 57
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
SELECT GROWTH MFS EMERGING ZERO COUPON BOND FUND ZERO COUPON BOND FUND
PORTFOLIO GROWTH PORTFOLIO PORTFOLIO SERIES 1998 PORTFOLIO SERIES 2000
- ------------------------ ---------------------- ---------------------- ----------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,447 $ -- $ -- $ 996 $ 691 $ 678 $ 4,713 $ 3,185
- --------- ----------- --------- --------- --------- --------- --------- ---------
478 -- 1,171 138 100 102 557 475
212 -- 547 65 53 49 284 226
- --------- ----------- --------- --------- --------- --------- --------- ---------
757 -- (1,718) 793 538 527 3,872 2,484
- --------- ----------- --------- --------- --------- --------- --------- ---------
2,397 -- 17,339 335 20,792 377 28,673 1,627
2,513 -- 15,614 326 20,917 374 26,763 1,597
- --------- ----------- --------- --------- --------- --------- --------- ---------
(116) -- 1,725 9 (125) 3 1,910 30
- --------- ----------- --------- --------- --------- --------- --------- ---------
-- -- (1,417) -- (154) (208) 175 (550)
255 -- 43,018 (1,417) -- (154) (1,241) 175
- --------- ----------- --------- --------- --------- --------- --------- ---------
255 -- 44,435 (1,417) 154 54 (1,416) 725
- --------- ----------- --------- --------- --------- --------- --------- ---------
896 -- 44,442 (615) 567 584 4,366 3,239
- --------- ----------- --------- --------- --------- --------- --------- ---------
-- -- (6) -- (1) -- -- --
80,558 -- 131,117 63,844 7,632 114 51,629 113
-- -- 35,580 -- -- 12,340 -- 51,482
(2,131) -- (1,939) (225) (208) (205) (1,105) (927)
-- -- (3,568) -- (20,560) (102) (26,889) (103)
-- -- (35,580) -- -- (12,340) -- (51,482)
- --------- ----------- --------- --------- --------- --------- --------- ---------
78,427 -- 125,604 63,619 (13,137) (193) 23,635 (917)
- --------- ----------- --------- --------- --------- --------- --------- ---------
79,323 -- 170,046 63,004 (12,570) 391 28,001 2,322
-- -- 63,004 -- 12,570 12,179 58,044 55,722
- --------- ----------- --------- --------- --------- --------- --------- ---------
$ 79,323 $ -- $ 233,050 $ 63,004 $ -- $ 12,570 $ 86,045 $ 58,044
========= =========== ========= ========= ========= ========= ========= =========
</TABLE>
-9-
<PAGE> 58
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF SEPARATE ACCOUNT THREE OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND AIM CAPITAL APPRECIATION
PORTFOLIO SERIES 2005 PORTFOLIO ALLIANCE GROWTH PORTFOLIO
----------------------- ------------------------ -------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
<S> <C> <C> <C> <C> <C> <C>
Dividends ........................................... $ 25,289 $ 16,030 $ 3,292 $ -- $ 249,920 $ --
--------- --------- ---------- ---------- ---------- ----------
EXPENSES:
Insurance charges ................................... 2,772 2,445 18,687 11,337 31,952 16,480
Administrative fees ................................. 1,358 1,201 9,139 5,298 15,842 7,761
--------- --------- ---------- ---------- ---------- ----------
Net investment income (loss) .................... 21,159 12,384 (24,534) (16,635) 202,126 (24,241)
--------- --------- ---------- ---------- ---------- ----------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold .................... 95,085 171,777 214,797 152,823 292,809 167,105
Cost of investments sold .......................... 85,483 166,155 179,624 126,355 194,004 123,729
--------- --------- ---------- ---------- ---------- ----------
Net realized gain (loss) ........................ 9,602 5,622 35,173 26,468 98,805 43,376
--------- --------- ---------- ---------- ---------- ----------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of year .......... 16,260 7,598 135,886 32,420 600,476 97,659
Unrealized gain (loss) end of year ................ 23,173 16,260 445,648 135,886 1,315,933 600,476
--------- --------- ---------- ---------- ---------- ----------
Net change in unrealized gain (loss) for the
year ........................................... 6,913 8,662 309,762 103,466 715,457 502,817
--------- --------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations ....................... 37,674 26,668 320,401 113,299 1,016,388 521,952
--------- --------- ---------- ---------- ---------- ----------
UNIT TRANSACTIONS:
Participant premium payments ........................ 124 -- 771 -- 543 --
Participant transfers from other Travelers
accounts.......................................... 280,507 61,005 836,358 1,033,135 1,794,668 1,184,783
Growth rate intra-fund transfers in ................. 100,613 275,670 948,245 946,825 1,689,982 1,453,046
Contract surrenders ................................. (11,827) (9,282) (50,394) (30,224) (60,954) (56,159)
Participant transfers to other Travelers accounts ... (80,001) (159,336) (139,143) (102,441) (84,269) (77,184)
Growth rate intra-fund transfers out ................ (100,613) (275,670) (948,245) (946,825) (1,689,982) (1,453,046)
--------- --------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets
resulting from unit transactions ................ 188,803 (107,613) 647,592 900,470 1,649,988 1,051,440
--------- --------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets ........... 226,477 (80,945) 967,993 1,013,769 2,666,376 1,573,392
NET ASSETS:
Beginning of year ................................. 310,695 391,640 1,743,200 729,431 2,720,986 1,147,594
--------- --------- ---------- ---------- ---------- ----------
End of year ....................................... $ 537,172 $ 310,695 $2,711,193 $1,743,200 $5,387,362 $2,720,986
========= ========= ========== ========== ========== ==========
</TABLE>
-10-
<PAGE> 59
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
MFS TOTAL RETURN PUTNAM DIVERSIFIED INCOME SMITH BARNEY INTERNATIONAL SMITH BARNEY MONEY MARKET
PORTFOLIO PORTFOLIO EQUITY PORTFOLIO PORTFOLIO
- ---------------------------- ---------------------------- ---------------------------- -----------------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 165,472 $ -- $ 41,663 $ -- $ -- $ -- $ 148,941 $ 131,787
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
28,375 13,067 7,292 3,698 15,310 8,704 26,457 23,575
13,706 6,121 3,500 1,770 7,480 4,126 12,046 10,566
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
123,391 (19,188) 30,871 (5,468) (22,790) (12,830) 110,438 97,646
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
333,398 231,197 90,468 92,623 153,789 61,621 7,856,592 6,865,826
251,109 187,699 84,683 87,094 135,230 52,457 7,856,592 6,865,826
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
82,289 43,498 5,785 5,529 18,559 9,164 -- --
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
263,423 20,902 30,551 1,048 23,396 31,701 -- --
352,731 263,423 (19,824) 30,551 50,445 23,396 -- --
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
89,308 242,521 (50,375) 29,503 27,049 (8,305) -- --
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
294,988 266,831 (13,719) 29,564 22,818 (11,971) 110,438 97,646
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
2,973 -- 2,087 -- (215) -- 8,913,404 10,072,788
1,783,561 1,268,160 580,962 328,642 1,019,843 649,033 118,916 311,243
1,127,953 1,019,454 198,574 279,734 742,861 749,616 404,229 372,612
(169,372) (61,816) (22,723) (11,482) (46,704) (16,824) (112,053) (76,120)
(128,473) (124,119) (54,333) (80,188) (92,664) (49,881) (9,504,606) (8,507,335)
(1,127,953) (1,019,454) (198,574) (279,734) (742,861) (749,616) (404,229) (372,612)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,488,689 1,082,225 505,993 236,972 880,260 582,328 (584,339) 1,800,576
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,783,677 1,349,056 492,274 266,536 903,078 570,357 (473,901) 1,898,222
2,232,787 883,731 530,950 264,414 1,261,274 690,917 2,976,180 1,077,958
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 4,016,464 $ 2,232,787 $ 1,023,224 $ 530,950 $ 2,164,352 $ 1,261,274 $ 2,502,279 $ 2,976,180
============ ============ ============ ============ ============ ============ ============ ============
</TABLE>
-11-
<PAGE> 60
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF SEPARATE ACCOUNT THREE OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
SMITH BARNEY HIGH SMITH BARNEY LARGE CAP TBC MANAGED INCOME
INCOME PORTFOLIO VALUE PORTFOLIO PORTFOLIO
----------------------- ------------------------- ---------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
<S> <C> <C> <C> <C> <C> <C>
Dividends ........................................... $ 54,547 $ -- $ 50,219 $ -- $ 9,960 $ --
----------- --------- ----------- ----------- --------- ---------
EXPENSES:
Insurance charges ................................... 6,803 3,496 11,521 5,358 1,928 850
Administrative fees ................................. 3,317 1,661 5,613 2,498 933 385
----------- --------- ----------- ----------- --------- ---------
Net investment income (loss) .................... 44,427 (5,157) 33,085 (7,856) 7,099 (1,235)
----------- --------- ----------- ----------- --------- ---------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment
transactions:
Proceeds from investments sold .................... 74,472 104,254 52,020 40,643 11,249 2,924
Cost of investments sold .......................... 67,931 92,849 36,116 30,277 9,986 2,705
----------- --------- ----------- ----------- --------- ---------
Net realized gain (loss) ........................ 6,541 11,405 15,904 10,366 1,263 219
----------- --------- ----------- ----------- --------- ---------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of year .......... 46,096 2,719 144,375 15,061 10,636 102
Unrealized gain (loss) end of year ................ (24,910) 46,096 185,704 144,375 9,524 10,636
----------- --------- ----------- ----------- --------- ---------
Net change in unrealized gain (loss) for the year (71,006) 43,377 41,329 129,314 (1,112) 10,534
----------- --------- ----------- ----------- --------- ---------
Net increase (decrease) in net assets
resulting from operations ....................... (20,038) 49,625 90,318 131,824 7,250 9,518
----------- --------- ----------- ----------- --------- ---------
UNIT TRANSACTIONS:
Participant premium payments ........................ (2) -- 116 -- (10) --
Participant transfers from other Travelers accounts . 576,743 228,242 610,611 571,914 135,653 139,944
Growth rate intra-fund transfers in ................. 450,457 265,878 471,489 456,117 156,618 29,923
Contract surrenders ................................. (15,430) (49,839) (27,556) (11,287) (5,797) (2,468)
Participant transfers to other Travelers accounts ... (24,203) (5,695) (19,755) (26,937) (5,219) (88)
Growth rate intra-fund transfers out ................ (450,457) (265,878) (471,489) (456,117) (156,618) (29,923)
----------- --------- ----------- ----------- --------- ---------
Net increase (decrease) in net assets
resulting from unit transactions ................ 537,108 172,708 563,416 533,690 124,627 137,388
----------- --------- ----------- ----------- --------- ---------
Net increase (decrease) in net assets ........... 517,070 222,333 653,734 665,514 131,877 146,906
NET ASSETS:
Beginning of year ................................. 523,014 300,681 1,034,694 369,180 163,813 16,907
----------- --------- ----------- ----------- --------- ---------
End of year ....................................... $ 1,040,084 $ 523,014 $ 1,688,428 $ 1,034,694 $ 295,690 $ 163,813
=========== ========= =========== =========== ========= =========
</TABLE>
-12-
<PAGE> 61
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
VAN KAMPEN ENTERPRISE
PORTFOLIO COMBINED
- -------------------------- ----------------------------
1998 1997 1998 1997
- ----------- ----------- ------------ ------------
<S> <C> <C> <C>
$ 114,834 $ -- $ 983,611 $ 214,149
- ----------- ----------- ------------ ------------
16,695 7,676 187,268 106,546
8,149 3,734 90,563 49,748
- ----------- ----------- ------------ ------------
89,990 (11,410) 705,780 57,855
- ----------- ----------- ------------ ------------
160,719 52,140 9,513,348 8,085,682
108,139 37,595 9,159,876 7,887,191
- ----------- ----------- ------------ ------------
52,580 14,545 353,472 198,491
- ----------- ----------- ------------ ------------
223,985 29,111 1,623,358 284,211
481,312 223,985 2,927,381 1,623,358
- ----------- ----------- ------------ ------------
257,327 194,874 1,304,023 1,339,147
- ----------- ----------- ------------ ------------
399,897 198,009 2,363,275 1,595,493
- ----------- ----------- ------------ ------------
(1,538) -- 8,920,352 10,072,788
959,261 725,595 9,841,235 7,483,363
880,295 585,637 8,383,600 7,198,001
(49,010) (14,390) (627,508) (403,189)
(60,954) (31,476) (10,278,808) (9,195,127)
(880,295) (585,637) (8,383,600) (7,198,001)
- ----------- ----------- ------------ ------------
847,759 679,729 7,855,271 7,957,835
- ----------- ----------- ------------ ------------
1,247,656 877,738 10,218,546 9,553,328
1,347,388 469,650 16,523,844 6,970,516
- ----------- ----------- ------------ ------------
$ 2,595,044 $ 1,347,388 $ 26,742,390 $ 16,523,844
=========== =========== ============ ============
</TABLE>
-13-
<PAGE> 62
NOTES TO FINANCIAL STATEMENTS - CONTINUED
7. SCHEDULE OF UNITS FOR SEPARATE ACCOUNT THREE FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TOTAL RETURN SELECT BALANCED SELECT CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------- ----------------------- ------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 1,034,630 433,485 -- -- -- --
Units purchased and transferred from
other Travelers accounts ......... 1,245,502 1,160,463 106,603 -- 22,606 --
Units redeemed and transferred to
other Travelers accounts ......... (817,190) (559,318) (1,206) -- (16,862) --
---------- ---------- ---------- ---- ---------- ----
Units end of year .................. 1,462,942 1,034,630 105,397 -- 5,744 --
========== ========== ========== ==== ========== ====
</TABLE>
<TABLE>
<CAPTION>
SELECT GROWTH MFS EMERGING GROWTH ZERO COUPON BOND FUND
PORTFOLIO PORTFOLIO PORTFOLIO SERIES 1998
-------------------- ------------------------ ------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ -- -- 55,109 -- 11,669 11,880
Units purchased and transferred from
other Travelers accounts ......... 71,853 -- 128,504 55,304 7,058 11,905
Units redeemed and transferred to
other Travelers accounts ......... (1,999) -- (29,987) (195) (18,727) (12,116)
-------- ---- -------- -------- -------- --------
Units end of year .................. 69,854 -- 153,626 55,109 -- 11,669
======== ==== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND ZERO COUPON BOND FUND AIM CAPITAL APPRECIATION
PORTFOLIO SERIES 2000 PORTFOLIO SERIES 2005 PORTFOLIO
------------------------- -------------------------- --------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 53,978 54,981 283,022 393,923 1,357,987 630,046
Units purchased and transferred from
other Travelers accounts ......... 45,981 49,538 325,899 329,678 1,314,827 1,570,818
Units redeemed and transferred to
other Travelers accounts ......... (24,620) (50,541) (167,750) (440,579) (848,325) (842,877)
---------- ---------- ---------- ---------- ---------- ----------
Units end of year .................. 75,339 53,978 441,171 283,022 1,824,489 1,357,987
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ALLIANCE GROWTH MFS TOTAL RETURN PUTNAM DIVERSIFIED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- ------------------------ -------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 1,617,464 870,543 1,637,053 776,168 467,539 247,942
Units purchased and transferred from
other Travelers accounts ......... 1,905,431 1,810,650 2,024,601 1,788,362 681,582 560,998
Units redeemed and transferred to
other Travelers accounts ......... (1,009,964) (1,063,729) (992,292) (927,477) (242,272) (341,401)
---------- ---------- ---------- ---------- ---------- ----------
Units end of year .................. 2,512,931 1,617,464 2,669,362 1,637,053 906,849 467,539
========== ========== ========== ========== ========== ==========
</TABLE>
-14-
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS - CONTINUED
7. SCHEDULE OF UNITS FOR SEPARATE ACCOUNT THREE FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
SMITH BARNEY INTERNATIONAL SMITH BARNEY MONEY MARKET SMITH BARNEY HIGH INCOME
EQUITY PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------- -------------------------- ---------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 1,039,227 578,127 2,744,995 1,031,783 404,740 261,976
Units purchased and transferred from
other Travelers accounts ........... 1,338,927 1,116,707 8,597,506 10,137,452 783,618 406,299
Units redeemed and transferred to
other Travelers accounts ........... (682,738) (655,607) (9,117,305) (8,424,240) (376,415) (263,535)
----------- ----------- ----------- ----------- ----------- -----------
Units end of year .................. 1,695,416 1,039,227 2,225,196 2,744,995 811,943 404,740
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SMITH BARNEY LARGE CAP TBC MANAGED INCOME VAN KAMPEN ENTERPRISE
VALUE PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------- -------------------------- -------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 701,302 313,239 149,666 16,739 862,199 382,114
Units purchased and transferred from
other Travelers accounts ......... 685,385 750,039 259,943 163,714 1,065,867 909,322
Units redeemed and transferred to
other Travelers accounts ......... (331,606) (361,976) (149,552) (30,787) (584,359) (429,237)
---------- ---------- ---------- ---------- ---------- ----------
Units end of year .................. 1,055,081 701,302 260,057 149,666 1,343,707 862,199
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
COMBINED
--------------------------
1998 1997
---- ----
<S> <C> <C>
Units beginning of year ............ 12,420,580 6,002,946
Units purchased and transferred from
other Travelers accounts ......... 20,611,693 20,821,249
Units redeemed and transferred to
other Travelers accounts ......... (15,413,169) (14,403,615)
----------- -----------
Units end of year .................. 17,619,104 12,420,580
=========== ===========
</TABLE>
-15-
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
To the Owners of Variable Life Insurance Contracts of The Travelers Variable
Life Insurance Separate Account Three:
We have audited the accompanying statement of assets and liabilities of The
Travelers Variable Life Insurance Separate Account Three as of December 31,
1998, and the related statement of operations for the year then ended and the
statement of changes in net assets for each of the two years in the period then
ended. These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of shares owned as of December 31, 1998, by correspondence with the
underlying funds. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Travelers Variable Life
Insurance Separate Account Three as of December 31, 1998, the results of its
operations for the year then ended and the changes in its net assets for each of
the two years in the period then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
Hartford, Connecticut
February 17, 1999
<PAGE> 65
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> 66
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> 67
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 $49,440
=============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 68
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS AND ACCUMULATED
OTHER CHANGES IN EQUITY FROM NON-OWNER SOURCES
($ 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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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 $1.5 million.
The Company writes workers' compensation business through its Accident
Department. This business is ceded 100% to an affiliate, The Travelers
Indemnity Company.
F-13
<PAGE> 78
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A summary of reinsurance financial data reflected within the consolidated
statements of income and balance sheets is presented below ($ 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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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 $207 million, by an affiliate.
Minimum future capital lease payments are not significant.
The Company is reimbursed for use of furniture and equipment through cost
sharing agreements by its affiliates.
F-23
<PAGE> 88
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. FEDERAL INCOME TAXES
($ 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 $8 million, respectively.
F-24
<PAGE> 89
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 1998 and 1997 were comprised
of the tax effects of temporary differences related to the following assets
and liabilities:
<TABLE>
<CAPTION>
($ 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> 90
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 $65
----------------------------------------------------------------------
</TABLE>
F-26
<PAGE> 91
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Changes in net unrealized investment gains (losses) that are reported as
accumulated other changes in equity from non-owner sources or unrealized
gains on Citigroup stock in shareholder's equity were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
------- ------- -------
($ 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
$5.1 billion at December 31, 1998 and 1997, respectively.
F-27
<PAGE> 92
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of investments in fixed maturities were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 GROSS GROSS
($ 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 $21,511
- --------------------------------------------------------------------------------------------------------------
</TABLE>
F-28
<PAGE> 93
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1998, by
contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
($ 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 $1.9 billion of GNMA, FNMA or
FHLMC mortgage-backed pass-through securities at December 31, 1998 and 1997,
respectively. Virtually all of these securities are rated AAA.
F-29
<PAGE> 94
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Equity Securities
The cost and fair values of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
EQUITY SECURITIES: GROSS UNREALIZED GROSS UNREALIZED FAIR
($ 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 $3,003
====================================================================================
</TABLE>
Underperforming mortgage loans include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest rates
below market.
F-30
<PAGE> 95
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
YEAR ENDING DECEMBER 31,
($ 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> 96
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> 97
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 $4.4
billion of liabilities are surrenderable without charge. More than 14.2% of
these relate to individual life products. These risks would have to be
underwritten again if transferred to another carrier, which is considered a
significant deterrent against withdrawal by long-term policyholders.
Insurance liabilities that are surrendered or withdrawn are reduced by
outstanding policy loans and related accrued interest prior to payout.
F-33
<PAGE> 98
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
($ 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> 99
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 $56,548
</TABLE>
F-35
<PAGE> 100
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TRAVELERS LIFE AND PRIMERICA LIFE
1997 ($ 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 $42,973
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of investments in equity method investees and total expenditures for
additions to long-lived assets other than financial instruments, long-term
customer relationships of a financial institution, mortgage and other servicing
rights, deferred policy acquisition costs, and deferred tax assets, were not
material.
F-36
<PAGE> 101
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
BUSINESS SEGMENT RECONCILIATION:
($ 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> 102
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
RULE 484 UNDERTAKING
Sections 33-770 et seq, inclusive of the Connecticut General Statutes ("C.G.S.")
regarding indemnification of directors and officers of Connecticut corporations
provides in general that Connecticut corporations shall indemnify their
officers, directors and certain other defined individuals against judgments,
fines, penalties, amounts paid in settlement and reasonable expenses actually
incurred in connection with proceedings against the corporation. The
corporation's obligation to provide such indemnification generally does not
apply unless (1) the individual is wholly successful on the merits in the
defense of any such proceeding; or (2) a determination is made (by persons
specified in the statute) that the individual acted in good faith and in the
best interests of the corporation and in all other cases, his conduct was at
least not opposed to the best interests of the corporation, and in a criminal
case he had no reasonable cause to believe his conduct was unlawful; or (3) the
court, upon application by the individual, determines in view of all of the
circumstances that such person is fairly and reasonably entitled to be
indemnified, and then for such amount as the court shall determine. With respect
to proceedings brought by or in the right of the corporation, the statute
provides that the corporation shall indemnify its officers, directors and
certain other defined individuals, against reasonable expenses actually incurred
by them in connection with such proceedings, subject to certain limitations.
Citigroup Inc. also provides liability insurance for its directors and officers
and the directors and officers of its subsidiaries, including the Registrant.
This insurance provides for coverage against loss from claims made against
directors and officers in their capacity as such, including, subject to certain
exceptions, liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
UNDERTAKING TO REPRESENT REASONABLENESS OF CHARGES
The Company hereby represents that the aggregate charges under the Policy of the
Registrant described herein are reasonable in relation to the services rendered,
the expenses expected to be incurred, and the risks assumed by the Company.
<PAGE> 103
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
<TABLE>
<S> <C>
- - The facing sheet.
- - The Prospectus.
- - The undertaking to file reports.
- - The signatures.
- - Written consents of the following persons:
A. Consent of Katherine M. Sullivan, General Counsel, to the filing of her
opinion as an exhibit to this Registration Statement and to the
reference to her opinion under the caption "Legal Proceedings and
Opinion" in the Prospectus. (See Exhibit 11 below).
B. Consent and Actuarial Opinion pertaining to the illustrations contained
in the Prospectus.
C. Consent of KPMG LLP, Independent Certified Public Accountants.
D. Powers of Attorney (See Exhibit 12 below).
- - The following Exhibits:
1. Resolution of the Board of Directors of The Travelers Insurance Company
authorizing the establishment of the Registrant. (Incorporated herein
by reference to Exhibit 1 to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-6, filed August 21, 1995.)
2. Not applicable.
3(a). 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). 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.)
3(c). Agents Agreement, including schedule of sales commissions.
(Incorporated herein by reference to Exhibit 3(c) to Post-Effective
Amendment No. 1 to the Registration Statement on Form S-6, filed April
25, 1997.)
4. None
5. Variable Life Insurance Policy. (Incorporated herein by reference to
Exhibit 5 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-6, filed August 21, 1995.)
6(a). Charter of The Travelers Insurance Company, as amended on October 19,
1994. (Incorporated herein by reference to Exhibit 3(a)(i) to the
Registration Statement on Form S-2, File No. 33-58677 filed via Edgar
on April 18, 1995.)
</TABLE>
<PAGE> 104
<TABLE>
<S> <C>
6(b). By-Laws of The Travelers Insurance Company, as amended on October 20,
1994. (Incorporated herein by reference to Exhibit 3(b)(i) to the
Registration Statement on Form S-2, File No. 33-58677 filed via Edgar
on April 18, 1995.)
7. None
8. None
9. None
10. Application for Variable Life Insurance Policy. (Incorporated herein by
reference to Exhibit 10 to Post-Effective Amendment No. 3 to the
Registration Statement on Form S-6 filed April 24, 1998.)
11. Opinion of Counsel, regarding the legality of securities being
registered. (Incorporated herein by reference to Exhibit 11 to
Post-Effective Amendment No. 3 to the Registration Statement on Form
S-6 filed April 24, 1998.)
12. Powers of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as
signatory for Michael A. Carpenter, Jay S. Benet, George C. Kokulis,
Ian R. Stuart, Katherine M. Sullivan, Robert I. Lipp and Marc P. Weill.
(Incorporated herein by reference to Exhibit 12 to Post-Effective
Amendment No. 1 to the Registration Statement on Form S-6, filed April
25, 1998.)
12(a). Powers of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as
signatory for J. Eric Daniels and Jay S. Benet.
13. Memorandum concerning transfer and redemption procedures, as required
by Rule 6e-3(T)(b)(12)(ii). (Incorporated herein by reference to
Exhibit 13 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-6, filed August 21, 1995.)
</TABLE>
<PAGE> 105
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant, The
Travelers Variable Life Insurance Separate Account Three, certifies that it
meets all of the requirements for effectiveness of this post-effective amendment
to this registration statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this post-effective amendment to this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hartford, State of Connecticut, on the 28th day of
April, 1999.
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
(Registrant)
THE TRAVELERS INSURANCE COMPANY
(Depositor)
By: *JAY S. BENET
----------------------------------------
Jay S. Benet
Senior Vice President, Chief Financial
Officer, Chief Accounting Officer and
Controller
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
on the 28th day of April 1999.
<TABLE>
<S> <C>
*MICHAEL A. CARPENTER Director, 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
(Jay S. Benet) Accounting Officer 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)
*By: -------------------------
Ernest J. Wright,
Attorney-in-Fact
</TABLE>
<PAGE> 106
EXHIBIT INDEX
<TABLE>
<CAPTION>
Attachment
or
Exhibit No. Description Method of Filing
- ------------ ----------- ----------------
<S> <C> <C>
ATTACHMENTS:
B. Consent and Actuarial Opinion pertaining to the Electronically
illustrations contained in the Prospectus.
C. Consent of KPMG LLP, Independent Certified Public Accountants. Electronically
Exhibits:
12(a). Powers of Attorney authorizing Ernest J. Wright or Electronically
Kathleen A. McGah as signatory for J. Eric Daniels
and Jay S. Benet.
</TABLE>
<PAGE> 1
ATTACHMENT B
Re: Travelers' Variable Vintage Life (File No. 33-88576)
Dear Sir or Madam:
In my capacity as Actuary of The Travelers Insurance Company, I have provided
actuarial advice concerning Travelers' Vintage Life product. I also provided
actuarial advice concerning the preparation of the Registration Statement on
Form S-6, File No. 33-88576 (the "Registration Statement") for filing with the
Securities and Exchange Commission under the Securities Act of 1933 in
connection with the Policy.
In my opinion the illustrations of benefits under the Policies included in the
prospectus under the caption "Illustrations of Death Benefit, Cash Values and
Cash Surrender Values" are, based on the assumptions stated in the
illustrations, consistent with the provisions of the Policies. Also, in my
opinion the age selected in the illustrations is representative of the manner in
which the Policies operate.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/Mahir Dugentas, ASA, MAAA
- ----------------------------
Pricing Actuary
Product Development
April 20, 1999
<PAGE> 1
ATTACHMENT C
Consent of Independent Certified Public Accountants
The Board of Directors
The Travelers Insurance Company
We consent to the use of our reports included herein and to the reference to our
firm as experts under the heading "Independent Accountants" in the prospectus.
KPMG LLP
Hartford, Connecticut
April 28, 1999
<PAGE> 1
EXHIBIT 12
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
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 S-6 or other appropriate form under the Securities Act of
1933 for The Travelers Variable Life Insurance Separate Account Three, a
separate account of the Company dedicated specifically to the funding of
variable life insurance 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 VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
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 S-6 or other appropriate form under the Securities Act of 1933 for The
Travelers Variable Life Insurance Separate Account Three, a separate account of
the Company dedicated specifically to the funding of variable life insurance
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
