-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ULsd8rYXDTsHXUHGpVgO5o/iJGrxB7o8LhodYG21tlVucLuCCa1KAMEDKHlr2DDw SesjbvCCWqD96vS5MIFDxA== 0000930413-05-002804.txt : 20050421 0000930413-05-002804.hdr.sgml : 20050421 20050421161125 ACCESSION NUMBER: 0000930413-05-002804 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20050421 DATE AS OF CHANGE: 20050421 EFFECTIVENESS DATE: 20050502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRAVELERS FUND BD II FOR VARIABLE ANNUITIES CENTRAL INDEX KEY: 0000941729 IRS NUMBER: 060904249 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-58131 FILM NUMBER: 05764929 BUSINESS ADDRESS: STREET 1: FINANCIAL SERVICES LEGAL DIVISION STREET 2: ONE TOWER SQUARE CITY: HARTFORD STATE: CT ZIP: 06183 BUSINESS PHONE: 860-277-0111 MAIL ADDRESS: STREET 1: FINANCIAL SERVICES LEGAL DIVISION STREET 2: ONE TOWER SQUARE CITY: HARTFORD STATE: CT ZIP: 06183 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRAVELERS FUND BD II FOR VARIABLE ANNUITIES CENTRAL INDEX KEY: 0000941729 IRS NUMBER: 060904249 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-07259 FILM NUMBER: 05764930 BUSINESS ADDRESS: STREET 1: FINANCIAL SERVICES LEGAL DIVISION STREET 2: ONE TOWER SQUARE CITY: HARTFORD STATE: CT ZIP: 06183 BUSINESS PHONE: 860-277-0111 MAIL ADDRESS: STREET 1: FINANCIAL SERVICES LEGAL DIVISION STREET 2: ONE TOWER SQUARE CITY: HARTFORD STATE: CT ZIP: 06183 485BPOS 1 c36276_485bpos.txt REGISTRATION NO. 33-58131 811-07259 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 POST-EFFECTIVE AMENDMENT NO. 10 AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 AMENDMENT NO. 10 ----------- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES (Exact Name of Registrant) THE TRAVELERS LIFE AND ANNUITY COMPANY (Name of Depositor) ---------- One Cityplace, Hartford, Connecticut 06103-3415 (Address of Depositor's Principal Executive Offices) Depositor's Telephone Number, including area code: (860) 308-1000 ERNEST J. WRIGHT Secretary The Travelers Life and Annuity Company One Cityplace, Hartford, Connecticut 06103-3415 (Name and Address of Agent for Service) ----------- Approximate Date of Proposed Public Offering: _____________________ It is proposed that this filing will become effective (check appropriate box): [ ] immediately upon filing pursuant to paragraph (b) of Rule 485. [ X ] on May 2, 2005 pursuant to paragraph (b) of Rule 485. [ ] __ days after filing pursuant to paragraph (a)(1) of Rule 485. [ N/A ] on ___________ pursuant to paragraph (a)(1) of Rule 485. If appropriate, check the following box: [ N/A ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment. PART A INFORMATION REQUIRED IN A PROSPECTUS TRAVELERS VINTAGE ANNUITY PROSPECTUS: THE TRAVELERS FUND BD FOR VARIABLE ANNUITIES THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES This prospectus describes TRAVELERS VINTAGE ANNUITY, a flexible premium deferred variable annuity contract (the "Contract") issued by The Travelers Insurance Company or The Travelers Life and Annuity Company. The Travelers Life and Annuity Company does not solicit or issue insurance products in the state of New York. Refer to your Contract for the name of your issuing company. The Contract is available in connection with certain retirement plans that qualify for special federal income tax treatment ("Qualified Contracts") as well as those that do not qualify for such treatment ("Non-qualified Contracts"). We may issue it as an individual Contract or as a group Contract. When we issue a group Contract, you will receive a certificate summarizing the Contract's provisions. For convenience, we refer to Contracts and certificates as "Contracts." You can choose to have your premium ("Purchase Payments") accumulate on a variable and/or fixed basis in one of our funding options. Your Contract Value before the Maturity Date and the amount of monthly income afterwards will vary daily to reflect the investment experience of the Variable Funding Options you select. You bear the investment risk of investing in the Variable Funding Options. The Variable Funding Options are: AIM VARIABLE INSURANCE FUNDS THE TRAVELERS SERIES TRUST AIM V.I. Premier Equity Fund -- Series I Shares Convertible Securities Portfolio ALLIANCEBERNSTEIN VARIABLE PRODUCT SERIES FUND, INC. Disciplined Mid Cap Stock Portfolio AllianceBernstein Large Cap Growth Portfolio -- Class B(1) Mercury Large Cap Core Portfolio(2) AMERICAN FUNDS INSURANCE SERIES MFS Mid Cap Growth Portfolio Global Growth Fund -- Class 2 Shares TRAVELERS SERIES FUND INC. Growth Fund -- Class 2 Shares AIM Capital Appreciation Portfolio Growth-Income Fund -- Class 2 Shares MFS Total Return Portfolio DREYFUS VARIABLE INVESTMENT FUND Pioneer Strategic Income Portfolio Developing Leaders Portfolio -- Initial Shares Salomon Brothers Strategic Total Return Bond Portfolio GREENWICH STREET SERIES FUND Smith Barney High Income Portfolio Equity Index Portfolio -- Class II Shares Smith Barney International All Cap Growth Portfolio Fundamental Value Portfolio Smith Barney Large Cap Value Portfolio SALOMON BROTHERS VARIABLE SERIES FUNDS INC. Smith Barney Large Capitalization Growth Portfolio Investors Fund -- Class I Smith Barney Money Market Portfolio Total Return Fund - Class I Strategic Equity Portfolio SMITH BARNEY ALLOCATION SERIES INC. Travelers Managed Income Portfolio Select Balanced Portfolio Van Kampen Enterprise Portfolio Select Growth Portfolio VARIABLE ANNUITY PORTFOLIOS Select High Growth Portfolio Smith Barney Small Cap Growth Opportunities Portfolio SMITH BARNEY INVESTMENT SERIES Smith Barney Dividend Strategy Portfolio Smith Barney Premier Selections All Cap Growth Portfolio
- -------------- (1) Formerly AllianceBernstein Premier Growth Portfolio -- Class B (2) Formerly Merrill Lynch Large Cap Core Portfolio The Contract, certain Contract features and/or some of the funding options may not be available in all states. This prospectus provides the information that you should know before investing in the Contract. Please keep this prospectus for future reference. You can receive additional information about your Contract by requesting a copy of the Statement of Additional Information ("SAI") dated May 2, 2005. We filed the SAI with the Securities and Exchange Commission ("SEC"), and it is incorporated by reference into this prospectus. To request a copy, write to Travelers Life & Annuity at One Cityplace, 3CP, Hartford, Connecticut 06103-3415, call 1-800-842-8573 or access the SEC's website (http://www.sec.gov). See Appendix E for the SAI's table of contents. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. VARIABLE ANNUITY CONTRACTS ARE NOT DEPOSITS OF ANY BANK, AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. PROSPECTUS DATED MAY 2, 2005 TABLE OF CONTENTS Glossary............................................ 3 Payment Options........................................ 30 Summary............................................. 5 Election of Options................................. 30 Fee Table........................................... 8 Annuity Options..................................... 30 Condensed Financial Information..................... 12 Income Options...................................... 30 The Annuity Contract................................ 12 Variable Liquidity Benefit.......................... 31 Contract Owner Inquiries......................... 13 Miscellaneous Contract Provisions...................... 31 Purchase Payments................................ 13 Right to Return..................................... 31 Accumulation Units............................... 13 Termination......................................... 31 The Variable Funding Options..................... 14 Required Reports.................................... 31 The Fixed Account................................... 17 Suspension of Payments.............................. 32 Charges and Deductions.............................. 17 The Separate Accounts.................................. 32 General.......................................... 17 Performance Information............................. 32 Withdrawal Charge................................ 18 Federal Tax Considerations............................. 33 Free Withdrawal Allowance........................ 19 General Taxation of Annuities....................... 33 Administrative Charges........................... 19 Types of Contracts: Qualified and Non-qualified..... 33 Mortality and Expense Risk Charge................ 19 Qualified Annuity Contracts......................... 33 Variable Liquidity Benefit Charge................ 19 Taxation of Qualified Annuity Contracts............. 33 Variable Funding Option Expenses................. 20 Mandatory Distributions for Qualified Plans......... 34 Premium Tax...................................... 20 Non-qualified Annuity Contracts..................... 34 Changes in Taxes Based upon Premium or Diversification Requirements for Variable Annuities. 35 Value.......................................... 20 Ownership of the Investments........................ 35 Transfers........................................... 20 Taxation of Death Benefit Proceeds.................. 35 Dollar Cost Averaging............................ 21 Other Tax Considerations............................ 35 Access to Your Money................................ 22 Treatment of Charges for Optional Benefits.......... 35 Systematic Withdrawals........................... 23 Penalty Tax for Premature Distribution.............. 35 Loans............................................ 23 Puerto Rico Tax Considerations...................... 36 Ownership Provisions................................ 23 Non-Resident Aliens................................. 36 Types of Ownership............................... 23 Other Information...................................... 36 Contract Owner................................. 23 The Insurance Companies............................. 36 Beneficiary.................................... 23 Financial Statements................................ 37 Annuitant...................................... 24 Distribution of Variable Annuity Contracts.......... 37 Death Benefit....................................... 24 Conformity with State and Federal Laws.............. 39 Death Proceeds before the Maturity Date.......... 24 Voting Rights....................................... 39 Payment of Proceeds.............................. 26 Restrictions on Financial Transactions.............. 39 Beneficiary Contract Continuance................. 27 Legal Proceedings and Opinions...................... 39 Planned Death Benefit............................ 28 Appendix A: Condensed Financial Information Death Proceeds after the Maturity Date........... 28 for The Travelers Insurance Company: Fund BD........ A-1 The Annuity Period.................................. 28 Appendix B: Condensed Financial Information Maturity Date.................................... 28 for The Travelers Life and Annuity Company: Fund Allocation of Annuity............................ 29 BD II............................................. B-1 Variable Annuity................................. 29 Appendix C: The Fixed Account.......................... C-1 Fixed Annuity.................................... 29 Appendix D: Enhanced Death Benefit for Contracts Issued before June 1, 1997.......................... D-1 Appendix E: Contents of the Statement of Additional Information........................... E-1
2 GLOSSARY ACCUMULATION UNIT -- an accounting unit of measure used to calculate the value of this Contract before Annuity Payments begin. ANNUITANT -- the person on whose life the Maturity Date and Annuity Payments depend. ANNUITY PAYMENTS -- a series of periodic payments (a) for life; (b) for life with a minimum number of payments; (c) for the joint lifetime of the Annuitant and another person, and thereafter during the lifetime of the survivor; or (d) for a fixed period. ANNUITY UNIT -- an accounting unit of measure used to calculate the amount of Annuity Payments. CASH SURRENDER VALUE -- the Contract Value less any withdrawal charge and premium tax not previously deducted. CODE -- the Internal Revenue Code of 1986, as amended, and all related laws and regulations that are in effect during the term of this Contract. CONTINGENT ANNUITANT -- the individual who becomes the Annuitant when the Annuitant who is not the owner dies prior to the Maturity Date. CONTRACT DATE -- the date on which the Contract is issued. CONTRACT OWNER (you) -- the person named in the Contract (on the specifications page) as the owner of the Contract. CONTRACT VALUE -- Purchase Payments, plus or minus any investment experience on the amounts allocated to the variable funds or interest on amounts allocated to the Fixed Account, adjusted by any applicable charges and withdrawals. CONTRACT YEARS -- twelve month periods beginning with the Contract Date. DEATH REPORT DATE -- the day on which we have received 1) Due Proof of Death and 2) written payment instructions or election of spousal or beneficiary contract continuation. DUE PROOF OF DEATH -- (I) a copy of a certified death certificate; (ii) a copy of a certified decree of a court of competent jurisdiction as to the finding of death; (iii) a written statement by a medical doctor who attended the deceased; or (iv) any other proof satisfactory to us. FIXED ACCOUNT -- an account that consists of all of the assets under this Contract other than those in the Separate Account. HOME OFFICE -- the Home Office of The Travelers Insurance Company or The Travelers Life and Annuity Company or any other office that we may designate for the purpose of administering this Contract. MATURITY DATE -- the date on which the Annuity Payments are to begin. PAYMENT OPTION -- an annuity or income option elected under your Contract. PURCHASE PAYMENT -- any premium paid by you to initiate or supplement this Contract. QUALIFIED CONTRACT -- a contract used in a retirement plan or program that is intended to qualify under Sections 401, 403, 408, or 414(d) of the Code. SEPARATE ACCOUNT -- a segregated account registered with the Securities and Exchange Commission ("SEC"), the assets of which are invested solely in the Underlying Funds. The assets of the Separate Account are held exclusively for the benefit of Contract Owners. SUBACCOUNT -- that portion of the assets of a Separate Account that is allocated to a particular Underlying Fund. UNDERLYING FUND -- a portfolio of an open-end management investment company that is registered with the SEC in which the Subaccounts invest. 3 VALUATION DATE -- a date on which a Subaccount is valued. VALUATION PERIOD -- the period between successive valuations. VARIABLE FUNDING OPTION -- a Subaccount of the Separate Account that invests in an Underlying Fund. WE, US, OUR -- The Travelers Insurance Company or The Travelers Life and Annuity Company. WRITTEN REQUEST -- written information sent to us in a form and content satisfactory to us and received at our Home Office. YOU, YOUR -- the Contract Owner. 4 SUMMARY: TRAVELERS VINTAGE VARIABLE ANNUITY THIS SUMMARY DETAILS SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. PLEASE READ THE ENTIRE PROSPECTUS CAREFULLY. WHAT COMPANY WILL ISSUE MY CONTRACT? Your issuing company is either The Travelers Insurance Company or The Travelers Life and Annuity Company ("the Company," "We" or "Us"). The Travelers Life and Annuity Company does not solicit or issue insurance products in the state of New York. Refer to your Contract for the name of your issuing company. Each company sponsors its own segregated account ("Separate Account"). The Travelers Insurance Company sponsors the Travelers Fund BD for Variable Annuities ("Fund BD"); The Travelers Life and Annuity Company sponsors the Travelers Fund BD II for Variable Annuities ("Fund BD II"). When we refer to the Separate Account, we are referring to either Fund BD or Fund BD II, depending upon your issuing Company. You may only purchase a Contract in states where the Contract has been approved for sale. The Contract may not currently be available for sale in all states. CAN YOU GIVE ME A GENERAL DESCRIPTION OF THE CONTRACT? We designed the Contract for retirement savings or other long-term investment purposes. The Contract provides a death benefit as well as guaranteed payout options. You direct your payment(s) to one or more of the Variable Funding Options and/or to the Fixed Account that is part of our general account (the "Fixed Account"). We guarantee money directed to the Fixed Account as to principal and interest. The Variable Funding Options fluctuate with the investment performance of the Underlying Funds and are not guaranteed. You can also lose money in the Variable Funding Options. The Contract, like all deferred variable annuity contracts, has two phases: the accumulation phase and the payout phase (annuity period). During the accumulation phase generally, under a Qualified Contract, your pre-tax contributions accumulate on a tax-deferred basis and are taxed as income when you make a withdrawal, presumably when you are in a lower tax bracket. During the accumulation phase, under a Non-qualified Contract, earnings on your after-tax contributions accumulate on a tax-deferred basis and are taxed as income when you make a withdrawal. The payout phase occurs when you begin receiving payments from your Contract. The amount of money you accumulate in your Contract determines the amount of income ("Annuity Payments:") you receive during the payout phase. During the payout phase, you may choose one of a number of annuity options. You may receive income payments from the Variable Funding Options and/or the Fixed Account. If you elect variable income payments, the dollar amount of your payments may increase or decrease. Once you choose one of the annuity options and begin to receive payments, it cannot be changed. WHO CAN PURCHASE THIS CONTRACT? The Contract is currently available for use in connection with (1) individual non-qualified purchases; (2) rollovers from Individual Retirement Annuities (IRAs); (3) rollovers from other qualified retirement plans; and (4) beneficiary-directed transfers of death proceeds from another contract. Qualified Contracts include contracts qualifying under Section 401(a), 403(b), or 408(b) of the Internal Revenue Code of 1986, as amended. Purchase of this Contract through a tax qualified retirement plan ("Plan") does not provide any additional tax deferral benefits beyond those provided by the Plan. Accordingly, if you are purchasing this Contract through a Plan, you should consider purchasing this Contract for its death benefit, annuity option benefits, and other non-tax-related benefits. You may purchase the Contract with an initial payment of at least $5,000. You may make additional payments of at least $500 at any time during the accumulation phase. No additional payments are allowed if this Contract is purchased with a beneficiary-directed transfer of death proceeds. The ages of the owner and Annuitant determine which death benefits and certain optional features are available to you. See The Annuity Contract section for more information. CAN I EXCHANGE MY CURRENT ANNUITY CONTRACT FOR THIS CONTRACT? The Code generally permits you to exchange one annuity contract for another in a "tax-free exchange." Therefore, you can transfer the proceeds from another annuity contract to purchase this Contract. Before making an exchange to acquire this Contract, you should carefully compare this Contract to your current contract. You may have to pay a surrender charge under your current contract to exchange it for this Contract, and this Contract has its own surrender charges that would apply to you. The other fees and charges under this Contract may be higher or lower and the benefits may be 5 different than those of your current contract. In addition, you may have to pay federal income or penalty taxes on the exchange if it does not qualify for tax-free treatment. You should not exchange another contract for this Contract unless you determine, after evaluating all the facts, the exchange is in your best interests. Remember that the person selling you the Contract generally will earn a commission on the sale. IS THERE A RIGHT TO RETURN PERIOD? If you cancel the Contract within twenty days after you receive it, you will receive a full refund of your Contract Value plus any Contract charges and premium taxes you paid (but not fees and charges assessed by the Underlying Funds). Where state law requires a different right to return period, or the return of Purchase Payments, the Company will comply. You bear the investment risk on the Purchase Payment allocated to a Variable Funding Option during the right to return period; therefore, the Contract Value we return may be greater or less than your Purchase Payment. If you purchased your Contract as an Individual Retirement Annuity, and you return it within the first seven days after delivery, or longer if your state law permits, we will refund your full Purchase Payment. During the remainder of the right to return period, we will refund your Contract Value (including charges we assessed). We will determine your Contract Value at the close of business on the day we receive a Written Request for a refund. CAN YOU GIVE A GENERAL DESCRIPTION OF THE VARIABLE FUNDING OPTIONS AND HOW THEY OPERATE? The Variable Funding Options represent Subaccounts of The Separate Account. At your direction, the Separate Account, through its Subaccounts, uses your Purchase Payments to purchase shares of one or more of the Underlying Funds that holds securities consistent with its own investment policy. Depending on market conditions, you may make or lose money in any of these Variable Funding Options. You can transfer among the Variable Funding Options as frequently as you wish without any current tax implications. Currently there is no charge for transfers, nor a limit to the number of transfers allowed. We may, in the future, charge a fee for any transfer request, or limit the number of transfers allowed. At a minimum, we would always allow one transfer every six months. We reserve the right to restrict transfers that we determine will disadvantage other Contract Owners. You may transfer between the Fixed Account and the Variable Funding Options twice a year (during the 30 days after the six-month Contract Date anniversary), provided the amount is not greater than 15% of the Fixed Account value on that date. Amounts previously transferred from the Fixed Account to the Variable Funding Options may not be transferred back to the Fixed Account for a period of at least six months from the date of the transfer. WHAT EXPENSES WILL BE ASSESSED UNDER THE CONTRACT? The Contract has insurance features and investment features, and there are costs related to each. We deduct an administrative expense charge and a mortality and expense risk ("M&E") charge daily from amounts you allocate to the Separate Account. We deduct the administrative expense charge at an annual rate of 0.15% and deduct the M&E at an annual rate of 1.02% for the Standard Death Benefit and 1.30% for the Enhanced Death Benefit. For Contracts with a value of less than $40,000, we also deduct an annual contract administrative charge of $30. Each Underlying Fund also charges for management costs and other expenses. We will apply a withdrawal charge to withdrawals from the Contract, and will calculate it as a percentage of the Purchase Payments withdrawn. The maximum percentage is 6%, decreasing to 0% in years seven and later. Upon annuitization, if the Variable Liquidity Benefit is selected, there is a maximum charge of 6% of the amounts withdrawn. Please refer to Payment Options for a description of this benefit. HOW WILL MY PURCHASE PAYMENTS AND WITHDRAWALS BE TAXED? Generally, the payments you make to a Qualified Contract during the accumulation phase are made with before-tax dollars. Generally, you will be taxed on your Purchase Payments and on any earnings when you make a withdrawal or begin receiving Annuity Payments. Under a Non-qualified Contract, payments to the Contract are made with after-tax dollars, and any credits and earnings will generally accumulate tax-deferred. You will be taxed on these earnings when they are withdrawn from the Contract. If you are younger than 591/2 when you take money out, you may be charged a 10% federal penalty tax on the amount withdrawn. For owners of Qualified Contracts, if you reach a certain age, you may be required by federal tax laws to begin receiving payments from your annuity or risk paying a penalty tax. In those cases, we can calculate and pay you the minimum required distribution amounts. HOW MAY I ACCESS MY MONEY? You can take withdrawals any time during the accumulation phase. Withdrawal charges may apply, and income taxes, and/or a penalty tax on amounts withdrawn. 6 WHAT IS THE DEATH BENEFIT UNDER THE CONTRACT? You may choose to purchase the Standard or Enhanced Death Benefit. The death benefit applies upon the first death of the Contract Owner, joint owner, or Annuitant. Assuming you are the Annuitant, the death benefit is as follows: If you die before the Contract is in the payout phase, the person you have chosen as your beneficiary will receive a death benefit. We calculate the death benefit value at the close of the business day on which our Home Office receives (1) Due Proof of Death and (2) written payment instructions. The Enhanced Death Benefit may not be available in all states. Please refer to the Death Benefit section in the prospectus for more details. WHERE MAY I FIND OUT MORE ABOUT ACCUMULATION UNIT VALUES? The Condensed Financial Information in Appendix A or Appendix B to this prospectus provides more information about Accumulation Unit values. ARE THERE ANY ADDITIONAL FEATURES? This Contract has other features you may be interested in. These include: o DOLLAR COST AVERAGING. This is a program that allows you to invest a fixed amount of money in Variable Funding Options each month, theoretically giving you a lower average cost per unit over time than a single one-time purchase. Dollar Cost Averaging requires regular investments regardless of fluctuating price levels, and does not guarantee profits or prevent losses in a declining market. Potential investors should consider their financial ability to continue purchases through periods of low price levels. o SYSTEMATIC WITHDRAWAL OPTION. Before the Maturity Date, you can arrange to have money sent to you at set intervals throughout the year. Of course, any applicable income and penalty taxes will apply on amounts withdrawn. Withdrawals in excess of the annual free withdrawal allowance may be subject to a withdrawal charge. o AUTOMATIC REBALANCING. You may elect to have the Company periodically reallocate the values in your Contract to match the rebalancing allocation selected. o BENEFICIARY CONTRACT CONTINUANCE (NOT PERMITTED FOR NON-NATURAL BENEFICIARIES). If you die before the Maturity Date, and if the value of any beneficiary's portion of the death benefit is between $20,000 and $1,000,000 as of the date of your death, that beneficiary(ies) may elect to continue his/her portion of the Contract rather than have the death benefit paid to the beneficiary. 7 FEE TABLE - -------------------------------------------------------------------------------- The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the Contract. The first table describes the fees and expenses that you will pay at the time that you buy the Contract, surrender the Contract, or transfer Contract Value between Variable Funding Options. Expenses shown do not include premium taxes, which may be applicable. CONTRACT OWNER TRANSACTION EXPENSES WITHDRAWAL CHARGE: 6%(1) (AS A PERCENTAGE OF THE PURCHASE PAYMENTS WITHDRAWN) VARIABLE LIQUIDITY BENEFIT CHARGE: 6%(2) (AS A PERCENTAGE OF THE PRESENT VALUE OF THE REMAINING ANNUITY PAYMENTS THAT ARE SURRENDERED. THE INTEREST RATE USED TO CALCULATE THIS PRESENT VALUE IS 1% HIGHER THAN THE ASSUMED (DAILY) NET INVESTMENT FACTOR USED TO CALCULATE THE ANNUITY PAYMENTS.) The next table describes the fees and expenses that you will pay periodically during the time that you own the Contract, not including Underlying Fund fees and expenses. CONTRACT ADMINISTRATIVE CHARGES ANNUAL CONTRACT ADMINISTRATIVE CHARGE: $30(3) - -------------- (1) The withdrawal charge declines to zero after the Purchase Payment has been in the Contract for 6 years. The charge is as follows: YEARS SINCE PURCHASE PAYMENT MADE ------------------------------------------- GREATER THAN OR EQUAL TO BUT LESS THAN WITHDRAWAL CHARGE 0 years 3 years 6% 3 years 4 years 3% 4 years 5 years 2% 5 years 6 years 1% 6 years+ 0% (2) This withdrawal charge only applies when you surrender the Contract after beginning to receive Annuity Payments. The Variable Liquidity Benefit Charge declines to zero after six years. The charge is as follows: YEARS SINCE INITIAL PURCHASE PAYMENT ------------------------------------------- GREATER THAN OR EQUAL TO BUT LESS THAN WITHDRAWAL CHARGE 0 years 3 years 6% 3 years 4 years 3% 4 years 5 years 2% 5 years 6 years 1% 6 years+ 0% (3) We do not assess this charge if Contract Value is $40,000 or more on the fourth Friday of each August. 8 ANNUAL SEPARATE ACCOUNT CHARGES: (AS A PERCENTAGE OF THE AVERAGE DAILY NET ASSETS OF THE SEPARATE ACCOUNT)
STANDARD DEATH BENEFIT ENHANCED DEATH BENEFIT Mortality and Expense Risk Charge......... 1.02% Mortality and Expense Risk Charge............. 1.30% Administrative Expense Charge............. 0.15% Administrative Expense Charge................. 0.15% ------ ------ Total Annual Separate Account Charges.. 1.17% Total Annual Separate Account Charges.... 1.45%
UNDERLYING FUND EXPENSES AS OF DECEMBER 31, 2004 (UNLESS OTHERWISE INDICATED): The first table below shows the range (minimum and maximum) of the total annual operating expenses charged by all of the Underlying Funds, before any voluntary or contractual fee waivers and/or expense reimbursements. The second table shows each Underlying Fund's management fee, distribution and/or service fees (12b-1) if applicable, and other expenses. The Underlying Funds provided this information and we have not independently verified it. More detail concerning each Underlying Fund's fees and expenses is contained in the prospectus for each Underlying Fund. Current prospectuses for the Underlying Funds can be obtained by calling 1-800-842-9406. MINIMUM AND MAXIMUM TOTAL ANNUAL UNDERLYING FUND OPERATING EXPENSES
MINIMUM MAXIMUM ----------- ----------- TOTAL ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Underlying Fund assets, including management fees, distribution and/or service fees (12b-1) fees, and other expenses.) 0.53% 1.25%
UNDERLYING FUND FEES AND EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
DISTRIBUTION AND/OR CONTRACTUAL FEE NET TOTAL SERVICE TOTAL ANNUAL WAIVER ANNUAL MANAGEMENT (12b-1) OTHER OPERATING AND/OR EXPENSE OPERATING UNDERLYING FUND: FEE FEES EXPENSES EXPENSES REIMBURSEMENT EXPENSES - ---------------- ------------ --------------- ----------- -------------- ----------------- ------------ AIM VARIABLE INSURANCE FUNDS AIM V.I. Premier Equity Fund -- Series I Shares...... 0.61% -- 0.30% 0.91% -- 0.91%(1) ALLIANCEBERNSTEIN VARIABLE PRODUCT SERIES FUND, INC. AllianceBernstein Large Cap Growth Portfolio -- Class B*..................... 0.75% 0.25% 0.05% 1.05% -- 1.05%(2) AMERICAN FUNDS INSURANCE SERIES Global Growth Fund -- Class 2 Shares*.................... 0.61% 0.25% 0.04% 0.90% -- --(14) Growth Fund -- Class 2 Shares*...................... 0.35% 0.25% 0.01% 0.61% -- 0.61% Growth-Income Fund -- Class 2 Shares*.................... 0.29% 0.25% 0.02% 0.56% -- --(14) DREYFUS VARIABLE INVESTMENT FUND Developing Leaders Portfolio -- Initial Shares....................... 0.75% -- 0.04% 0.79% -- 0.79% GREENWICH STREET SERIES FUND Equity Index Portfolio -- Class II Shares*............. 0.31% 0.25% 0.03% 0.59% -- 0.59% Fundamental Value Portfolio.... 0.75% -- 0.02% 0.77% -- 0.77%(3) SALOMON BROTHERS VARIABLE SERIES FUNDS INC. Investors Fund -- Class I...... 0.68% -- 0.09% 0.77% -- 0.77%(4) Total Return Fund -- Class I... 0.78% -- 0.18% 0.96% -- 0.96%
9
DISTRIBUTION AND/OR CONTRACTUAL FEE NET TOTAL SERVICE TOTAL ANNUAL WAIVER ANNUAL MANAGEMENT (12b-1) OTHER OPERATING AND/OR EXPENSE OPERATING UNDERLYING FUND: FEE FEES EXPENSES EXPENSES REIMBURSEMENT EXPENSES - ---------------- ------------ --------------- ----------- -------------- ----------------- ------------ SMITH BARNEY ALLOCATION SERIES INC. Select Balanced Portfolio...... 0.35% -- 0.67% 1.02% -- 1.02%(5) Select Growth Portfolio........ 0.35% -- 0.73% 1.08% -- 1.08%(5) Select High Growth Portfolio.................... 0.35% -- 0.79% 1.14% -- 1.14%(5) SMITH BARNEY INVESTMENT SERIES Smith Barney Dividend Strategy Portfolio........... 0.73% -- 0.15% 0.88% -- 0.88%(6) Smith Barney Premier Selections All Cap Growth Portfolio............. 0.75% -- 0.19% 0.94% -- 0.94% THE TRAVELERS SERIES TRUST Convertible Securities Portfolio.................... 0.60% -- 0.15% 0.75% -- --(8), (14) Disciplined Mid Cap Stock Portfolio.................... 0.70% -- 0.12% 0.82% -- --(8), (14) Mercury Large Cap Core Portfolio.................... 0.79% -- 0.16% 0.95% -- --(7), (14) MFS Mid Cap Growth Portfolio.................... 0.75% -- 0.07% 0.82% -- 0.82%(9) TRAVELERS SERIES FUND INC. AIM Capital Appreciation Portfolio.................... 0.80% -- 0.05% 0.85% -- 0.85% MFS Total Return Portfolio..... 0.77% -- 0.02% 0.79% -- 0.79%(10) Pioneer Strategic Income Portfolio.................... 0.75% -- 0.15% 0.90% -- 0.90% Salomon Brothers Strategic Total Return Bond Portfolio.................... 0.80% -- 0.45% 1.25% -- --(14) Smith Barney High Income Portfolio.................... 0.60% -- 0.06% 0.66% -- 0.66% Smith Barney International All Cap Growth Portfolio..... 0.88% -- 0.13% 1.01% -- 1.01%(11) Smith Barney Large Cap Value Portfolio.............. 0.63% -- 0.05% 0.68% -- 0.68%(12) Smith Barney Large Capitalization Growth Portfolio.................... 0.75% -- 0.03% 0.78% -- 0.78%(13) Smith Barney Money Market Portfolio.................... 0.50% -- 0.03% 0.53% -- 0.53% Strategic Equity Portfolio..... 0.80% -- 0.05% 0.85% -- 0.85% Travelers Managed Income Portfolio.................... 0.65% -- 0.04% 0.69% -- 0.69% Van Kampen Enterprise Portfolio.................... 0.70% -- 0.10% 0.80% -- 0.80% VARIABLE ANNUITY PORTFOLIOS Smith Barney Small Cap Growth Opportunities Portfolio.................... 0.75% -- 0.35% 1.10% -- --(14)
- -------------- * The 12b-1 fees deducted from these classes cover certain distribution, shareholder support and administrative services provided by intermediaries (the insurance company, broker dealer or other service provider). 10 NOTES (1) Except as otherwise noted, figures shown in the table are for the year ended December 31, 2004 and are expressed as a percentage of the Fund's average daily net assets. There is no guarantee that actual expenses will be the same as those shown in the table. The Fund's advisor has contractually agreed to waive advisory fees and/or reimburse expenses of Series I shares to the extent necessary to limit Total Annual Fund Operating Expenses (excluding certain items discussed below) of Series I shares to 1.30% of average daily nets assets for each series portfolio of AIM Variable Insurance Funds. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the Total Annual Fund Operating Expenses to exceed the limit stated above: (i) Rule 12b-1 plan fees, if any; (ii) interest; (iii) taxes; (iv) dividend expense on short sales; (v) extraordinary items (these are expenses that are not anticipated to arise from the Fund's day-to day operations), or items designated as such by the Fund's Board of Trustees; (vi) expenses related to a merger or reorganization, as approved by the Fund's Board of Trustees; and (vii) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Currently, the only expense offset arrangements from which the Fund benefits are in the form of credits that the Fund receives from banks where the Fund or its transfer agent has deposit accounts in which it holds uninvested cash. Those credits are used to pay certain expenses incurred by the Fund. The expense limitation is in effect through April 30, 2006. (2) Expense information restated to reflect a reduction in advisory fees effective September 7, 2004. (3) Effective August 1, 2004, the management fee (including the administration fee), was reduced from 0.75% to the following breakpoints: 0.75% on first $1.5 billion of net assets; 0.70% on next $0.5 billion; 0.65% on next $0.5 billion; 0.60% on the next $1 billion; and 0.50% on net assets in excess of $3.5 billion. (4) Effective August 1, 2004, the management fees were reduced from 0.70% to the following breakpoints: First $350 million 0.65%; next $150 million 0.55%; next $250 million 0.53%; next $250 million 0.50%; over $1 billion 0.45%. (5) Each Portfolio of the Smith Barney Allocation Series Inc. (a "fund of funds") invests in the shares of other mutual funds ("underlying funds"). The Management Fee for each Portfolio is 0.35%. While the Portfolios have no direct expenses, the "Other Expenses" figure represents a weighted average of the total expense ratios of the underlying funds as of 1/31/05 (the fiscal year end of the Portfolios). (6) Effective September 1, 2004, the management fees were reduced from 0.75% to the following breakpoints: First $1 billion 0.65%; next $1 billion 0.60%; next $1 billion 0.55%; next $1 billion 0.50%; over $4 billion 0.45%. (7) Effective September 1, 2004, the investment advisory fee was revised from the annual rate of 0.80% to the following breakpoints: 0.775% on first $250 million of net assets; 0.75% on the next $250 million; 0.725% on next $500 million; 0.70% on next $1 billion and 0.65% on assets in excess of $2 billion. Other Expenses include 0.06% administrative services fee the Fund pays to The Travelers Insurance Company. (8) Other expenses include 0.06% administrative services fee the Fund pays to The Travelers Insurance Company. (9) Effective February 25, 2005, the investment advisory fee was revised to the following breakpoints: For the first $500 million of average daily net assets the advisory fee is 0.7775%; the next $300 million 0.7525%; the next $600 million 0.7275%; the next $1 billion 0.7025%; over $2.5 billion 0.625%. Also effective February 25, 2005, for purposes of meeting the various asset levels and determining an effective fee rate, the combined average daily net assets of: (1) the Fund; and (2) other portfolios of The Travelers Series Trust that are subadvised by MFS; and (3) another portfolio of the Travelers Series Fund that is subadvised by MFS, are used in performing the calculation. The expense information in the table has been restated to reflect the current fee schedule. Between February 25, 2004 and February 24, 2005 the investment advisory fee was as follows: for the first $600 million of average daily net assets the advisor fee is 0.800%; the next $300 million 0.775%; the next $600 million 0.750%; the next $1 billion 0.725%; over $2.5 billion 0.675%. Previous to September 1, 2004 the fee was an annual rate of 0.80%. Other expenses include a 0.06% administrative services fee the Fund pays to The Travelers Insurance Company. (10) Effective November 1, 2004, the advisory fee was reduced from 0.80% to the following breakpoints: 0.80% on first $600 million of net assets; 0.775% on next $300 million; 0.75% on next $600 million; 0.725% on next $1 billion and 0.675% in excess of $2.5 billion. Effective February 25, 2005, for purposes of meeting the various asset levels and determining an effective fee rate, the combined average daily net assets of: (1) the Fund; and (2) other portfolios of The Travelers Series Trust that are subadvised by MFS are used in performing the calculation. The expense information in the table has been restated to reflect the current fee schedule. (11) Effective July 1, 2004, the management fee was reduced from 0.90% to 0.85% of the Fund's daily net assets. (12) Effective July 1, 2004, the management fee was reduced from 0.65% to the following breakpoints: 0.60% on the first $500 million of net assets; 0.55% on the next $500 million of net assets and 0.50% on assets in excess of $1 billion. (13) Effective July 1, 2004, the management fee was reduced from 0.75% to the following breakpoints: 0.75% on the first $5 billion of net assets; 0.725% on the next $2.5 billion; 0.70% on the next $2.5 billion and 0.65% on assets in excess of $10 billion. (14) The table below shows the amount of the waiver or reimbursement and the net total annual operating expenses for underlying funds that have entered into a voluntary fee waiver and/or expense reimbursement arrangement. The net total annual operating expense figure reflects the fee waivers and/or expense reimbursements that were in effect as of the underlying fund's fiscal year end. However, as these arrangements are voluntary, they may be changed or terminated at any time, in which case the underlying fund would be subject to different net total annual operating expenses. Without such waivers performance would be lower.
VOLUNTARY FEE WAIVER AND/OR EXPENSE NET TOTAL ANNUAL FUNDING OPTION REIMBURSEMENT OPERATING EXPENSES ---------------- ------------------- ---------------------- Global Growth Fund -- Class 2 Shares......................... 0.01% 0.89% Growth-Income Fund -- Class 2 Shares......................... 0.01% 0.55% Convertible Securities Portfolio............................. 0.01% 0.74% Disciplined Mid Cap Stock Portfolio.......................... 0.02% 0.80% Mercury Large Cap Core Portfolio............................. 0.03% 0.92% Salomon Brothers Strategic Total Return Bond Portfolio....... 0.01% 1.24% Smith Barney Small Cap Growth Opportunities Portfolio........ 0.20% 0.90%
11 EXAMPLES These examples are intended to help you compare the cost of investing in the Contract with the cost of investing in other variable annuity contracts. These costs include Contract Owner transaction expenses, contract fees, separate account annual expenses, and Underlying Fund total annual operating expenses. These examples do not represent past or future expenses. Your actual expenses may be more or less than those shown. These examples assume that you invest $10,000 in the Contract for the time periods indicated and that your investment has a 5% return each year. The examples reflect the annual contract administrative charge, factoring in that the charge is waived for contracts over a certain value. Additionally, the examples are based on the minimum and maximum Underlying Fund total annual operating expenses shown above, and do not reflect any Underlying Fund fee waivers and/or expense reimbursements. The examples assume you have allocated all of your Contract Value to either the Underlying Fund with the maximum total annual operating expenses or the Underlying Fund with the minimum total annual operating expenses.
IF CONTRACT IS SURRENDERED AT THE END IF CONTRACT IS NOT SURRENDERED OR OF PERIOD SHOWN: ANNUITIZED AT THE END OF PERIOD SHOWN: ---------------------------------------- ------------------------------------------ FUNDING OPTION 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------- - -------- --------- ---------- ---------- -------- --------- ---------- ----------- Underlying Fund with Maximum Total Annual Operating Expenses 876 1446 1643 3058 276 846 1443 3058 Underlying Fund with Minimum Total Annual Operating Expenses 804 1230 1281 2334 204 630 1081 2334
CONDENSED FINANCIAL INFORMATION - -------------------------------------------------------------------------------- See Appendices A and B. THE ANNUITY CONTRACT - -------------------------------------------------------------------------------- Travelers Vintage Annuity is a contract between the Contract Owner ("you") and the Company. This is the prospectus -- it is not the Contract. The prospectus highlights many contract provisions to focus your attention on the Contract's essential features. Your rights and obligations under the Contract will be determined by the language of the Contract itself. When you receive your Contract, we suggest you read it promptly and carefully. There may be differences in your Contract from the descriptions in this prospectus because of the requirements of the state where we issued your Contract. We will include any such differences in your Contract. The Company offers several different annuities that your investment professional may be authorized to offer to you. Each annuity offers different features and benefits that may be appropriate for you. In particular, the annuities differ based on variations in the standard and optional death benefit protection provided for your beneficiaries, the availability of optional living benefits, the ability to access your Contract Value if necessary and the charges that you will be subject to if you make a withdrawal or surrender the annuity. The separate account charges and other charges may be different between each annuity we offer. Optional death benefits and living benefits are subject to a separate charge for the additional protections they offer to you and your beneficiaries. Furthermore, annuities that offer greater flexibility to access your Contract Value generally are subject to higher separate account charges than annuities that deduct charges if you make a withdrawal or surrender. We encourage you to evaluate the fees, expenses, benefits and features of this annuity against those of other investment products, including other annuity products offered by us and other insurance companies. Before purchasing this or any other investment product you should consider whether the product you purchase is consistent with your risk tolerance, investment objectives, investment time horizon, financial and tax situation, liquidity needs and how you intend to use the annuity. You make Purchase Payments to us and we credit them to your Contract. We promise to pay you an income, in the form of Annuity Payments, beginning on a future date that you choose, the Maturity Date. The Purchase 12 Payments accumulate tax deferred in the funding options of your choice. We offer multiple Variable Funding Options. We may also offer a Fixed Account option. The Contract Owner assumes the risk of gain or loss according to the performance of the Variable Funding Options. The Contract Value is the amount of Purchase Payments, plus or minus any investment experience on the amounts you allocate to the Separate Account ("Separate Account Contract Value") or interest on the amounts you allocate to the Fixed Account ("Fixed Account Contract Value"). The Contract Value also reflects all withdrawals made and charges deducted. There is generally no guarantee that at the Maturity Date the Contract Value will equal or exceed the total Purchase Payments made under the Contract. The date the Contract and its benefits become effective is referred to as the Contract Date. Each 12-month period following the Contract Date is called a Contract Year. Certain changes and elections must be made in writing to the Company. Where the term "Written Request" is used, it means that you must send written information to our Home Office in a form and content satisfactory to us. On or after May 2, 2005, the Contract is not available for purchase if the proposed owner or Annuitant is age 81 or older. The ages of the owner and Annuitant determine which death benefits and certain optional features are available to you.
MAXIMUM AGE BASED ON THE OLDER OF THE OWNER AND DEATH BENEFIT/OPTIONAL FEATURE ANNUITANT ON THE CONTRACT DATE --------------------------------------- --------------------------------------------------- Standard Death Benefit 80 Enhanced Death Benefit 75
Since optional death benefits carry higher charges, you should consider the ages of the owner and Annuitant when electing these benefits, as the additional value provided by the benefit may be significantly reduced or eliminated depending on the ages of the owner and Annuitant at the time of election. Purchase of this Contract through a tax qualified retirement plan or IRA does not provide any additional tax deferral benefits beyond those provided by the plan or the IRA. Accordingly, if you are purchasing this Contract through a plan or IRA, you should consider purchasing this Contract for its Death Benefit, Annuity Option Benefits, and other non-tax-related benefits. You should consult with your financial adviser to determine if this Contract is appropriate for you. CONTRACT OWNER INQUIRIES Any questions you have about your Contract should be directed to our Home Office at 1-800-842-8573. PURCHASE PAYMENTS Your initial Purchase Payment is due and payable before the Contract becomes effective. The initial Purchase Payment must be at least $5,000. You may make additional payments of at least $500 at any time. No additional Purchase Payments are allowed if this Contract is purchased with a beneficiary-directed transfer of death benefit proceeds. Under certain circumstances, we may waive the minimum Purchase Payment requirement. Purchase Payments over $1,000,000 may be made only with our prior consent. We will apply the initial Purchase Payment less any applicable premium tax within two business days after we receive it at our Home Office with a properly completed application or order request. If your request or other information accompanying the initial Purchase Payment is incomplete when received, we will hold the Purchase Payment for up to five business days. If we cannot obtain the necessary information within five business days, we will return the Purchase Payment in full, unless you specifically consent for us to keep it until you provide the necessary information. We will credit subsequent Purchase Payments to a Contract on the same business day we receive it, if it is received in good order by our Home Office by 4:00 p.m. Eastern time. A business day is any day that the New York Stock Exchange is open for regular trading (except when trading is restricted due to an emergency as defined by the Securities and Exchange Commission). ACCUMULATION UNITS The period between the Contract Date and the Maturity Date is the Accumulation Period. During the Accumulation Period, an Accumulation Unit is used to calculate the value of a Contract. Each Variable Funding 13 Option has a corresponding Accumulation Unit value. The Accumulation Units are valued each business day and their values may increase or decrease from day to day. The daily change in value of an Accumulation Unit each day is based on the investment performance of the corresponding Underlying Fund, and the deduction of separate account charges shown in the Fee Table in this prospectus. The number of Accumulation Units we will credit to your Contract once we receive a Purchase Payment is determined by dividing the amount directed to each Variable Funding Option by the value of its Accumulation Unit. Normally, we calculate the value of an Accumulation Unit for each Variable Funding Option as of the close of regular trading (generally 4:00 p.m. Eastern time) each day the New York Stock Exchange is open. After the value is calculated, we credit your Contract. During the Annuity Period (i.e., after the Maturity Date), you are credited with Annuity Units. THE VARIABLE FUNDING OPTIONS You choose the Variable Funding Options to which you allocate your Purchase Payments. These Variable Funding Options are Subaccounts of the Separate Account. The Subaccounts invest in the Underlying Funds. You are not investing directly in the Underlying Fund. Each Underlying Fund is a portfolio of an open-end management investment company that is registered with the SEC under the Investment Company Act of 1940. These Underlying Funds are not publicly traded and are offered only through variable annuity and variable life insurance products. They are not the same retail mutual funds as those offered outside of a variable annuity or variable life insurance product, although the investment practices and fund names may be similar, and the portfolio managers may be identical. Accordingly, the performance of the retail mutual fund is likely to be different from that of the Underlying Fund, and Contract Owners should not compare the two. The Underlying Funds offered though this product are selected by the Company based on several criteria, including asset class coverage, the strength of the manager's reputation and tenure, brand recognition, performance, and the capability and qualification of each sponsoring investment firm. Another factor the Company considers during the initial selection process is whether the Underlying Fund or an affiliate of the Underlying Fund will compensate the Company for providing administrative, marketing, and support services that would otherwise be provided by the Fund, the Fund's investment advisor, or its distributor. Finally, when the Company develops a variable annuity product in cooperation with a fund family or distributor (e.g. a "private label" product), the Company will generally include Underlying Funds based on recommendations made by the fund family or distributor, whose selection criteria may differ from the Company's selection criteria. Each Underlying Fund is reviewed periodically after having been selected. Upon review, the Company may remove an Underlying Fund or restrict allocation of additional Purchase Payments to an Underlying Fund if the Company determines the Underlying Fund no longer meets one or more of the criteria and/or if the Underlying Fund has not attracted significant contract owner assets. In addition, if any of the Underlying Funds become unavailable for allocating Purchase Payments, or if we believe that further investment in an Underlying Fund is inappropriate for the purposes of the Contract, we may substitute another funding option. However, we will not make any substitutions without notifying you and obtaining any state and SEC approval, if necessary. From time to time we may make new funding options available. You will find detailed information about the Underlying Funds and their inherent risks in the current prospectuses for the Underlying Funds. Since each option has varying degrees of risk, please read the prospectuses carefully. There is no assurance that any of the Underlying Funds will meet its investment objectives. Contact your registered representative or call 1-800-842-9406 to request copies of the prospectuses. ADMINISTRATIVE, MARKETING AND SUPPORT SERVICE FEES. As described above, the Company and TDLLC have arrangements with the investment adviser, subadviser, distributor, and/or affiliated companies of most of the Underlying Funds under which the Company and TDLLC receive payments in connection with our provision of administrative, marketing or other support services to the Funds. Proceeds of these payments may be used for any corporate purpose, including payment of expenses that the Company and TDLLC incur in promoting, issuing, distributing and administering the contracts. The Company and its affiliates may profit from these fees. The payments are generally based on a percentage of the average assets of each Underlying Fund allocated to the Variable Funding Options under the Contract or other contracts offered by the Company. The amount of the fee that an Underlying Fund and its affiliates pay the Company and/or the Company's affiliates is negotiated and varies with each Underlying Fund. Aggregate fees relating to the different Underlying Funds may be as much as 14 0.65% of the average net assets of an Underlying Fund attributable to the relevant contracts. A portion of these payments may come from revenue derived from the Distribution and/or Service Fees (12b-1 fees) that are paid by an Underlying Fund out its assets as part of its Total Annual Operating Expenses. The current Underlying Funds are listed below, along with their investment advisers and any subadviser:
FUNDING INVESTMENT INVESTMENT OPTION OBJECTIVE ADVISER/SUBADVISER - --------------------------------------- ---------------------------------------- ----------------------------------- AIM VARIABLE INSURANCE FUNDS AIM V.I. Premier Equity Fund -- Seeks to achieve long-term growth of A I M Advisors, Inc. Series I Shares capital. Income is a secondary objective. The Fund invests, normally, at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities, including convertible securities. ALLIANCEBERNSTEIN VARIABLE PRODUCT SERIES FUND, INC. AllianceBernstein Large Cap Growth Seeks growth of capital by pursuing Alliance Capital Management L.P. Portfolio -- Class B aggressive investment policies. AMERICAN FUNDS INSURANCE SERIES Global Growth Fund -- Class 2 Shares Seeks capital appreciation. The Fund Capital Research and Management normally invests in common stocks of Co. companies located around the world. Growth Fund -- Class 2 Shares Seeks capital appreciation. The Fund Capital Research and Management normally invests in common stocks of Co. companies that appear to offer superior opportunities for growth of capital. Growth-Income Fund -- Class 2 Shares Seeks capital appreciation and income. Capital Research and Management The Fund normally invests in common Co. stocks or other securities that demonstrate the potential for appreciation and/or dividends. DREYFUS VARIABLE INVESTMENT FUND Dreyfus Variable Investment Fund -- Seeks to maximize capital The Dreyfus Corporation Developing Leaders Portfolio -- appreciation. The Fund normally Initial Shares invests in companies with market capitalizations of less than $2 billion at the time of purchase. GREENWICH STREET SERIES FUND Equity Index Portfolio -- Class II Seeks investment results that, before Travelers Investment Management Shares expenses, correspond to the price and Company ("TIMCO") yield performance of the S&P 500 Index. The Fund normally invests in equity securities, or other investments with similar economic characteristics that are included in the S&P 500 Index. Fundamental Value Portfolio Seeks long-term capital growth. Smith Barney Fund Management LLC Current income is a secondary ("SBFM") consideration. The Fund normally invests in common stocks, and common stock equivalents of companies, the manager believes are undervalued. SALOMON BROTHERS VARIABLE SERIES FUNDS INC. Investors Fund -- Class I Seeks long term growth of capital. Salomon Brothers Asset Secondarily seeks current income. The Management, Inc. ("SBAM") Fund normally invests in common stocks of established companies. Total Return Fund -- Class I Seeks above average income (compared SBAM to a portfolio invested entirely in equity securities). Secondarily seeks growth of capital and income. The Fund normally invests in a broad range of equity and fixed-income securities of U.S. and foreign issuers.
15
FUNDING INVESTMENT INVESTMENT OPTION OBJECTIVE ADVISER/SUBADVISER - --------------------------------------- ---------------------------------------- ----------------------------------- SMITH BARNEY ALLOCATION SERIES INC. Select Balanced Portfolio Seeks a balance of growth of capital Travelers Investment Adviser, and income. The Fund is a "fund of Inc. ("TIA") funds." Rather than investing directly in securities, the Fund normally invests in other Smith Barney equity and fixed-income mutual funds. Select Growth Portfolio Seeks long-term growth of capital. The TIA Fund is a "fund of funds." Rather than investing directly in securities, the Fund normally invests in other Smith Barney mutual funds, which are primarily equity funds. Select High Growth Portfolio Seeks capital appreciation. The Fund TIA is a "fund of funds." Rather than investing directly in securities, the Fund normally invests in other Smith Barney mutual funds, which are primarily fixed-income funds. SMITH BARNEY INVESTMENT SERIES Smith Barney Dividend Strategy Seeks capital appreciation. SBFM Portfolio Principally through investing in dividend paying stocks. Smith Barney Premier Selections Seeks long term capital growth. The SBFM All Cap Growth Portfolio Fund consists of a Large Cap Growth segment, Mid Cap Growth segment and Small Cap Growth segment. All three segments normally invest in equity securities. The Large Cap Growth segment invests in large sized companies. The Mid Cap Growth segment invests in medium sized companies. The Small Cap Growth segment invests in small sized companies. THE TRAVELERS SERIES TRUST Convertible Securities Portfolio Seeks current income and capital Travelers Asset Management appreciation. The Fund normally International Company LLC invests in convertible securities. ("TAMIC") Disciplined Mid Cap Stock Portfolio Seeks growth of capital. The Fund TAMIC normally invests in the equity Subadviser: TIMCO securities of companies with mid-size market capitalizations. Mercury Large Cap Core Portfolio Seeks long-term capital growth. The TAMIC Fund normally invests in a diversified Subadviser: Merrill Lynch portfolio of equity securities of Investment Managers, L.P. ("MLIM") large cap companies. MFS Mid Cap Growth Portfolio Seeks long term growth of capital. The TAMIC Fund normally invests in equity Subadviser: Massachusetts securities of companies with medium Financial Services ("MFS") market capitalization. TRAVELERS SERIES FUND INC. AIM Capital Appreciation Portfolio Seeks capital appreciation. The Fund TIA normally invests in common stocks of Subadviser: AIM Capital companies that are likely to benefit Management Inc. from new products, services or processes or have experienced above-average earnings growth. MFS Total Return Portfolio Seeks above average income consistent TIA with the prudent employment of Subadviser: MFS capital. Secondarily, seeks growth of capital and income. The Fund normally invests in a broad range of equity and fixed-income securities of both U.S. and foreign issuers. Pioneer Strategic Income Portfolio Seeks high current income. The Fund TIA normally invests in debt securities Subadviser: Pioneer Investment and has the flexibility to invest in a Management, Inc. broad range of issuers and segments of the debt securities market. Salomon Brothers Strategic Total Seeks total return. The Fund normally TIA Return Bond Portfolio invests in a globally diverse portfolio of fixed-income securities.
16
FUNDING INVESTMENT INVESTMENT OPTION OBJECTIVE ADVISER/SUBADVISER - --------------------------------------- ---------------------------------------- ----------------------------------- Smith Barney High Income Portfolio Seeks high current income. SBFM Secondarily, seeks capital appreciation. The Fund normally invests in high yield corporate debt and preferred stock of U.S. and foreign issuers. Smith Barney International All Cap Seeks total return on assets from SBFM Growth Portfolio growth of capital and income. The Fund normally invests in equity securities of foreign companies. Smith Barney Large Cap Value Seeks long-term growth of capital with SBFM Portfolio current income is a secondary objective. The Fund normally invests in equities, or similar securities, of companies with large market capitalizations. Smith Barney Large Capitalization Seeks long term growth of capital. The SBFM Growth Portfolio Fund normally invests in equities, or similar securities, of companies with large market capitalizations. Smith Barney Money Market Portfolio Seeks to maximize current income SBFM consistent with preservation of capital. The Fund seeks to maintain a stable $1 share price. The Fund normally invests in high quality U.S. short-term debt securities. Strategic Equity Portfolio Seeks capital appreciation. The Fund TIA normally invests in U.S. and foreign Subadviser: Fidelity Management & equity securities. Research Company ("FMR") Travelers Managed Income Portfolio Seeks high current income consistent TAMIC with prudent risk of capital. The Fund normally invests in U.S. corporate debt and U.S. government securities. Van Kampen Enterprise Portfolio Seeks capital appreciation. The Fund TIA normally invests in common stocks of Subadviser: Van Kampen Asset growth companies. Management Inc. VARIABLE ANNUITY PORTFOLIOS Smith Barney Small Cap Growth Seeks long term capital growth. The Citi Fund Management, Inc. Opportunities Portfolio Fund normally invests in equity securities of small cap companies and related investments.
FIXED ACCOUNT - -------------------------------------------------------------------------------- We offer our Fixed Account as a funding option. Please see Appendix C for more information. CHARGES AND DEDUCTIONS - -------------------------------------------------------------------------------- GENERAL We deduct the charges described below. The charges are for the service and benefits we provide, costs and expenses we incur, and risks we assume under the Contracts. Services and benefits we provide include: o the ability for you to make withdrawals and surrenders under the Contracts; o the death benefit paid on the death of the Contract Owner, Annuitant, or first of the joint owners, o the available funding options and related programs (including dollar-cost averaging, portfolio rebalancing, and systematic withdrawal programs); o administration of the annuity options available under the Contracts; and o the distribution of various reports to Contract Owners. Costs and expenses we incur include: o losses associated with various overhead and other expenses associated with providing the services and benefits provided by the Contracts, 17 o sales and marketing expenses including commission payments to your registered representative, and o other costs of doing business. Risks we assume include: o that Annuitants may live longer than estimated when the annuity factors under the Contracts were established; o that the amount of the death benefit will be greater than the Contract Value, and o that the costs of providing the services and benefits under the Contracts will exceed the charges deducted. o We may also deduct a charge for taxes. Unless otherwise specified, charges are deducted proportionately from all funding options in which you are invested. We may reduce or eliminate the withdrawal charge, the administrative charges and/or the mortality and expense risk charge under the Contract when certain sales or administration of the Contract result in savings or reduced expenses and/or risks .For certain trusts, we may change the order in which Purchase Payments and earnings are withdrawn in order to determine the withdrawal charge. We will not reduce or eliminate the withdrawal charge or the administrative charge where such reduction or elimination would be unfairly discriminatory to any person. The amount of a charge may not necessarily correspond to the costs associated with providing the services or benefits indicated by the designated charge. For example, the withdrawal charge we collect may not fully cover all of the sales and distribution expenses we actually incur. We may also profit on one or more of the charges. We may use any such profits for any corporate purpose, including the payment of sales expenses. WITHDRAWAL CHARGE We do not deduct a sales charge from Purchase Payments when they are made to the Contract. However, a withdrawal charge will apply if Purchase Payments are withdrawn before they have been in the Contract for six years. We will assess the charge as a percentage of the Purchase Payment withdrawn as follows: YEARS SINCE PURCHASE PAYMENT MADE WITHDRAWAL CHARGE ----------------------------------------------- --------------------- GREATER THAN OR EQUAL TO BUT LESS THAN 0 years 3 years 6% 3 years 4 years 3% 4 years 5 years 2% 5 years 6 years 1% 6+years 0% For purposes of the withdrawal charge calculation, withdrawals are deemed to be taken first from: (a) any Purchase Payment to which no withdrawal charge applies then (b) any remaining free withdrawal allowance (as described below) (after being reduced by (a)), then (c) any Purchase Payment to which a withdrawal charge applies (on a first-in, first-out basis) then (d) any Contract earnings. Unless you instruct us otherwise, we will deduct the withdrawal charge from the amount requested. We will not deduct a withdrawal charge if Purchase Payments are distributed: o due to the death of the Contract Owner or the Annuitant (with no Contingent Annuitant surviving) o if an annuity payout has begun o due to a minimum distribution under our minimum distribution rules then in effect o if an income option of at least five year's duration is begun after the first Contract Year. 18 FREE WITHDRAWAL ALLOWANCE Beginning in the second Contract Year, you may withdraw up to 15% of the Contract Value annually. We calculate the available withdrawal amount as of the end of the previous Contract Year. The free withdrawal provision applies to partial withdrawals only. ANY WITHDRAWAL IS SUBJECT TO FEDERAL INCOME TAXES ON THE TAXABLE PORTION. IN ADDITION, A 10% FEDERAL PENALTY MAY BE ASSESSED ON ANY WITHDRAWAL IF THE CONTRACT OWNER IS UNDER AGE 59 1/2. YOU SHOULD CONSULT WITH YOUR TAX ADVISER REGARDING THE TAX CONSEQUENCES OF A WITHDRAWAL. ADMINISTRATIVE CHARGES There are two administrative charges: the $30 annual contract administrative charge and the administrative expense charge. We will deduct the annual contract administrative charge on the fourth Friday of each August. This charge compensates us for expenses incurred in establishing and maintaining the Contract and we will prorate this charge (i.e. calculate) from the date of purchase. We will also prorate this charge if you surrender your Contract, or if we terminate your Contract. We will not deduct the contract administrative charge from the Fixed Account or: (1) from the distribution of death proceeds; (2) after an annuity payout has begun, or (3) if the Contract Value on the date of assessment equals or is greater than $40,000. We deduct the administrative expense charge (sometimes called "Subaccount administrative charge") on each business day from amounts allocated to the Variable Funding Options to compensate the Company for certain related administrative and operating expenses. The charge equals, on an annual basis, 0.15% of the daily net asset value allocated to each of the Variable Funding Options, and is reflected in our Accumulation and Annuity Unit value calculations. MORTALITY AND EXPENSE RISK CHARGE Each business day, we deduct a mortality and expense risk ("M&E") charge from amounts we hold in the Variable Funding Options. We reflect the deduction in our calculation of Accumulation and Annuity Unit values. The charges stated are the maximum for this product. We reserve the right to lower this charge at any time. If you choose the Standard Death Benefit, the M&E charge is 1.02% annually. If you choose the Enhanced Death Benefit, the M&E charge is 1.30% annually. This charge compensates the Company for risks assumed, benefits provided and expenses incurred, including the payment of commissions to your sales agent. VARIABLE LIQUIDITY BENEFIT CHARGE If the Variable Liquidity Benefit is selected, there is a maximum charge of 6% of the amounts withdrawn. This charge is not assessed during the accumulation phase. We will assess the charge as a percentage of the total benefit received as follows: YEARS SINCE INITIAL PURCHASE PAYMENT MADE ----------------------------------------------- GREATER THAN OR EQUAL TO BUT LESS THAN WITHDRAWAL CHARGE 0 years 3 years 6% 3 years 4 years 3% 4 years 5 years 2% 5 years 6 years 1% 6+years 0% Please refer to Payment Options for a description of this benefit. 19 VARIABLE FUNDING OPTION EXPENSES We summarized the charges and expenses of the Underlying Funds in the fee table. Please review the prospectus for each Underlying Fund for a more complete description of that fund and its expenses. Underlying Fund expenses are not fixed or guaranteed and are subject to change by the Fund. PREMIUM TAX Certain state and local governments charge premium taxes ranging from 0% to 5%, depending upon jurisdiction. We are responsible for paying these taxes and will determine the method used to recover premium tax expenses incurred. We will deduct any applicable premium taxes from your Contract Value either upon death, surrender, annuitization, or at the time you make Purchase Payments to the Contract, but no earlier than when we have a tax liability under state law. CHANGES IN TAXES BASED UPON PREMIUM OR VALUE If there is any change in a law assessing taxes against the Company based upon premiums, Contract gains or value of the Contract, we reserve the right to charge you proportionately for this tax. TRANSFERS - -------------------------------------------------------------------------------- Subject to the limitations described below, you may transfer all or part of your Contract Value between Variable Funding Options at any time up to 30 days before the Maturity Date. After the Maturity Date, you may make transfers only if allowed by your Contract or with our consent. Transfer requests received at our Home Office that are in good order before the close of the New York Stock Exchange (NYSE) will be processed according to the value(s) next computed following the close of business. Transfer requests received on a non-business day or after the close of the NYSE will be processed based on the value(s) next computed on the next business day. Where permitted by state law, we reserve the right to restrict transfers from the Variable Funding Options to the Fixed Account whenever the credited interest rate on the Fixed Account is equal to the minimum guaranteed interest rate specified under the Contract. Currently, there are no charges for transfers; however, we reserve the right to charge a fee for any transfer request which exceeds twelve per year. Since each Underlying Fund may have different overall expenses, a transfer of Contract Values from one Variable Funding Option to another could result in your investment becoming subject to higher or lower expenses. Also, when making transfers, you should consider the inherent risks associated with the Variable Funding Options to which your Contract Value is allocated. MARKET TIMING/EXCESSIVE TRADING THE CONTRACT IS INTENDED FOR USE AS A LONG-TERM INVESTMENT VEHICLE AND IS NOT DESIGNED TO SERVE AS A VEHICLE FOR EXCESSIVE TRADING OR MARKET TIMING IN AN ATTEMPT TO TAKE ADVANTAGE OF SHORT-TERM FLUCTUATIONS IN THE STOCK MARKET. EXCESSIVE TRADING IS DISRUPTIVE TO THE MANAGEMENT OF AN UNDERLYING FUND AND INCREASES OVERALL COSTS TO ALL INVESTORS IN THE UNDERLYING FUND. If, in our sole discretion, we determine you are engaging in excessive trading activity, trading activity that we believe is indicative of market timing, or any similar trading activity which will potentially hurt the rights or interests of other Contract Owners, we will exercise our contractual right to restrict your number of transfers to one every six months. We will notify you in writing if we choose to exercise our contractual right to restrict your transfers. In determining whether we believe you are engaged in excessive trading or market timing activity, we will consider, among other things, the following factors: o the dollar amount you request to transfer; o the number of transfers you made within the previous three months; o whether your transfers follow a pattern designed to take advantage of short term market fluctuations; and 20 o whether your transfers are part of a group of transfers made by a third party on behalf of several individual Contract Owners. Transfers made under a Dollar Cost Averaging Program, a rebalancing program, or, if applicable, any asset allocation program described in this prospectus are not treated as a transfer when we evaluate trading patterns for market timing or excessive trading. In addition to the above, we also reserve the right, but do not have the obligation, to further restrict the right to request transfers by any market timing firm or any other third party who has been authorized to initiate transfers on behalf of multiple Contract Owners. We may, among other things: o reject the transfer instructions of any agent acting under a power of attorney on behalf of more than one owner, or o reject the transfer or exchange instructions of individual owners who have executed pre-authorized transfer forms which are submitted by market timing firms or other third parties on behalf of more than one owner. We will notify you in writing before we restrict your right to request transfers through such market timing firm or other third party. The policy of the Company is to seek to apply its anti-market timing and excessive trading procedures uniformly. These procedures, however, will not prevent all excessive trading and market timing activity from occurring. For example: o Some of the Underlying Funds are available as investments for variable insurance contracts offered by other insurance companies. These other insurance companies may have different procedures to prevent excessive trading and market timing activity or may not have any such procedures because of contractual limitations. o The Company issues Contracts to qualified retirement plans that request financial transactions with the Company on an omnibus basis on behalf of all plan participants. These plans generally employ a record-keeper to maintain records of participant financial activity. Because the Company does not have the records to monitor the trading activity of the individual participants, the Company may not be able to identify plan participants who may be engaging in excessive trading or market timing activity and/or may not be able to apply its contractual trade restrictions to such participants. o There may be other circumstances where the Company does not identify trading activity as market timing or excessive trading or take action to restrict trading activity that does not qualify as excessive trading or market timing activity under our current anti-market timing procedures. For example, Contract Owners may engage in trading activity involving dollar amounts that are less than the threshold that we use for trade surveillance. Or, Contract Owners may request trades in a frequency or pattern that does not qualify as excessive trading or market timing activity under our current anti-market timing procedures. Excessive trading and market timing activity increases the overall transaction costs of an Underlying Fund, which may serve to decrease the Underlying Fund's performance. Further, excessive trading and market timing activity may disrupt the management of an Underlying Fund because the portfolio's advisor must react to frequent requests to purchase and redeem investments. FUTURE MODIFICATIONS. We will continue to monitor the transfer activity occurring among the Variable Funding Options, and may modify these transfer restrictions at any time if we deem it necessary to protect the interest of all Contract Owners. These modifications may include curtailing or eliminating, without notice, the ability to use the Internet, facsimile or telephone in making transfers. DOLLAR COST AVERAGING Dollar cost averaging or the pre-authorized transfer program (the "DCA Program") allows you to transfer a set dollar amount to other funding options on a monthly or quarterly basis during the accumulation phase of the Contract. Using this method, you will purchase more Accumulation Units in a funding option if the value per unit is low and will purchase fewer Accumulation Units if the value per unit is high. Therefore, you may achieve 21 a lower-than-average cost per unit in the long run if you have the financial ability to continue the program over a long enough period of time. Dollar cost averaging does not assure a profit or protect against a loss. You may elect the DCA Program through Written Request or other method acceptable to us. You must have a minimum total Contract Value of $5,000 to enroll in the DCA Program. The minimum amount that may be transferred through this program is $400. There is no additional fee to participate in the DCA Program. You may establish pre-authorized transfers of Contract Values from the Fixed Account, subject to certain restrictions. Under the DCA Program, automated transfers from the Fixed Account may not deplete your Fixed Account Value in less than twelve months from your enrollment in the DCA Program. In addition to the DCA Program, we may credit increased interest rates to Contract Owners under an administrative Special DCA Program established at our discretion, depending on availability and state law. Under this program, the Contract Owner may pre-authorize level transfers to any of the funding options under either a 6 Month Program or 12 Month Program. The 6 Month Program and the 12 Month Program will generally have different credited interest rates. Under the 6 Month Program, the interest rate can accrue up to 6 months on amounts in the Special DCA Program and we must transfer all Purchase Payments and accrued interest on a level basis to the selected funding options in 6 months. Under the 12 Month Program, the interest rate can accrue up to 12 months on funds in the Special DCA Program and we must transfer all Purchase Payments and accrued interest in this Program on a level basis to the selected funding options in 12 months. The pre-authorized transfers will begin after the initial Program Purchase Payment and complete enrollment instructions are received by the Company. If we do not receive complete Program enrollment instructions within 15 days of receipt of the initial Program Purchase Payment, the entire balance in the Program will be credited with the non-Program interest rate then in effect for the Fixed Account. You may start or stop participation in the DCA Program at any time, but you must give the Company at least 30 days' notice to change any automated transfer instructions that are currently in place. If you stop the Special DCA Program and elect to remain in the Fixed Account, we will credit your Contract Value for the remainder of 6 or 12 months with the interest rate for non-Program funds. You may only have one DCA Program or Special DCA Program in place at one time. We will allocate any subsequent Purchase Payments we receive within the Program period selected to the current funding options over the remainder of that Program transfer period, unless you direct otherwise. All provisions and terms of the Contract apply to the DCA and Special DCA Programs, including provisions relating to the transfer of money between funding options. We reserve the right to suspend or modify transfer privileges at any time and to assess a processing fee for this service. ACCESS TO YOUR MONEY - -------------------------------------------------------------------------------- Any time before the Maturity Date, you may redeem all or any portion of the Cash Surrender Value, that is, the Contract Value less any withdrawal charge, outstanding loans, and any premium tax not previously deducted. Unless you submit a Written Request specifying the fixed or Variable Funding Option(s) from which we are to withdraw amounts, we will make the withdrawal on a pro rata basis. We will determine the Cash Surrender Value as of the close of business after we receive your surrender request at our Home Office. The Cash Surrender Value may be more or less than the Purchase Payments you made. You may not make withdrawals during the annuity period. For amounts allocated to the Variable Funding Options, we may defer payment of any Cash Surrender Value for a period of up to five business days after the Written Request is received. For amounts allocated to the fixed account, we may defer payment of any Cash Surrender Value for a period up to six months. In either case, it is our intent to pay as soon as possible. We cannot process requests for withdrawals that are not in good order. We will contact you if there is a deficiency causing a delay and will advise what is needed to act upon the withdrawal request. If your Contract is issued as part of a 403(b) plan, there are restrictions on your ability to make withdrawals from your Contract. You may not withdraw contributions or earnings made to your Contract after December 31, 1988 unless you are (a) age 59 1/2, (b) no longer employed, (c) deceased, (d) disabled, or (e) experiencing a 22 financial hardship. Even if you are experiencing a financial hardship, you may only withdraw contributions, not earnings. You should consult with your tax adviser before making a withdrawal from your Contract. SYSTEMATIC WITHDRAWALS Before the Maturity Date, you may choose to withdraw a specified dollar amount (at least $100) on a monthly, quarterly, semiannual or annual basis. We will deduct any applicable premium taxes and withdrawal charge. To elect systematic withdrawals, you must have a Contract Value of at least $15,000 and you must make the election on the form we provide. We will surrender Accumulation Units pro rata from all funding options in which you have an interest, unless you instruct us otherwise. You may begin or discontinue systematic withdrawals at any time by notifying us in writing, but you must give at least 30 days' notice to change any systematic withdrawal instructions that are currently in place. We reserve the right to discontinue offering systematic withdrawals or to assess a processing fee for this service upon 30 days' written notice to Contract Owners (where allowed by state law). Each systematic withdrawal is subject to federal income taxes on the taxable portion. In addition, a 10% federal penalty tax may be assessed on systematic withdrawals if the Contract Owner is under age 591/2. There is no additional fee for electing Systematic Withdrawals. You should consult with your tax adviser regarding the tax consequences of systematic withdrawals. LOANS Loans may be available under your Contract. Loans may only be taken against funds allocated or transferred to the Fixed Account. If available, all loan provisions are described in your Contract or loan agreement. OWNERSHIP PROVISIONS - -------------------------------------------------------------------------------- TYPES OF OWNERSHIP CONTRACT OWNER The Contract belongs to the Contract Owner named in the Contract (on the Contract Specifications page), or to any other person to whom you subsequently assign the Contract. You may only make an assignment of ownership or a collateral assignment for Non-qualified Contracts. You have sole power during the Annuitant's lifetime to exercise any rights and to receive all benefits given in the Contract provided you have not named an irrevocable beneficiary and provided you have not assigned the Contract. You receive all payments while the Annuitant is alive unless you direct them to an alternate recipient. An alternate recipient does not become the Contract Owner. JOINT OWNER. For Non-qualified Contracts only, you may name joint owners (e.g., spouses) in a Written Request before the Contract is in effect. Joint owners may independently exercise transfers allowed under the Contract. All other rights of ownership must be exercised by both owners. Joint owners own equal shares of any benefits accruing or payments made to them. SUCCEEDING OWNER. For Non-qualified Contracts only, if joint owners are not named, the Contract Owner may name a succeeding owner in a Written Request. The succeeding owner becomes the Contract Owner if living when the Contract Owner dies. The succeeding owner has no interest in the Contract before then. The Contract Owner may change or delete a succeeding owner by Written Request. BENEFICIARY You name the beneficiary in a Written Request. The beneficiary has the right to receive any death benefit proceeds remaining under the Contract upon the death of the Annuitant or the Contract Owner. If more than one beneficiary survives the Annuitant or Contract Owner, they will share equally in benefits unless you recorded different shares with the Company by Written Request before the death of the Annuitant or Contract Owner. In the case of a non-spousal beneficiary or a spousal beneficiary who has not chosen to assume the Contract, we 23 will not transfer or otherwise remove the death benefit proceeds from either the Variable Funding Options or the Fixed Account, as most recently elected by the Contract Owner, until the Death Report Date. Unless you have named an irrevocable beneficiary you have the right to change any beneficiary by Written Request during the lifetime of the Annuitant and while the Contract continues. ANNUITANT The Annuitant is designated in the Contract (on the Contract Specifications page), and is the individual on whose life the Maturity Date and the amount of the monthly Annuity Payments depend. You may not change the Annuitant after your Contract is in effect. CONTINGENT ANNUITANT. You may name one individual as a Contingent Annuitant. A Contingent Annuitant may not be changed, deleted or added to the Contract after the Contract Date. If the Annuitant who is not the owner dies prior to the Maturity Date, and the Contingent Annuitant is still living; o the death benefit will not be payable upon the Annuitant's death o the contingent Annuitant becomes the Annuitant o all other rights and benefits will continue in effect When a Contingent Annuitant becomes the Annuitant, the Maturity Date remains the same as previously in effect. If the Annuitant is also the owner, a death benefit is paid to the beneficiary regardless of whether or not there is a Contingent Annuitant. You may not change, delete or add a Contingent Annuitant after the Contract becomes effective. DEATH BENEFIT - -------------------------------------------------------------------------------- Before the Maturity Date, generally, a death benefit is payable when either the Annuitant or a Contract Owner dies. At purchase, you elect either the Standard Death Benefit, or the Enhanced Death Benefit (also referred to as the "Roll-Up Death Benefit"). The death benefit is calculated at the close of the business day on which the Company's Home Office receives Due Proof of Death and written payment instructions or election of beneficiary contract continuance ("Death Report Date"). Note: If the owner dies before the Annuitant, the death benefit is recalculated, replacing all references to "Annuitant" with "owner." DEATH PROCEEDS BEFORE THE MATURITY DATE STANDARD DEATH BENEFIT DEATH OF ANY OWNER OR THE ANNUITANT BEFORE AGE 75. We will pay to the beneficiary a death benefit in an amount equal to the greatest of (1), (2) or (3) below, each reduced by any applicable premium tax, withdrawals or outstanding loans not previously deducted: (1) the Contract Value; (2) the total Purchase Payments made under the Contract; or (3) the Contract Value on the latest fifth Contract Year anniversary immediately preceding the date on which the Company receives Due Proof of Death. DEATH OF ANY OWNER OR THE ANNUITANT ON OR AFTER AGE 75. We will pay to the beneficiary a death benefit in an amount equal to the greatest of (1), (2) or (3) below, each reduced by any applicable premium tax, withdrawals or outstanding loans not previously deducted: (1) the Contract Value; (2) the total Purchase Payments made under the Contract; or 24 (3) the Contract Value on the latest fifth Contract Year anniversary occurring on or before the Annuitant's 75th birthday. ENHANCED DEATH BENEFIT (ROLL-UP DEATH BENEFIT) (NOT AVAILABLE WHEN EITHER THE ANNUITANT OR OWNER IS AGE 76 OR OLDER ON THE CONTRACT DATE) (Please refer to Appendix D for a description of the Enhanced Death Benefit for contracts purchased prior to June 1, 1997.) All death benefits described below are reduced by any applicable premium tax, prior withdrawals or outstanding loans not previously deducted.
- -------------------------------------------------------------------------------------------------------------------------- AGE AT TIME OF DEATH DEATH BENEFIT - -------------------------------------------------------------------------------------------------------------------------- If the Annuitant dies before age 80, the death benefit o the Contract Value on the Death Report Date will be the greatest of: o the roll-up death benefit value on the Death Report Date (as described below) o the maximum of all step-up death benefit values (as described below) available on the Death Report Date If the Annuitant dies on or after age 80, the death benefit will be the greatest of: o the Contract Value on the Death Report Date o the roll-up death benefit value (as described below) on the Annuitant's 80th birthday, plus any additional Purchase Payments and minus any partial surrender reductions (as described below) that occur after the Annuitant's 80th birthday; or o The maximum of all step-up death benefit values (as described below) in effect on the Death Report Date which are associated with any Contract Date anniversary occurring on or before the Annuitant's 80th birthday - ---------------------------------------------------------------------------------------------------------------------------
THE ROLL-UP DEATH BENEFIT VALUE. On the Contract Date, the roll-up death benefit value is equal to the Purchase Payment. On each Contract Date anniversary, the roll-up death benefit value will be recalculated to equal (a) plus (b) minus (c), increased by 5%, where: (a) is the roll-up death benefit value as of the previous Contract Date anniversary (b) is any Purchase Payment during the previous Contract Year (c) is any partial surrender reduction (as described below) during the previous Contract Year On dates other than the Contract Date anniversary, the roll-up death benefit value equals (a) plus (b) minus (c) where: (a) is the roll-up death benefit value as of the previous Contract Date anniversary (b) is any Purchase Payment made since the previous Contract Date anniversary (c) is any partial surrender reduction (as described below) since the previous Contract Date anniversary. The maximum roll-up death benefit payable equals 200% of the difference between all Purchase Payments and all partial surrender reductions (as described below). STEP-UP VALUE. We will establish a separate death benefit value on each anniversary of the Contract Date which occurs on or prior to the Death Report Date. The step-up value will initially equal the Contract Value on that anniversary. Whenever you make a Purchase Payment, we will increase the step-up value by the amount of that Purchase Payment. Whenever you take a withdrawal, we will reduce the step-up value by a partial surrender 25 reduction as described below. Recalculations of step-up death benefit values related to any Purchase Payments or any withdrawals will be made in the order that such Purchase Payments or withdrawals occur. THE PARTIAL SURRENDER REDUCTION referenced above is equal to (1) the amount of a death benefit value (step-up or roll-up) immediately prior to the reduction for the withdrawal, multiplied by (2) the amount of the withdrawal divided by the Contract Value immediately prior to the withdrawal. For example, assume your current Contract Value is $55,000. If your original step-up value is $50,000, and you decide to make a withdrawal of $10,000, we would reduce the step-up value as follows: 50,000 x (10,000/55,000) = $9,090 Your new step-up value would be 50,000 -- 9,090 or $40,910. The following example shows what would happen in a declining market. Assume your current Contract Value is $30,000. If your original step-up value is $50,000, and you decide to make a withdrawal of $10,000, we would reduce the step-up value as follows: 50,000 x (10,000/30,000) = $16,666 Your new step-up value would be 50,000 -- 16,666, or $33,334. PAYMENT OF PROCEEDS We describe the process of paying death benefit proceeds before the Maturity Date in the charts below. The charts do not encompass every situation and are merely intended as a general guide. More detailed information is provided in your Contract. Generally, the person(s) receiving the benefit may request that the proceeds be paid in a lump sum, or be applied to one of the settlement options available under the Contract. NON-QUALIFIED CONTRACTS
- ----------------------------------------------------------------------------------------------------------------------------- MANDATORY BEFORE THE MATURITY DATE, THE COMPANY WILL PAYOUT RULES UPON THE DEATH OF THE PAY THE PROCEEDS TO: UNLESS. . . APPLY* - ----------------------------------------------------------------------------------------------------------------------------- OWNER (WHO IS NOT THE The beneficiary Unless the beneficiary elects to Yes ANNUITANT) (WITH NO JOINT OWNER) (ies), or if none, to continue the Contract rather than the Contract Owner's receive the distribution. estate. - ----------------------------------------------------------------------------------------------------------------------------- OWNER (WHO IS THE ANNUITANT) The beneficiary Unless the beneficiary elects to Yes (WITH NO JOINT OWNER) (ies), or if none, to continue the Contract rather than the Contract Owner's receive the distribution. estate. - ----------------------------------------------------------------------------------------------------------------------------- JOINT OWNER (WHO IS NOT THE The surviving joint Unless the surviving joint owner Yes ANNUITANT) owner. elects to continue the Contract rather than receive the distribution. - ----------------------------------------------------------------------------------------------------------------------------- JOINT OWNER (WHO IS THE The beneficiary Unless the beneficiary/surviving Yes ANNUITANT) (ies), or if none, to joint owner elects to continue the the surviving joint Contract rather than receive the owner. distribution. - ----------------------------------------------------------------------------------------------------------------------------- ANNUITANT (WHO IS THE CONTRACT See death of "owner Yes OWNER) who is the Annuitant" above. - -----------------------------------------------------------------------------------------------------------------------------
26
- ----------------------------------------------------------------------------------------------------------------------------- MANDATORY BEFORE THE MATURITY DATE, THE COMPANY WILL PAYOUT RULES UPON THE DEATH OF THE PAY THE PROCEEDS TO: UNLESS. . . APPLY* - ----------------------------------------------------------------------------------------------------------------------------- ANNUITANT (WHERE OWNER IS A The beneficiary (ies) Yes (Death of NONNATURAL PERSON/TRUST) (e.g. the trust) or Annuitant is if none, to the owner. treated as death of the owner in these circumstances.) - ----------------------------------------------------------------------------------------------------------------------------- CONTINGENT ANNUITANT (ASSUMING No death proceeds are N/A ANNUITANT IS STILL ALIVE) payable; contract continues. - ----------------------------------------------------------------------------------------------------------------------------- BENEFICIARY No death proceeds are N/A payable; contract continues. - ----------------------------------------------------------------------------------------------------------------------------- CONTINGENT BENEFICIARY No death proceeds are N/A payable; contract continues. - -----------------------------------------------------------------------------------------------------------------------------
- ---------------------- * Certain payout rules of the Internal Revenue Code (IRC) are triggered upon the death of any Owner. Non-spousal beneficiaries (as well as spousal beneficiaries who choose not to assume the Contract) must begin taking distributions based on the beneficiary's life expectancy within one year of death or take a complete distribution of Contract proceeds within 5 years of death. If mandatory distributions have begun, the 5 year payout option is not available. QUALIFIED CONTRACTS
- ----------------------------------------------------------------------------------------------------------------------------- MANDATORY BEFORE THE MATURITY DATE, THE COMPANY WILL PAYOUT RULES UPON THE DEATH OF THE PAY THE PROCEEDS TO: UNLESS. . . APPLY* - ----------------------------------------------------------------------------------------------------------------------------- OWNER/ANNUITANT The beneficiary (ies), Unless the beneficiary elects to Yes or if none, to the continue the Contract rather than Contract Owner's receive a distribution. estate. - ----------------------------------------------------------------------------------------------------------------------------- BENEFICIARY No death proceeds are N/A payable; Contract continues. - ----------------------------------------------------------------------------------------------------------------------------- CONTINGENT BENEFICIARY No death proceeds are N/A payable; Contract continues. - -----------------------------------------------------------------------------------------------------------------------------
BENEFICIARY CONTRACT CONTINUANCE (NOT PERMITTED FOR NON-NATURAL BENEFICIARIES) If you die before the Maturity Date, and if the value of any beneficiary's portion of the death benefit is between $20,000 and $1,000,000 as of the Death Report Date, (more than $1,000,000 is subject to Home Office approval), your beneficiary(ies) may elect to continue his/her portion of the Contract subject to applicable Internal Revenue Code distribution requirements, rather than receive the death benefit in a lump sum. If the beneficiary chooses to continue the Contract, the beneficiary can extend the payout phase of the Contract enabling the beneficiary to "stretch" the death benefit distributions out over his life expectancy as permitted by the Internal Revenue Code. 27 If your beneficiary elects to continue the Contract, the death benefit will be calculated as of the Death Report Date. The initial Contract Value of the continued contract (the "adjusted Contract Value") will equal the greater of the Contract Value or the death benefit calculated on the Death Report Date and will be allocated to the funding options in the same proportion as prior to the Death Report Date. If the adjusted Contract Value is allocated to the Variable Funding Options, the beneficiary bears the investment risk. The beneficiary who continues the Contract will be granted the same rights as the owner under the original Contract, except the beneficiary cannot: o transfer ownership o take a loan o make additional Purchase Payments The beneficiary may also name his/her own beneficiary ("succeeding beneficiary") and has the right to take withdrawals at any time after the Death Report Date without a withdrawal charge. All other fees and charges applicable to the original contract will also apply to the continued contract. All benefits and features of the continued contract will be based on the beneficiary's age on the Death Report Date as if the beneficiary had purchased the Contract with the adjusted Contract Value on the Death Report Date PLANNED DEATH BENEFIT You may request that rather than receive a lump-sum death benefit, the beneficiary(ies) receive all or a portion of the death benefit proceeds either: o through an annuity for life or a period that does not exceed the beneficiary's life expectancy; or o under the terms of the Beneficiary Continuance provision described above. If the Beneficiary Continuance provision is selected as the planned death benefit, no surrenders will be allowed other than payments meant to satisfy minimum distribution amounts or systematic withdrawal amounts, if greater. You must make the planned death benefit request as well as any revocation of this request in writing. Upon your death, your beneficiary(ies) cannot revoke or modify this request. If the death benefit at the time we receive Due Proof of Death is less than $2,000, we will only pay a lump sum to the beneficiary. If periodic payments due under the planned death benefit election are less than $100, we reserve the right to make Annuity Payments at less frequent intervals, resulting in a payment of at least $100 per year. If no beneficiary is alive when death benefits become payable, we will pay the death benefit as provided in your Contract. DEATH PROCEEDS AFTER THE MATURITY DATE If any Contract Owner or the Annuitant dies on or after the Maturity Date, the Company will pay the beneficiary a death benefit consisting of any benefit remaining under the annuity or income option then in effect. THE ANNUITY PERIOD - -------------------------------------------------------------------------------- MATURITY DATE Under the Contract, you can receive regular payments ("Annuity Payments"). You can choose the month and the year in which those payments begin ("Maturity Date"). You can also choose among payout options (annuity or income options) or elect a lump sum distribution. While the Annuitant is alive, you can change your selection any time up to the Maturity Date. Annuity or income payments will begin on the Maturity Date stated in the Contract unless (1) you fully surrendered the Contract; (2) we paid the proceeds to the beneficiary before that date; or (3) you elected another date. Annuity payments are a series of periodic payments (a) for life; (b) for life with a minimum number of payments; or (c) for the joint lifetime of the Annuitant and another person, and thereafter during the lifetime of the survivor. We may require proof that the Annuitant is alive before we make Annuity Payments. Not all options may be available in all states. You may choose to annuitize at any time after you purchase your Contract. Unless you elect otherwise, the Maturity Date will be the Annuitant's 70th birthday for Qualified Contracts, or for Non-qualified Contracts, the 28 Annuitant's 75th birthday or ten years after the effective date of the Contract, if later. (For Contracts issued in Florida and New York, the Maturity Date you elect may not be later than the Annuitant's 90th birthday.) At least 30 days before the original Maturity Date, you may elect to extend the Maturity Date to any time prior to the Annuitant's 90th birthday for Non-qualified Contracts, or 70th birthday for Qualified Contracts, or for all Contracts, to a later date with our consent. You may use certain annuity options taken at the Maturity Date to meet the minimum required distribution requirements of federal tax law, or you may use a program of withdrawals instead. These mandatory distribution requirements take effect generally upon the death of the Contract Owner, or with certain Qualified Contracts upon either the later of the Contract Owner's attainment of age 701/2 or year of retirement; or the death of the Contract Owner. You should seek independent tax advice regarding the election of minimum required distributions. ALLOCATION OF ANNUITY You may elect to receive your Annuity Payments in the form of a variable annuity, a fixed annuity, or a combination of both. If, at the time Annuity Payments begin, you have not made an election, we will apply your Cash Surrender Value to provide an annuity funded by the same funding options as you have selected during the accumulation period. At least 30 days before the Maturity Date, you may transfer the Contract Value among the funding options in order to change the basis on which we will determine Annuity Payments. (See "Transfers.") VARIABLE ANNUITY You may choose an annuity payout that fluctuates depending on the investment experience of the Variable Funding Options. We determine the number of Annuity Units credited to the Contract by dividing the first monthly Annuity Payment attributable to each Variable Funding Option by the corresponding Accumulation Unit value as of 14 days before the date Annuity Payments begin. We use an Annuity Unit to measure the dollar value of an Annuity Payment. The number of Annuity Units (but not their value) remains fixed during the annuity period. DETERMINATION OF FIRST ANNUITY PAYMENT. Your Contract contains the tables we use to determine your first monthly Annuity Payment. If you elect a variable annuity, the amount we apply to it will be the Cash Surrender Value as of 14 days before the date Annuity Payments begin, less any applicable premium taxes not previously deducted. The amount of your first monthly payment depends on the annuity option you elected and the Annuitant's adjusted age. Your Contract contains the formula for determining the adjusted age. We determine the total first monthly Annuity Payment by multiplying the benefit per $1,000 of value shown in the Contract tables by the number of thousands of dollars of Contract Value you apply to that annuity option. The contract tables factor in an assumed daily net investment factor of 3.0%. We call this your net investment rate. Your net investment rate of 3% corresponds to an annual interest rate of 3%. This means that if the annualized investment performance, after expenses, of your Variable Funding Options is less than 3%, then the dollar amount of your variable Annuity Payments will decrease. However, if the annualized investment performance, after expenses, of your Variable Funding Options is greater than 3%, then the dollar amount of your variable Annuity Payments will increase. DETERMINATION OF SECOND AND SUBSEQUENT ANNUITY PAYMENTS. The dollar amount of all subsequent Annuity Payments changes from month to month based on the investment experience, as described above, of the applicable funding options. The total amount of each Annuity Payment will equal the sum of the basic payments in each funding option. We determine the actual amounts of these payments by multiplying the number of Annuity Units we credited to each funding option by the corresponding Annuity Unit value as of the date 14 days before the date the payment is due. FIXED ANNUITY You may choose a fixed annuity that provides payments that do not vary during the annuity period. We will calculate the dollar amount of the first fixed Annuity Payment as described under "Variable Annuity," except that the amount we apply to begin the annuity will be your Cash Surrender Value as of the date Annuity Payments begin. Payout rates will not be lower than that shown in the Contract. If it would produce a larger payment, the first fixed Annuity Payment will be determined using the Life Annuity Tables in effect on the Maturity Date. 29 PAYMENT OPTIONS - -------------------------------------------------------------------------------- ELECTION OF OPTIONS While the Annuitant is alive, you can change your annuity or income option selection any time up to the Maturity Date. Once annuity or income payments have begun, no further elections are allowed. During the Annuitant's lifetime, if you do not elect otherwise before the Maturity Date, we will pay you (or another designated payee) the first of a series of monthly annuity or income payments based on the life of the Annuitant, in accordance with Annuity Option 2 (Life Annuity with 120 monthly payments assured). For certain Qualified Contracts, Annuity Option 4 (Joint and Last Survivor Life Annuity -- Annuity Reduced on Death of Primary Payee) will be the automatic option as described in the Contract. The minimum amount that can be placed under an annuity or income option will be $1,000 unless we agree to a lesser amount. If any monthly periodic payment due is less than $100, the Company reserves the right to make payments at less frequent intervals, or to pay the Contract Value in a lump-sum. On the Maturity Date, we will pay the amount due under the Contract in accordance with the payment option that you select. You may choose to receive a single lump-sum payment. You must elect an option in writing, in a form satisfactory to the Company. Any election made during the lifetime of the Annuitant must be made by the Contract Owner. ANNUITY OPTIONS Subject to the conditions described in "Election of Options" above, we may pay all or any part of the Cash Surrender Value under one or more of the following annuity options. Payments under the annuity options are generally made on a monthly basis. We may offer additional options. Option 1 -- Life Annuity -- No Refund. The Company will make Annuity Payments during the lifetime of the Annuitant ending with the last payment before death. This option offers the maximum periodic payment, since there is no assurance of a minimum number of payments or provision for a death benefit for beneficiaries. Option 2 -- Life Annuity with 120, 180 or 240 Monthly Payments Assured. The Company will make monthly Annuity Payments during the lifetime of the Annuitant, with the agreement that if, at the death of that person, payments have been made for less than 120, 180 or 240 months, as elected, we will continue making payments to the beneficiary during the remainder of the period. Option 3 -- Joint and Last Survivor Life Annuity -- No Refund. The Company will make regular Annuity Payments during the lifetime of the Annuitant and a second person. When either person dies, we will continue making payments to the survivor. No further payments will be made following the death of the survivor. Option 4 -- Joint and Last Survivor Life Annuity -- Annuity Reduced on Death of Primary Payee. The Company will make Annuity Payments during the lifetimes of the Annuitant and a second person. You will designate one as primary payee, and the other will be designated as secondary payee. On the death of the secondary payee, the Company will continue to make monthly Annuity Payments to the primary payee in the same amount that would have been payable during the joint lifetime of the two persons. On the death of the primary payee, the Company will continue to make Annuity Payments to the secondary payee in an amount equal to 50% of the payments, which would have been made during the lifetime of the primary payee. No further payments will be made once both payees have died. Option 5 -- Other Annuity Options. The Company will make any other arrangements for Annuity Payments as may be mutually agreed upon. INCOME OPTIONS Instead of one of the annuity options described above, and subject to the conditions described under "Election of Options," all or part of the Contract's Cash Surrender Value (or, if required by state law, Contract Value) may be paid under one or more of the following income options, provided that they are consistent with federal tax 30 law qualification requirements. Payments under the income options may be elected on a monthly, quarterly, semiannual or annual basis: Option 1 -- Payments of a Fixed Amount. We will make equal payments of the amount elected until the Cash Surrender Value applied under this option has been exhausted. We will pay the first payment and all later payments from each funding option or the Fixed Account in proportion to the Cash Surrender Value attributable to each funding option and/or Fixed Account. The final payment will include any amount insufficient to make another full payment. Option 2 -- Payments for a Fixed Period. We will make payments for the period selected. Option 3 -- Other Income Options. We will make any other arrangements for income options as may be mutually agreed upon. VARIABLE LIQUIDITY BENEFIT This benefit is only offered with the income option "Payments for a Fixed Period." At any time after annuitization and before death, the Contract Owner may surrender and receive a payment equal to (A) minus (B), where (A) equals the present value of remaining certain payments, and (B) equals a withdrawal charge not to exceed the maximum withdrawal charge rate shown on the specifications page of the Contract multiplied by (A). The interest rate used to calculate the present value is a rate 1% higher than the Assumed (Daily) Net Investment Factor used to calculate the Annuity Payments. The remaining period certain payments are assumed to be level payments equal to the most recent period certain payment prior to the request for this liquidity benefit. A withdrawal charge is not imposed if the surrender is made after the expiration of the withdrawal charge period shown on the specifications page of the Contract. MISCELLANEOUS CONTRACT PROVISIONS - -------------------------------------------------------------------------------- RIGHT TO RETURN You may return the Contract for a full refund of the Contract Value plus any Contract charges and premium taxes you paid (but not any fees and charges the Underlying Fund assessed) within ten days after you receive it (the "right to return period"). You bear the investment risk of investing in the Variable Funding Options during the right to return period; therefore, the Contract Value we return may be greater or less than your Purchase Payment. If you purchase the Contract as an Individual Retirement Annuity, and return it within the first seven days after delivery, or longer if your state law permits, we will refund your Purchase Payment in full; during the remainder of the right to return period, we will refund the Contract Value (including charges). We will determine the Contract Value following the close of the business day on which we receive your Contract and a Written Request for a refund. Where state law requires a different period, or the return of Purchase Payments or other variations of this provision, we will comply. Refer to your Contract for any state-specific information. TERMINATION We reserve the right to terminate the Contract on any business day if your Contract Value as of that date is less than $2,000 and you have not made Purchase Payments for at least two years, unless otherwise specified by state law. Termination will not occur until 31 days after we have mailed notice of termination to your last known address and to any assignee of record. If we terminate the Contract, we will pay you the Cash Surrender Value less any applicable taxes. REQUIRED REPORTS As often as required by law, but at least once in each Contract Year before the due date of the first Annuity Payment, we will furnish a report showing the number of Accumulation Units credited to the Contract and the corresponding Accumulation Unit value(s) as of the report date for each funding option to which the Contract 31 Owner has allocated amounts during the applicable period. The Company will keep all records required under federal and state laws. SUSPENSION OF PAYMENTS The Company reserves the right to suspend or postpone the date of any payment or determination of values on any business day (1) when the New York Stock Exchange ("the Exchange") is closed; (2) when trading on the Exchange is restricted; (3) when an emergency exists as determined by the SEC so that the sale of securities held in the Separate Account may not reasonably occur or so that the Company may not reasonably determine the value the Separate Account's net assets; or (4) during any other period when the SEC, by order, so permits for the protection of security holders. Payments from the Fixed Account may be delayed up to 6 months. THE SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- The Travelers Insurance Company and the Travelers Life and Annuity Company each sponsor Separate Accounts: Fund BD and Fund BD II, respectively. Fund BD was established on October 22, 1993 and Fund BD II was established on February 22, 1995, and both are registered with the SEC as unit investment trusts (Separate Account) under the Investment Company Act of 1940, as amended. We will invest Separate Account assets attributable to the Contracts exclusively in the shares of the Variable Funding Options. We hold the assets of Fund BD and Fund BD II for the exclusive and separate benefit of the owners of each Separate Account, according to the laws of Connecticut. Income, gains and losses, whether or not realized, from assets allocated to the Separate Account are, in accordance with the Contracts, credited to or charged against the Separate Account without regard to other income, gains and losses of the Company. The assets held by the Separate Account are not chargeable with liabilities arising out of any other business that we may conduct. Obligations under the Contract are obligations of the Company. All investment income and other distributions of the funding options are payable to the Separate Account. We reinvest all such income and/or distributions in shares of the respective funding option at net asset value. Shares of the funding options are currently sold only to life insurance company Separate Accounts to fund variable annuity and variable life insurance contracts. Certain variable annuity Separate Accounts and variable life insurance Separate Accounts may invest in the funding options simultaneously (called "mixed" and "shared" funding). It is conceivable that in the future it may be disadvantageous to do so. Although the Company and the Variable Funding Options do not currently foresee any such disadvantages either to variable annuity Contract Owners or variable life policy owners, each Underlying Fund's Board of Directors intends to monitor events in order to identify any material conflicts between them and to determine what action, if any, should be taken. If a Board of Directors was to conclude that separate funds should be established for variable life and variable annuity Separate Accounts, the variable annuity Contract Owners would not bear any of the related expenses, but variable annuity Contract Owners and variable life insurance policy owners would no longer have the economies of scale resulting from a larger combined fund. PERFORMANCE INFORMATION In advertisements for the Contract, we may include performance figures to show you how a Variable Funding Option has performed in the past. These figures are rates of return or yield quotations shown as a percent. These figures show past performance of a Variable Funding Option and are not an indication of how a Variable Funding Option will perform in the future. Our advertisements may show performance figures assuming that you do not elect any optional features. However, if you elect any of these optional features, they involve additional charges that will serve to decrease the performance of your Variable Funding Options. You may wish to speak with your registered representative to obtain performance information specific to the optional features you may wish to select. Performance figures for each Variable Funding Option are based in part on the performance of a corresponding Underlying Fund. In some cases, the Underlying Fund may have existed before the technical inception of the corresponding Variable Funding Option. In those cases, we can create "hypothetical historical performance" of a 32 Variable Funding Option. These figures show the performance that the Variable Funding Option would have achieved had it been available during the entire history of the Underlying Fund. In a low interest rate environment, yields for money market Subaccounts, after deduction of the Mortality and Expense Risk Charge, Administrative Expense Charge and the charge for any optional benefit riders (if applicable), may be negative even though the Underlying Fund's yield, before deducting for such charges, is positive. If you allocate a portion of your Contract Value to a money market Subaccount or participate in an asset allocation program where Contract Value is allocated to a money market Subaccount under the applicable asset allocation model, that portion of your Contract Value may decrease in value. FEDERAL TAX CONSIDERATIONS - -------------------------------------------------------------------------------- The following general discussion of the federal income tax consequences related to your investment in this Contract is not intended to cover all situations, and is not meant to provide tax or legal advice. Because of the complexity of the law and the fact that the tax results will vary depending on many factors, you should consult your tax and/or legal adviser regarding the tax implications of purchasing this Contract based upon your individual situation. For further tax information, an additional discussion of certain tax matters is contained in the SAI. GENERAL TAXATION OF ANNUITIES Congress has recognized the value of saving for retirement by providing certain tax benefits, in the form of tax deferral, for premiums paid under an annuity and permitting tax-free transfers between the various investment options offered under the Contract. The Internal Revenue Code ("Code") governs how earnings on your investment in the Contract are ultimately taxed, depending upon the type of Contract, Qualified or Non-qualified, and the manner in which the money is distributed, as briefly described below. In analyzing the benefits of tax deferral it is important to note that the Jobs and Growth Tax Relief Reconciliation Act of 2003 amended Code Section 1 to reduce the marginal tax rates on long-term capital gains and dividends to 5% and 15%. The reduced rates apply during 2003 through 2008, and thereafter will increase to prior levels. Earnings under annuity Contracts, like interest payable as fixed investments (notes, bonds, etc.), continue to be taxed as ordinary income (top rate of 35%). TAX-FREE EXCHANGES: Code Section 1035 provides that, if certain conditions are met, no gain or loss is recognized when an annuity contract is received in exchange for a life, endowment, or annuity Contract. Since different annuity contracts have different expenses, fees and benefits, a tax-free exchange could result in your investment becoming subject to higher or lower fees and/or expenses. TYPES OF CONTRACTS: QUALIFIED AND NON-QUALIFIED QUALIFIED ANNUITY CONTRACTS If you purchase your Contract with proceeds of an eligible rollover distribution from any qualified employee pension plan or individual retirement annuity (IRA), your Contract is referred to as a Qualified Contract. Some examples of Qualified Contracts are: IRAs, tax-sheltered annuities established by public school systems or certain tax-exempt organizations under Code Section 403(b), corporate sponsored pension and profit-sharing plans (including 401(k) plans), Keogh Plans (for self-employed individuals), and certain other qualified deferred compensation plans. Another type of Qualified Contract is a Roth IRA, under which after-tax contributions accumulate until maturity, when amounts (including earnings) may be withdrawn tax-free. The rights and benefits under a Qualified Contract may be limited by the terms of the retirement plan, regardless of the terms and conditions of the Contract. Plan participants making contributions to Qualified Contracts will be subject to the required minimum distribution rules as provided by the Code and described below. TAXATION OF QUALIFIED ANNUITY CONTRACTS Under a qualified annuity, since amounts paid into the Contract have generally not yet been taxed, the full amount of such distributions, including the amount attributable to Purchase Payments, whether paid in the form of lump-sum withdrawals or Annuity Payments, are generally taxed at the ordinary income tax rate unless the distribution is transferred to an eligible rollover account or Contract. The Contract is available as a vehicle for 33 IRA rollovers and for other Qualified Contracts. There are special rules which govern the taxation of Qualified Contracts, including withdrawal restrictions, requirements for mandatory distributions, and contribution limits. Amounts rolled over to the Contract from other qualified plan funding vehicles are generally not subject to current taxation. We have provided a more complete discussion in the SAI. MANDATORY DISTRIBUTIONS FOR QUALIFIED PLANS Federal tax law requires that minimum annual distributions begin by April 1st of the calendar year following the calendar year in which an IRA owner attains age 701/2. Participants in qualified plans and 403(b) annuities may defer minimum distributions until the later of April 1st of the calendar year following the calendar year in which they attain age 701/2 or the year of retirement. If you own more than one individual retirement annuity and/or account, you may satisfy the minimum distribution rules on an aggregate basis (i.e. determine the total amount of required distributions from all IRAs and take the required amount from any one or more IRAs). A similar aggregate approach is available to meet your 403(b) minimum distribution requirements if you have multiple 403(b) annuities. Recently promulgated Treasury regulations changed the distribution requirements; therefore, it is important that you consult your tax adviser as to the impact of these regulations on your personal situation. MINIMUM DISTRIBUTIONS FOR BENEFICIARIES UPON THE CONTRACT OWNER'S DEATH: Upon the death of the Contract Owner and/or Annuitant of a Qualified Contract, the funds remaining in the Contract must be completely withdrawn within 5 years from the date of death (including in a single lump sum) or minimum distributions may be taken over the life expectancy of the individual beneficiaries (and in certain situations, trusts for individuals), provided such distributions are payable at least annually and begin within one year from the date of death. Special rules apply where the beneficiary is the surviving spouse, which allow the spouse to assume the Contract and defer the minimum distribution requirements. NOTE TO PARTICIPANTS IN QUALIFIED PLANS INCLUDING 401, 403(B), 457 AS WELL AS IRA OWNERS: While annual plan contribution limits may be increased from time to time by Congress and the IRS for federal income tax purposes, these limits must be adopted by each state for the higher limits to be effective at a state income tax level. In other words, the permissible contribution limit for income tax purposes may be different at the federal level from your state's income tax laws. Therefore, in certain states, a portion of the contributions may not be excludible or deductible from state income taxes. Please consult your employer or tax adviser regarding this issue. NON-QUALIFIED ANNUITY CONTRACTS If you purchase the Contract on an individual basis with after-tax dollars and not under one of the programs described above, your Contract is referred to as non-qualified. As the owner of a non-qualified annuity, you do not receive any tax benefit (deduction or deferral of income) on Purchase Payments, but you will not be taxed on increases in the value of your Contract until a distribution occurs -- either as a withdrawal (distribution made prior to the Maturity Date), or as periodic Annuity Payments. When a withdrawal is made, you are taxed on the amount of the withdrawal that is considered earnings under federal tax laws. Similarly, when you receive an Annuity Payment, part of each periodic payment is considered a return of your Purchase Payments and will not be taxed. The remaining portion of the Annuity Payment (i.e., any earnings) will be considered ordinary income for federal income tax purposes. If a non-qualified annuity is owned by other than an individual, however, (e.g., by a corporation), increases in the value of the Contract attributable to Purchase Payments made after February 28, 1986 are includable in income annually and taxed at ordinary income tax rates. Furthermore, for Contracts issued after April 22, 1987, if you transfer the Contract to another person or entity without adequate consideration, all deferred increases in value will be includable in your income for federal income tax purposes at the time of the transfer. If you make a partial withdrawal of your annuity balance, the distribution will generally be taxed as first coming from earnings, (income in the contract), and then from your Purchase Payments. These withdrawn earnings are includable in your taxable income. (See Penalty Tax for Premature Distributions below.) As a general rule, there is income in the Contract to the extent the Contract Value exceeds your investment in the Contract. The investment in the Contract equals the total Purchase Payments you paid less any amount received previously which was excludible from gross income. Any direct or indirect borrowing against the value of the Contract or pledging of the Contract as security for a loan will be treated as a cash distribution under the tax law, and will have tax consequences in the year taken. It should be noted that there is no guidance as to the determination of 34 the amount of income in a Contract if it is issued with a guaranteed minimum withdrawal benefit. Therefore, you should consult with your tax adviser as to the potential tax consequences of a partial surrender if your Contract is issued with a guaranteed minimum withdrawal benefit. Code Section 72(s) requires that non-qualified annuity Contracts meet minimum mandatory distribution requirements upon the death of the Contract Owner, including the death of either of the joint owners. If these requirements are not met, the Contract will not be treated as an annuity Contract for federal income tax purposes and earnings under the Contract will be taxable currently, not when distributed. The distribution required depends, among other things, upon whether an annuity option is elected or whether the succeeding Contract Owner is the surviving spouse. We will administer Contracts in accordance with these rules and we will notify you when you should begin receiving payments. There is a more complete discussion of these rules in the SAI. DIVERSIFICATION REQUIREMENTS FOR VARIABLE ANNUITIES The Code requires that any non-qualified variable annuity Contracts based on a Separate Account must meet specific diversification standards. Non-qualified variable annuity contracts shall not be treated as an annuity for Federal income tax purposes if investments made in the account are not adequately diversified. Final tax regulations define how Separate Accounts must be diversified. The Company monitors the diversification of investments constantly and believes that its accounts are adequately diversified. The consequence of any failure to diversify is essentially the loss to the Contract Owner of tax-deferred treatment, requiring the current inclusion of a proportionate share of the income and gains from the Separate Account assets in the income of each Contract Owner. The Company intends to administer all Contracts subject to this provision of law in a manner that will maintain adequate diversification. OWNERSHIP OF THE INVESTMENTS In certain circumstances, owners of variable annuity contracts have been considered to be the owners of the assets of the underlying Separate Account for Federal income tax purposes due to their ability to exercise investment control over those assets. When this is the case, the contract owners have been currently taxed on income and gains attributable to the variable account assets. There is little guidance in this area, and some features of the Contract, such as the number of funds available and the flexibility of the Contract Owner to allocate premium payments and transfer amounts among the funding options, have not been addressed in public rulings. While we believe that the Contract does not give the Contract Owner investment control over Separate Account assets, we reserve the right to modify the Contract as necessary to prevent a Contract Owner from being treated as the owner of the Separate Account assets supporting the Contract. TAXATION OF DEATH BENEFIT PROCEEDS Amounts may be distributed from a Non-qualified Contract because of the death of an owner or Annuitant. Generally, such amounts are includable in the income of the recipient as follows: (i) if distributed in a lump sum, they are taxed in the same manner as a full surrender of the contract; or (ii) if distributed under a payment option, they are taxed in the same way as Annuity Payments. OTHER TAX CONSIDERATIONS TREATMENT OF CHARGES FOR OPTIONAL BENEFITS The Contract may provide one or more optional enhanced death benefits or other minimum guaranteed benefit that in some cases may exceed the greater of purchase price or the Contract Value. It is possible that the Internal Revenue Service may take the position that the charges for the optional enhanced benefit(s) are deemed to be taxable distributions to you. Although we do not believe that a charge under such optional enhanced benefit should be treated as a taxable withdrawal, you should consult with your tax adviser before selecting any rider or endorsement to the Contract. PENALTY TAX FOR PREMATURE DISTRIBUTIONS For both Qualified and Non-qualified Contracts, taxable distributions taken before the Contract Owner has reached the age of 591/2 will be subject to a 10% additional tax penalty unless the distribution is taken in a series 35 of periodic distributions, for life or life expectancy, or unless the distribution follows the death or disability of the Contract Owner. Other exceptions may be available in certain qualified plans. The 10% additional tax is in addition to any penalties that may apply under your Contract and the normal income taxes due on the distribution. PUERTO RICO TAX CONSIDERATIONS The Puerto Rico Internal Revenue Code of 1994 (the "1994 Code") taxes distributions from non-qualified annuity contracts differently than in the U.S. Distributions that are not in the form of an annuity (including partial surrenders and period certain payments) are treated under the 1994 Code first as a return of investment. Therefore, no taxable income is recognized for Puerto Rico tax purposes until the cumulative amount paid exceeds your tax basis. The amount of income on annuity distributions (payable over your lifetime) is also calculated differently under the 1994 Code. Since Puerto Rico residents are also subject to U.S. income tax on all income other than income sourced to Puerto Rico, and the Internal Revenue Service issued guidance in 2004 which indicated that the income from an annuity contract issued by a U.S. life insurer would be considered U.S. source income, the timing of recognition of income from an annuity contract could vary between the two jurisdictions. Although the 1994 Code provides a credit against the Puerto Rico income tax for U.S. income taxes paid, an individual may not get full credit because of the timing differences. You should consult with a personal tax adviser regarding the tax consequences of purchasing an annuity contract and/or any proposed distribution, particularly a partial distribution or election to annuitize. NON-RESIDENT ALIENS Distributions to non-resident aliens ("NRAs") are subject to special and complex tax and withholding rules under the Code with respect to U.S. source income, some of which are based upon the particular facts and circumstances of the Contract Owner, the beneficiary and the transaction itself. As stated above, the IRS has taken the position that income from the Contract received by NRAs is considered U.S. source income. In addition, Annuity Payments to NRAs in many countries are exempt from U.S. tax (or subject to lower rates) based upon a tax treaty, provided that the Contract Owner complies with the applicable requirements. NRAs should seek guidance from a tax adviser regarding their personal situation. OTHER INFORMATION - -------------------------------------------------------------------------------- THE INSURANCE COMPANIES Please refer to your Contract to determine which Company issued your Contract. The Travelers Insurance Company is a stock insurance company chartered in 1863 in Connecticut and continuously engaged in the insurance business since that time. It is licensed to conduct life insurance business in all states of the United States, the District of Columbia, Puerto Rico, Guam, the U.S. and British Virgin Islands and the Bahamas. The Company is an indirect wholly-owned subsidiary of Citigroup Inc. The Company's Home Office is located at One Cityplace, Hartford, Connecticut 06103-3415. The Travelers Life and Annuity Company is a stock insurance company chartered in 1973 in Connecticut and continuously engaged in the insurance business since that time. It is licensed to conduct life insurance business in all states of the United States (except New York), the District of Columbia and Puerto Rico. The Company is an indirect wholly owned subsidiary of Citigroup Inc. The Company's Home Office is located at One Cityplace, Hartford, Connecticut 06103-3415. On January 31, 2005, CITIGROUP INC. announced that it has agreed to sell its life insurance and annuity businesses to METLIFE, INC. The proposed sale would include the following insurance companies that issue the variable annuity or variable life insurance contract described in your prospectus: o The Travelers Insurance Company ("TIC") o The Travelers Life and Annuity Company ("TLAC") 36 The proposed sale would also include TIC and TLAC's affiliated investment advisory companies, Travelers Asset Management International Company LLC, and Travelers Investment Adviser Inc., each of which serves as the investment advisor for certain of the funding options that may be available under your variable contract. The transaction is subject to certain domestic and international regulatory approvals, as well as other customary conditions to closing. The transaction is expected to close this summer. Under the terms of the transaction, The Travelers Insurance Company will distribute its ownership of Primerica Life Insurance Company and certain other assets, including shares of Citigroup preferred stock, to Citigroup Inc., or its subsidiaries prior to the closing. The Travelers Insurance Company has filed a current report on Form 8-K on February 2, 2005 with additional information about the transaction, including pro forma financial information. The filing can be found at the SEC's Internet website at http://www.sec.gov. The transaction will not affect the terms or conditions of your variable annuity or variable life insurance contract, and The Travelers Insurance Company or The Travelers Life and Annuity Company will remain fully responsible for their respective contractual obligations to variable annuity or variable life insurance contract owners. FINANCIAL STATEMENTS The financial statements for the Company and its Separate Account are located in the Statement of Additional Information. DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS DISTRIBUTION AND PRINCIPAL UNDERWRITING AGREEMENT. The Travelers Insurance Company and The Travelers Life and Annuity Company (together the "Company") have appointed Travelers Distribution LLC ("TDLLC") to serve as the principal underwriter and distributor of the securities offered through this Prospectus, pursuant to the terms of a Distribution and Principal Underwriting Agreement. TDLLC, which is an affiliate of the Company, also acts as the principal underwriter and distributor of other variable annuity contracts and variable life insurance policies issued by the Company and its affiliated companies. The Company reimburses TDLLC for expenses TDLLC incurs in distributing the Contracts (e.g. commissions payable to retail broker-dealers who sell the Contracts). TDLLC does not retain any fees under the Contracts; however, TDLLC may receive 12b-1 fees from the Underlying Funds. TDLLC's principal executive offices are located at One Cityplace, Hartford, Connecticut 06103. TDLLC is registered as a broker-dealer with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as well as the securities commissions in the states in which it operates, and is a member of the National Association of Securities Dealers, Inc. ("NASD"). TDLLC and the Company enter into selling agreements with broker-dealers who are registered with the SEC and are members of the NASD, and with entities that may offer the Contracts but are exempt from registration. Applications for the Contract are solicited by registered representatives who are associated persons of such broker-dealer firms. Such representatives act as appointed agents of the Company under applicable state insurance law and must be licensed to sell variable insurance products. The Company intends to offer the Contract in all jurisdictions where it is licensed to do business and where the Contract is approved. The Contracts are offered on a continuous basis. COMPENSATION. Broker-dealers who have selling agreements with TDLLC and the Company are paid compensation for the promotion and sale of the Contracts. Registered representatives who solicit sales of the Contract typically receive a portion of the compensation payable to the broker-dealer firm, depending on the agreement between the firm and the registered representative. A broker-dealer firm or registered representative of a firm may receive different compensation for selling one product over another and/or may be inclined to favor or disfavor one product provider over another product provider due to differing compensation rates. We generally pay compensation as a percentage of purchase payments invested in the Contract. Alternatively, we may pay lower compensation on purchase payments but pay periodic asset-based compensation based on all or a portion of the Contract Value. The amount and timing of compensation may vary depending on the selling agreement but is not expected to exceed 7.50% of Purchase Payments (if up-front compensation is paid to registered representatives) and up to 1.50% annually of average Contract Value (if asset-based compensation is paid to registered representatives). We may periodically establish compensation specials whereby we pay a 37 higher amount for sales of the Contract during a specified period. While a compensation special is in effect, registered representatives may be inclined to favor a product that pays a higher compensation over another product where a compensation special is not in effect. We are not currently offering any compensation specials. This Contract does not assess a front-end sales charge, so you do not directly pay for sales and distribution expenses. Instead, you indirectly pay for sales and distribution expenses through the overall charges and fees assessed under your Contract. For example, any profits the Company may realize through assessing the mortality and expense risk charge under your Contract may be used to pay for sales and distribution expenses. The Company may also pay for sales and distribution expenses out of any payments the Company or TDLLC may receive from the Underlying Funds for providing administrative, marketing and other support and services to the Underlying Funds. If your Contract assesses a Contingent Deferred Sales Charge, proceeds from this charge may be used to reimburse the Company for sales and distribution expenses. No additional sales compensation is paid if you select any optional benefits under your Contract. To the extent permitted by NASD rules and other applicable laws and regulations, TDLLC may pay or allow other promotional incentives or payments in the form of cash or other compensation. The Company and TDLLC have also entered into preferred distribution arrangements with certain broker-dealer firms. These arrangements are sometimes called "shelf space" arrangements. Under these arrangements, the Company and TDLLC pay separate, additional compensation to the broker-dealer firm for services the broker-dealer provides in connection with the distribution of the Company's products. These services may include providing the Company with access to the distribution network of the broker-dealer, the hiring and training of the broker-dealer's sales personnel, the sponsoring of conferences and seminars by the broker-dealer, or general marketing services performed by the broker-dealer. The broker-dealer may also provide other services or incur other costs in connection with distributing the Company's products. These preferred distribution arrangements will not be offered to all broker-dealer firms and the terms of such arrangements may differ between broker-dealer firms. Compensation payable under such arrangements may be based on aggregate, net or anticipated sales of the Contracts, total assets attributable to sales of the Contract by registered representatives of the broker-dealer firm or based on the length of time that a Contract owner has owned the Contract. Any such compensation payable to a broker-dealer firm will be made by TDLLC or the Company out of their own assets and will not result in any additional direct charge to you. Such compensation may cause the broker-dealer firm and its registered representatives to favor the Company's products. The Company and TDLLC have entered into a preferred distribution arrangement with Citigroup Global Markets Inc. (f/k/a Smith Barney) and Citicorp Investment Services, Inc., the only broker-dealer firms that are authorized by the Company and TDLLC to offer the Contracts. The Company and TDLLC have entered into selling agreements with certain broker-dealer firms that have an affiliate that acts as investment adviser to one or more Underlying Funds or serves as a subadviser to a Portfolio of The Travelers Series Trust or Travelers Series Fund Inc., which are offered under the Contracts. These firms include Fidelity Management & Research Company, Morgan Stanley Investment Advisers Inc., Merrill Lynch Investment Managers, L.P., Salomon Brothers Asset Management and Smith Barney Fund Management. Registered representatives of broker-dealer firms with an affiliated company acting as an adviser or a sub-adviser may favor these Funds when offering the Contracts. SALE OF VARIABLE ANNUITIES BY AFFILIATES OF THE COMPANY. The Company and TDLLC may offer the Contracts through retail broker-dealer firms that are affiliates of the Company. Because of the affiliation, these broker-dealer firms and their registered representatives may favor the Company's products. CITICORP INVESTMENT SERVICES, INC. The Company and TDLLC have entered into a selling agreement with Citicorp Investment Services, Inc. ("CIS"), which is affiliated with the Company. CIS is a subsidiary of Citibank, N.A. Registered representatives of CIS, who are properly licensed and appointed, may offer the Contract to customers. CITIGROUP GLOBAL MARKETS INC. The Company and TDLLC have entered into a selling agreement with Citigroup Global Markets Inc. ("Smith Barney"), which is affiliated with the Company. Smith Barney is a subsidiary of Citigroup. Registered representatives of Smith Barney, who are properly licensed and appointed, may offer the Contract to customers. 38 CONFORMITY WITH STATE AND FEDERAL LAWS The laws of the state in which we deliver a Contract govern that Contract. Where a state has not approved a Contract feature or funding option, it will not be available in that state. Any paid-up annuity, Cash Surrender Value or death benefits that are available under the Contract are not less than the minimum benefits required by the statutes of the state in which we delivered the Contract. We reserve the right to make any changes, including retroactive changes, in the Contract to the extent that the change is required to meet the requirements of any law or regulation issued by any governmental agency to which the Company, the Contract or the Contract Owner is subject. VOTING RIGHTS The Company is the legal owner of the shares of the Underlying Funds. However, we believe that when an Underlying Fund solicits proxies in conjunction with a vote of shareholders we are required to obtain from you and from other owners instructions on how to vote those shares. We will vote all shares, including those we may own on our own behalf, and those where we have not received instructions from Contract Owners, in the same proportion as shares for which we received voting instructions. Should we determine that we are no longer required to comply with the above, we will vote on the shares in our own right. In certain limited circumstances, and when permitted by law, we may disregard voting instructions. 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 Contract Owners. RESTRICTIONS ON FINANCIAL TRANSACTIONS Federal laws designed to counter terrorism and prevent money laundering might, in certain circumstances, require us to block a Contract Owner's ability to make certain transactions and thereby refuse to accept any request for transfers, withdrawals, surrenders, or death benefits, until the instructions are received from the appropriate regulator. We may also be required to provide additional information about you and your Contract to government regulators. LEGAL PROCEEDINGS AND OPINIONS Legal matters in connection with the federal laws and regulations affecting the issue and sale of the contract described in this prospectus, as well as the organization of the Companies, their authority to issue variable annuity contracts under Connecticut law and the validity of the forms of the variable annuity contracts under Connecticut law, have been passed on by the Deputy General Counsel of the Companies. In 2003 and 2004, several issues in the mutual fund and variable insurance product industries have come under the scrutiny of federal and state regulators. Like many other companies in our industry, the Company has received a request for information from the Securities and Exchange Commission (SEC) and a subpoena from the New York Attorney General regarding market timing and late trading. During 2004 the SEC requested additional information about the Company's variable product operations on market timing, late trading and revenue sharing, and the SEC, the National Association of Securities Dealers and the New York Insurance Department have made inquiries into these issues and other matters associated with the sale and distribution of insurance products. In addition, like many insurance companies and agencies, in 2004 and 2005 the Company received inquiries from certain state Departments of Insurance regarding producer compensation and bidding practices. The Company is cooperating fully with all of these requests and is not able to predict their outcomes. Notwithstanding the above, there here are no pending legal proceedings affecting either the Separate Account or the principal underwriter. There are no pending legal proceedings against either Company likely to have a material adverse affect on the ability of either Company to meet its obligations under the applicable Contract. 39 APPENDIX A -- CONDENSED FINANCIAL INFORMATION - -------------------------------------------------------------------------------- THE TRAVELERS FUND BD FOR VARIABLE ANNUITIES ACCUMULATION UNIT VALUES (IN DOLLARS) The following Accumulation Unit Value information should be read in conjunction with the Separate Account's audited financial statement and notes, which are included in the Statement of Additional Information. SEPARATE ACCOUNT CHARGES 1.17%
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- AIM Variable Insurance Funds, Inc. AIM V.I. Premier Equity Fund -- Series I (5/01).......... 2004 0.755 0.790 49,723 2003 0.611 0.755 75,908 2002 0.886 0.611 450,377 2001 1.000 0.886 668,710 AllianceBernstein Variable Product Series Fund, Inc. AllianceBernstein Premier Growth Portfolio -- Class B (5/01)........................................... 2004 0.714 0.764 445,460 2003 0.585 0.714 511,962 2002 0.857 0.585 546,050 2001 1.000 0.857 297,549 American Funds Insurance Series Global Growth Fund -- Class 2 Shares (5/01).............. 2004 0.988 1.108 4,084,784 2003 0.739 0.988 2,904,801 2002 0.876 0.739 2,231,042 2001 1.000 0.876 802,933 Growth Fund -- Class 2 Shares (5/01)..................... 2004 0.860 0.957 8,964,439 2003 0.636 0.860 8,634,706 2002 0.852 0.636 5,528,439 2001 1.000 0.852 1,775,888 Growth-Income Fund -- Class 2 Shares (5/01).............. 2004 1.022 1.115 9,809,591 2003 0.781 1.022 9,887,549 2002 0.967 0.781 6,543,536 2001 1.000 0.967 2,371,512 Dreyfus Variable Investment Fund Dreyfus Variable Investment Fund -- Developing Leaders Portfolio -- Initial Shares (5/98)....................... 2004 1.122 1.235 2,640,571 2003 0.862 1.122 3,128,195 2002 1.078 0.862 3,595,868
A-1 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Dreyfus Variable Investment Fund -- Developing Leaders Portfolio -- Initial Shares (continued).................. 2001 1.162 1.078 3,233,826 2000 1.038 1.162 3,583,484 1999 0.852 1.038 2,129,773 1998 1.000 0.852 1,024,905 Greenwich Street Series Fund Equity Index Portfolio -- Class II Shares (5/99)......... 2004 0.818 0.892 1,746,644 2003 0.648 0.818 2,376,230 2002 0.845 0.648 2,780,694 2001 0.976 0.845 3,052,737 2000 1.088 0.976 2,024,943 1999 1.000 1.088 1,741,701 Fundamental Value Portfolio (11/94)...................... 2004 2.662 2.847 24,106,289 2003 1.942 2.662 29,927,751 2002 2.497 1.942 36,718,095 2001 2.667 2.497 46,360,039 2000 2.240 2.667 55,492,831 1999 1.857 2.240 65,203,019 1998 1.790 1.857 73,467,726 Salomon Brothers Variable Series Funds Inc. Investors Fund -- Class I (5/98)......................... 2004 1.201 1.310 3,433,092 2003 0.918 1.201 3,570,075 2002 1.207 0.918 3,952,134 2001 1.275 1.207 4,597,550 2000 1.119 1.275 1,901,624 1999 1.014 1.119 1,845,539 1998 1.000 1.014 704,294 Total Return Fund -- Class I (5/98)...................... 2004 1.096 1.178 792,837 2003 0.956 1.096 996,893 2002 1.039 0.956 1,278,668 2001 1.060 1.039 1,200,238 2000 0.994 1.060 845,563 1999 0.997 0.994 769,348 1998 1.000 0.997 397,259
A-2 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Smith Barney Allocation Series Inc. Select Balanced Portfolio (3/97)......................... 2004 1.396 1.485 2,221,117 2003 1.174 1.396 2,560,375 2002 1.270 1.174 3,121,798 2001 1.303 1.270 3,742,546 2000 1.258 1.303 3,561,033 1999 1.183 1.258 3,958,544 1998 1.093 1.183 4,046,998 1997 1.000 1.093 3,114,900 Select Growth Portfolio (3/97)........................... 2004 1.239 1.331 1,158,365 2003 0.965 1.239 1,584,448 2002 1.192 0.965 2,169,501 2001 1.338 1.192 2,631,461 2000 1.421 1.338 2,951,806 1999 1.238 1.421 3,487,443 1998 1.099 1.238 3,135,267 1997 1.000 1.099 2,261,767 Select High Growth Portfolio (3/97)...................... 2004 1.266 1.384 420,556 2003 0.936 1.266 499,464 2002 1.242 0.936 574,369 2001 1.429 1.242 618,220 2000 1.558 1.429 707,214 1999 1.242 1.558 807,243 1998 1.090 1.242 723,814 1997 1.000 1.090 602,892 Smith Barney Investment Series Smith Barney Dividend Strategy Portfolio (5/01).......... 2004 0.799 0.816 281,085 2003 0.655 0.799 554,679 2002 0.895 0.655 364,889 2001 1.000 0.895 441,029 Smith Barney Premier Selections All Cap Growth Portfolio (5/01)......................................... 2004 0.860 0.875 1,659,510 2003 0.648 0.860 1,657,215 2002 0.896 0.648 680,370 2001 1.000 0.896 233,523
A-3 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- The Travelers Series Trust Convertible Securities Portfolio (6/98).................. 2004 1.469 1.543 1,082,850 2003 1.177 1.469 1,192,485 2002 1.280 1.177 1,982,316 2001 1.306 1.280 2,206,650 2000 1.175 1.306 1,168,231 1999 1.001 1.175 626,884 1998 1.000 1.001 248,991 Disciplined Mid Cap Stock Portfolio (5/98)............... 2004 1.461 1.682 3,783,231 2003 1.105 1.461 3,810,819 2002 1.305 1.105 4,509,768 2001 1.376 1.305 4,124,695 2000 1.194 1.376 3,158,686 1999 1.064 1.194 1,843,199 1998 1.000 1.064 397,554 Merrill Lynch Large Cap Core Portfolio (5/98)............ 2004 0.803 0.920 1,065,482 2003 0.671 0.803 1,579,231 2002 0.906 0.671 2,067,818 2001 1.183 0.906 3,143,694 2000 1.267 1.183 3,989,985 1999 1.037 1.267 3,898,421 1998 1.000 1.037 1,353,759 MFS Emerging Growth Portfolio (11/96).................... 2004 1.154 1.285 8,722,581 2003 0.904 1.154 10,995,857 2002 1.391 0.904 14,406,268 2001 2.205 1.391 20,409,633 2000 2.793 2.205 26,758,940 1999 1.599 2.793 28,192,848 1998 1.204 1.599 25,199,790 1997 1.005 1.204 19,165,838 1996 1.000 1.005 4,789,844 Travelers Series Fund Inc. AIM Capital Appreciation Portfolio (10/95)............... 2004 1.267 1.333 27,573,752 2003 0.991 1.267 34,875,318 2002 1.317 0.991 43,597,234 2001 1.748 1.317 58,613,993
A-4 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- AIM Capital Appreciation Portfolio (continued).......... 2000 1.974 1.748 74,130,562 1999 1.397 1.974 81,401,202 1998 1.206 1.397 90,905,019 1997 1.088 1.206 91,233,697 1996 0.958 1.088 71,085,132 1995 1.000 0.958 20,366,025 MFS Total Return Portfolio (6/94)........................ 2004 2.268 2.498 29,790,919 2003 1.969 2.268 37,607,488 2002 2.103 1.969 44,972,133 2001 2.127 2.103 54,056,696 2000 1.845 2.127 64,462,637 1999 1.819 1.845 78,484,497 1998 1.648 1.819 86,949,854 1997 1.376 1.648 83,810,525 1996 1.216 1.376 68,235,801 1995 0.979 1.216 41,813,313 Pioneer Strategic Income Portfolio (6/94)................ 2004 1.661 1.822 14,941,189 2003 1.406 1.661 18,272,707 2002 1.344 1.406 23,732,550 2001 1.304 1.344 28,854,109 2000 1.325 1.304 37,822,306 1999 1.326 1.325 45,594,724 1998 1.332 1.326 53,053,274 1997 1.252 1.332 51,751,252 1996 1.170 1.252 43,898,066 1995 1.009 1.170 26,077,726 Salomon Brothers Strategic Total Return Bond Portfolio (6/94)......................................... 2004 1.739 1.827 3,672,857 2003 1.553 1.739 5,037,212 2002 1.450 1.553 5,507,970 2001 1.378 1.450 5,251,702 2000 1.319 1.378 6,890,789 1999 1.359 1.319 8,990,726 1998 1.397 1.359 11,299,081 1997 1.316 1.397 12,826,830 1996 1.121 1.316 11,505,498 1995 0.945 1.121 6,839,747
A-5 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Smith Barney High Income Portfolio (6/94)................ 2004 1.534 1.675 10,075,486 2003 1.217 1.534 13,435,291 2002 1.273 1.217 17,114,943 2001 1.338 1.273 22,158,369 2000 1.472 1.338 28,815,814 1999 1.452 1.472 38,357,097 1998 1.463 1.452 44,406,204 1997 1.300 1.463 42,964,010 1996 1.162 1.300 33,737,040 1995 0.988 1.162 20,136,397 Smith Barney International All Cap Growth Portfolio (6/94)......................................... 2004 1.026 1.195 23,196,293 2003 0.814 1.026 29,382,959 2002 1.109 0.814 36,517,428 2001 1.630 1.109 49,462,447 2000 2.164 1.630 63,128,882 1999 1.305 2.164 72,748,400 1998 1.240 1.305 82,330,241 1997 1.222 1.240 87,384,895 1996 1.050 1.222 77,554,062 1995 0.955 1.050 47,316,609 Smith Barney Large Cap Value Portfolio (6/94)............ 2004 1.937 2.118 21,065,983 2003 1.536 1.937 25,941,256 2002 2.083 1.536 33,420,816 2001 2.296 2.083 45,558,878 2000 2.053 2.296 55,091,429 1999 2.076 2.053 67,687,987 1998 1.913 2.076 71,417,242 1997 1.528 1.913 71,149,294 1996 1.291 1.528 57,479,117 1995 0.981 1.291 31,342,864 Smith Barney Large Capitalization Growth Portfolio (5/98) ........................................ 2004 1.379 1.368 10,814,819 2003 0.945 1.379 13,098,784 2002 1.272 0.945 14,669,240 2001 1.471 1.272 23,676,786 2000 1.599 1.471 27,150,090
A-6 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Smith Barney Large Capitalization Growth Portfolio (continued).............................................. 1999 1.237 1.599 25,851,563 1998 1.000 1.237 12,224,352 Smith Barney Money Market Portfolio (6/94)............... 2004 1.311 1.308 12,948,924 2003 1.318 1.311 19,072,257 2002 1.317 1.318 34,637,166 2001 1.285 1.317 40,479,011 2000 1.226 1.285 33,979,597 1999 1.184 1.226 45,052,907 1998 1.140 1.184 47,120,777 1997 1.098 1.140 38,096,919 1996 1.058 1.098 49,671,947 1995 1.016 1.058 36,636,843 Strategic Equity Portfolio (6/94)........................ 2004 2.259 2.461 39,371,551 2003 1.724 2.259 49,020,099 2002 2.627 1.724 60,860,309 2001 3.068 2.627 84,551,493 2000 3.795 3.068 110,497,118 1999 2.903 3.795 131,228,285 1998 2.276 2.903 142,801,580 1997 1.785 2.276 144,292,812 1996 1.396 1.785 123,293,902 1995 1.047 1.396 79,333,827 Travelers Managed Income Portfolio (6/94)................ 2004 1.590 1.616 7,066,638 2003 1.483 1.590 9,092,631 2002 1.469 1.483 11,833,198 2001 1.392 1.469 13,910,891 2000 1.306 1.392 13,842,174 1999 1.309 1.306 17,250,745 1998 1.261 1.309 20,492,138 1997 1.163 1.261 17,886,675 1996 1.142 1.163 15,376,353 1995 0.997 1.142 11,294,401 Van Kampen Enterprise Portfolio (6/94)................... 2004 1.842 1.891 15,562,554 2003 1.484 1.842 19,773,015 2002 2.125 1.484 24,341,031
A-7 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Van Kampen Enterprise Portfolio (continued)............. 2001 2.731 2.125 32,559,084 2000 3.238 2.731 43,294,726 1999 2.601 3.238 50,445,762 1998 2.103 2.601 55,902,505 1997 1.655 2.103 55,871,473 1996 1.362 1.655 45,338,023 1995 1.039 1.362 26,472,613 Variable Annuity Portfolios Smith Barney Small Cap Growth Opportunities Portfolio (5/01)......................................... 2004 0.976 1.115 1,354,383 2003 0.696 0.976 1,401,009 2002 0.947 0.696 529,979 2001 1.000 0.947 443,888
A-8 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45%
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- AIM Variable Insurance Funds, Inc. AIM V.I. Premier Equity Fund -- Series I (5/01).......... 2004 0.750 0.782 -- 2003 0.608 0.750 12,043 2002 0.885 0.608 -- 2001 1.000 0.885 62,490 AllianceBernstein Variable Product Series Fund, Inc. AllianceBernstein Premier Growth Portfolio -- Class B (5/01)........................................... 2004 0.709 0.757 90,390 2003 0.583 0.709 164,993 2002 0.855 0.583 98,794 2001 1.000 0.855 220,509 American Funds Insurance Series Global Growth Fund -- Class 2 Shares (5/01).............. 2004 0.980 1.097 385,941 2003 0.735 0.980 246,731 2002 0.874 0.735 186,424 2001 1.000 0.874 42,484 Growth Fund -- Class 2 Shares (5/01)..................... 2004 0.854 0.947 1,170,991 2003 0.633 0.854 1,297,330 2002 0.850 0.633 1,169,096 2001 1.000 0.850 249,033 Growth-Income Fund -- Class 2 Shares (5/01).............. 2004 1.014 1.103 2,168,615 2003 0.777 1.014 1,567,244 2002 0.965 0.777 1,363,147 2001 1.000 0.965 735,883 Dreyfus Variable Investment Fund Dreyfus Variable Investment Fund -- Developing Leaders Portfolio -- Initial Shares (5/98)....................... 2004 1.104 1.212 618,001 2003 0.851 1.104 841,633 2002 1.067 0.851 569,457 2001 1.153 1.067 333,484 2000 1.033 1.153 475,404 1999 0.851 1.033 301,650 1998 1.000 0.851 49,426
A-9 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Greenwich Street Series Fund Equity Index Portfolio -- Class II Shares (5/99)......... 2004 0.808 0.878 391,851 2003 0.642 0.808 501,650 2002 0.839 0.642 647,264 2001 0.971 0.839 199,427 2000 1.086 0.971 172,120 1999 1.000 1.086 78,197 Fundamental Value Portfolio (11/94)...................... 2004 2.595 2.767 3,806,079 2003 1.899 2.595 4,976,343 2002 2.448 1.899 5,662,520 2001 2.622 2.448 6,985,229 2000 2.208 2.622 8,605,537 1999 1.836 2.208 10,465,245 1998 1.775 1.836 11,653,902 1997 1.541 1.775 11,852,617 1996 1.247 1.541 9,168,615 1995 1.013 1.247 4,873,580 Salomon Brothers Variable Series Funds Inc. Investors Fund -- Class I (5/98)......................... 2004 1.182 1.286 601,184 2003 0.906 1.182 755,600 2002 1.195 0.906 646,567 2001 1.265 1.195 766,415 2000 1.114 1.265 250,413 1999 1.012 1.114 171,466 1998 1.000 1.012 75,864 Total Return Fund -- Class I (5/98)...................... 2004 1.078 1.156 231,724 2003 0.944 1.078 249,017 2002 1.028 0.944 196,277 2001 1.052 1.028 255,785 2000 0.989 1.052 112,585 1999 0.996 0.989 115,789 1998 1.000 0.996 69,952 Smith Barney Allocation Series Inc. Select Balanced Portfolio (3/97)......................... 2004 1.370 1.453 729,632 2003 1.155 1.370 742,664 2002 1.253 1.155 839,760
A-10 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Select Balanced Portfolio (continued)................... 2001 1.290 1.253 893,618 2000 1.248 1.290 778,489 1999 1.177 1.248 922,423 1998 1.091 1.177 1,086,882 1997 1.000 1.091 777,806 Select Growth Portfolio (3/97)........................... 2004 1.216 1.302 847,668 2003 0.950 1.216 917,612 2002 1.176 0.950 989,634 2001 1.323 1.176 1,678,477 2000 1.410 1.323 1,838,058 1999 1.232 1.410 1,847,452 1998 1.097 1.232 1,838,554 1997 1.000 1.097 1,403,455 Select High Growth Portfolio (3/97)...................... 2004 1.242 1.354 185,463 2003 0.921 1.242 237,262 2002 1.225 0.921 222,093 2001 1.414 1.225 225,839 2000 1.546 1.414 226,088 1999 1.236 1.546 319,187 1998 1.087 1.236 325,871 1997 1.000 1.087 230,988 Smith Barney Investment Series Smith Barney Dividend Strategy Portfolio (5/01).......... 2004 0.793 0.808 91,054 2003 0.652 0.793 61,630 2002 0.893 0.652 17,317 2001 1.000 0.893 -- Smith Barney Premier Selections All Cap Growth Portfolio (5/01)......................................... 2004 0.854 0.866 243,584 2003 0.645 0.854 182,965 2002 0.894 0.645 426,644 2001 1.000 0.894 90,901 The Travelers Series Trust Convertible Securities Portfolio (6/98).................. 2004 1.446 1.515 225,069 2003 1.162 1.446 200,298 2002 1.267 1.162 302,585
A-11 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Convertible Securities Portfolio (continued)............ 2001 1.297 1.267 314,155 2000 1.169 1.297 141,023 1999 0.999 1.169 181,058 1998 1.000 0.999 24,086 Disciplined Mid Cap Stock Portfolio (5/98)............... 2004 1.438 1.651 740,971 2003 1.091 1.438 828,184 2002 1.292 1.091 977,077 2001 1.366 1.292 965,597 2000 1.188 1.366 801,701 1999 1.063 1.188 330,146 1998 1.000 1.063 54,397 Merrill Lynch Large Cap Core Portfolio (5/98)............ 2004 0.790 0.903 233,259 2003 0.662 0.790 251,631 2002 0.897 0.662 339,786 2001 1.174 0.897 613,613 2000 1.261 1.174 1,310,179 1999 1.035 1.261 1,159,613 1998 1.000 1.035 1,038,696 MFS Emerging Growth Portfolio (11/96).................... 2004 1.131 1.256 1,613,687 2003 0.888 1.131 2,268,562 2002 1.371 0.888 2,794,759 2001 2.180 1.371 4,160,492 2000 2.769 2.180 5,768,911 1999 1.589 2.769 6,685,207 1998 1.200 1.589 6,078,936 1997 1.005 1.200 4,600,192 1996 1.000 1.005 780,369 Travelers Series Fund Inc. AIM Capital Appreciation Portfolio (10/95)............... 2004 1.238 1.299 4,350,099 2003 0.971 1.238 5,476,460 2002 1.294 0.971 6,512,841 2001 1.723 1.294 9,370,593 2000 1.951 1.723 12,252,599 1999 1.385 1.951 14,474,829 1998 1.198 1.385 15,792,402 1997 1.084 1.198 15,590,753
A-12 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- AIM Capital Appreciation Portfolio (continued).......... 1996 0.957 1.084 12,861,969 1995 1.000 0.957 5,394,325 MFS Total Return Portfolio (6/94)........................ 2004 2.208 2.426 6,564,147 2003 1.922 2.208 8,011,019 2002 2.059 1.922 9,194,869 2001 2.089 2.059 10,752,298 2000 1.817 2.089 12,764,698 1999 1.796 1.817 16,859,973 1998 1.632 1.796 18,458,912 1997 1.366 1.632 17,373,326 1996 1.211 1.366 14,689,857 1995 0.977 1.211 9,472,924 Pioneer Strategic Income Portfolio (6/94)................ 2004 1.618 1.769 3,252,720 2003 1.373 1.618 4,610,898 2002 1.316 1.373 5,513,126 2001 1.281 1.316 6,907,426 2000 1.304 1.281 8,635,386 1999 1.309 1.304 11,060,448 1998 1.319 1.309 12,925,220 1997 1.243 1.319 12,723,780 1996 1.165 1.243 11,788,520 1995 1.007 1.165 8,650,123 Salomon Brothers Strategic Total Return Bond Portfolio (6/94)......................................... 2004 1.694 1.774 777,079 2003 1.516 1.694 1,113,505 2002 1.420 1.516 1,391,400 2001 1.353 1.420 1,096,011 2000 1.299 1.353 1,562,190 1999 1.342 1.299 2,350,837 1998 1.383 1.342 2,624,158 1997 1.306 1.383 2,883,105 1996 1.116 1.306 2,795,018 1995 0.944 1.116 2,179,955 Smith Barney High Income Portfolio (6/94)................ 2004 1.494 1.626 2,423,115 2003 1.189 1.494 3,064,466 2002 1.246 1.189 3,806,067
A-13 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Smith Barney High Income Portfolio (continued).......... 2001 1.314 1.246 4,788,057 2000 1.450 1.314 5,829,717 1999 1.434 1.450 8,209,532 1998 1.448 1.434 9,311,914 1997 1.291 1.448 8,926,610 1996 1.157 1.291 6,931,775 1995 0.986 1.157 3,771,792 Smith Barney International All Cap Growth Portfolio (6/94)......................................... 2004 0.999 1.161 4,592,678 2003 0.795 0.999 5,570,530 2002 1.086 0.795 6,526,506 2001 1.601 1.086 8,902,580 2000 2.131 1.601 11,816,707 1999 1.289 2.131 15,530,355 1998 1.228 1.289 17,670,056 1997 1.213 1.228 18,730,554 1996 1.046 1.213 16,661,870 1995 0.954 1.046 12,187,268 Smith Barney Large Cap Value Portfolio (6/94)............ 2004 1.886 2.056 4,718,730 2003 1.499 1.886 5,636,938 2002 2.040 1.499 6,591,070 2001 2.254 2.040 8,282,092 2000 2.022 2.254 10,588,184 1999 2.050 2.022 13,629,236 1998 1.894 2.050 14,890,673 1997 1.517 1.894 15,382,871 1996 1.285 1.517 12,169,907 1995 0.980 1.285 7,140,022 Smith Barney Large Capitalization Growth Portfolio (5/98) ........................................ 2004 1.357 1.343 2,036,808 2003 0.933 1.357 2,464,721 2002 1.259 0.933 2,575,008 2001 1.460 1.259 3,245,914 2000 1.592 1.460 3,984,628 1999 1.234 1.592 3,416,335 1998 1.000 1.234 1,022,328
A-14 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Smith Barney Money Market Portfolio (6/94)............... 2004 1.277 1.270 2,220,744 2003 1.287 1.277 3,445,461 2002 1.289 1.287 5,718,355 2001 1.262 1.289 5,797,292 2000 1.207 1.262 4,483,256 1999 1.169 1.207 6,608,638 1998 1.129 1.169 8,253,674 1997 1.090 1.129 8,609,673 1996 1.054 1.090 10,176,442 1995 1.014 1.054 9,062,842 Strategic Equity Portfolio (6/94)........................ 2004 2.200 2.390 6,967,705 2003 1.684 2.200 8,513,118 2002 2.572 1.684 10,451,939 2001 3.012 2.572 15,076,327 2000 3.737 3.012 20,965,025 1999 2.867 3.737 26,575,989 1998 2.254 2.867 28,709,572 1997 1.772 2.254 30,063,293 1996 1.390 1.772 27,251,039 1995 1.046 1.390 20,570,511 Travelers Managed Income Portfolio (6/94)................ 2004 1.548 1.569 1,524,563 2003 1.448 1.548 2,636,504 2002 1.438 1.448 3,344,464 2001 1.367 1.438 3,524,194 2000 1.286 1.367 3,447,356 1999 1.293 1.286 4,233,630 1998 1.248 1.293 3,895,003 1997 1.154 1.248 3,090,967 1996 1.137 1.154 2,501,925 1995 0.995 1.137 1,782,544 Van Kampen Enterprise Portfolio (6/94)................... 2004 1.794 1.836 3,136,961 2003 1.449 1.794 4,145,363 2002 2.081 1.449 4,915,422 2001 2.682 2.081 7,087,006 2000 3.188 2.682 9,306,589 1999 2.568 3.188 11,751,851 1998 2.083 2.568 12,560,574
A-15 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Van Kampen Enterprise Portfolio (continued)............. 1997 1.643 2.083 13,032,150 1996 1.356 1.643 10,651,957 1995 1.037 1.356 6,569,199 Variable Annuity Portfolios Smith Barney Small Cap Growth Opportunities Portfolio (5/01)......................................... 2004 0.969 1.104 290,200 2003 0.692 0.969 202,946 2002 0.945 0.692 70,815 2001 1.000 0.945 52,916
NOTES Effective 11/01/2004 Smith Barney Investment Series: Smith Barney Large Cap Core Portfolio changed its name to Smith Barney Investment Series: Smith Barney Dividend Strategy Portfolio. The date next to each funding option's name reflects the date money first came into the funding option through the Separate Account. Funding options not listed above had no amount allocated to them or were not available as of December 31, 2004. "Number of Units Outstanding at End of Year" may include units for Contracts Owners in payout phase, where appropriate. If an accumulation unit value has no assets and units across all sub-accounts within the Separate Account, and has had no assets and units for the history displayed on the Condensed Financial Information in the past, then it may not be displayed. A-16 APPENDIX B -- CONDENSED FINANCIAL INFORMATION - -------------------------------------------------------------------------------- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES ACCUMULATION UNIT VALUES (IN DOLLARS) The following Accumulation Unit Value information should be read in conjunction with the Separate Account's audited financial statement and notes, which are included in the Statement of Additional Information. SEPARATE ACCOUNT CHARGES 1.17%
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- AIM Variable Insurance Funds, Inc. AIM V.I. Premier Equity Fund -- Series I (5/01).......... 2004 0.755 0.790 222,287 2003 0.611 0.755 549,581 2002 0.886 0.611 452,916 2001 1.000 0.886 784,729 AllianceBernstein Variable Product Series Fund, Inc. AllianceBernstein Premier Growth Portfolio -- Class B (5/01)........................................... 2004 0.714 0.764 552,089 2003 0.585 0.714 541,563 2002 0.857 0.585 591,301 2001 1.000 0.857 1,599,889 American Funds Insurance Series Global Growth Fund -- Class 2 Shares (5/01).............. 2004 0.988 1.108 3,073,714 2003 0.739 0.988 2,338,416 2002 0.876 0.739 1,531,673 2001 1.000 0.876 302,319 Growth Fund -- Class 2 Shares (5/01)..................... 2004 0.860 0.957 7,585,044 2003 0.636 0.860 7,876,123 2002 0.852 0.636 5,204,523 2001 1.000 0.852 1,775,006 Growth-Income Fund -- Class 2 Shares (5/01).............. 2004 1.022 1.115 9,204,918 2003 0.781 1.022 10,455,500 2002 0.967 0.781 8,045,731 2001 1.000 0.967 4,182,477 Dreyfus Variable Investment Fund Dreyfus Variable Investment Fund -- Developing Leaders Portfolio -- Initial Shares (5/98)....................... 2004 1.122 1.235 4,881,409 2003 0.862 1.122 6,426,577 2002 1.078 0.862 7,558,046
B-1 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Dreyfus Variable Investment Fund -- Developing Leaders Portfolio -- Initial Shares (continued)................. 2001 1.162 1.078 8,367,551 2000 1.038 1.162 8,748,382 1999 0.852 1.038 4,918,004 1998 1.000 0.852 1,712,698 Greenwich Street Series Fund Equity Index Portfolio -- Class II Shares (5/99)......... 2004 0.818 0.892 4,122,866 2003 0.648 0.818 4,934,524 2002 0.845 0.648 5,023,828 2001 0.976 0.845 5,290,969 2000 1.088 0.976 5,833,689 1999 1.000 1.088 4,474,800 Fundamental Value Portfolio (11/95)...................... 2004 2.662 2.847 18,731,408 2003 1.942 2.662 23,008,144 2002 2.497 1.942 28,541,086 2001 2.667 2.497 35,936,645 2000 2.240 2.667 39,497,603 1999 1.857 2.240 42,818,333 1998 1.790 1.857 42,829,917 Salomon Brothers Variable Series Funds Inc. Investors Fund -- Class I (5/98)......................... 2004 1.201 1.310 4,475,846 2003 0.918 1.201 5,788,326 2002 1.207 0.918 7,175,121 2001 1.275 1.207 8,630,494 2000 1.119 1.275 3,800,664 1999 1.014 1.119 2,903,384 1998 1.000 1.014 1,024,070 Total Return Fund -- Class I (5/98)...................... 2004 1.096 1.178 1,229,680 2003 0.956 1.096 1,568,694 2002 1.039 0.956 1,661,014 2001 1.060 1.039 1,775,865 2000 0.994 1.060 1,806,836 1999 0.997 0.994 1,619,636 1998 1.000 0.997 761,112
B-2 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Smith Barney Allocation Series Inc. Select Balanced Portfolio (3/97)......................... 2004 1.396 1.485 4,780,579 2003 1.174 1.396 6,058,621 2002 1.270 1.174 7,016,157 2001 1.303 1.270 8,521,339 2000 1.258 1.303 7,372,296 1999 1.183 1.258 8,078,329 1998 1.093 1.183 7,215,935 1997 1.000 1.093 4,148,291 Select Growth Portfolio (3/97)........................... 2004 1.239 1.331 2,108,022 2003 0.965 1.239 2,810,456 2002 1.192 0.965 3,477,779 2001 1.338 1.192 4,058,208 2000 1.421 1.338 4,479,543 1999 1.238 1.421 5,037,394 1998 1.099 1.238 5,355,940 1997 1.000 1.099 3,396,120 Select High Growth Portfolio (3/97)...................... 2004 1.266 1.384 641,406 2003 0.936 1.266 1,063,284 2002 1.242 0.936 2,145,452 2001 1.429 1.242 2,532,075 2000 1.558 1.429 2,672,371 1999 1.242 1.558 2,931,329 1998 1.090 1.242 3,434,814 1997 1.000 1.090 2,656,918 Smith Barney Investment Series Smith Barney Dividend Strategy Portfolio (5/01).......... 2004 0.799 0.816 298,839 2003 0.655 0.799 454,774 2002 0.895 0.655 107,552 2001 1.000 0.895 49,350 Smith Barney Premier Selections All Cap Growth Portfolio (5/01)......................................... 2004 0.860 0.875 1,422,862 2003 0.648 0.860 1,433,743 2002 0.896 0.648 945,291 2001 1.000 0.896 165,628
B-3 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- The Travelers Series Trust Convertible Securities Portfolio (5/98).................. 2004 1.469 1.543 2,910,835 2003 1.177 1.469 3,580,128 2002 1.280 1.177 2,836,081 2001 1.306 1.280 3,229,548 2000 1.175 1.306 2,705,832 1999 1.001 1.175 1,597,497 1998 1.000 1.001 418,194 Disciplined Mid Cap Stock Portfolio (5/98)............... 2004 1.461 1.682 5,322,574 2003 1.105 1.461 6,731,651 2002 1.305 1.105 7,539,227 2001 1.376 1.305 7,464,051 2000 1.194 1.376 7,288,284 1999 1.064 1.194 3,984,156 1998 1.000 1.064 550,487 Merrill Lynch Large Cap Core Portfolio (5/98)............ 2004 0.803 0.920 3,507,945 2003 0.671 0.803 4,011,608 2002 0.906 0.671 5,179,705 2001 1.183 0.906 7,294,912 2000 1.267 1.183 8,594,088 1999 1.037 1.267 7,720,777 1998 1.000 1.037 3,295,301 MFS Emerging Growth Portfolio (11/96).................... 2004 1.154 1.285 14,148,258 2003 0.904 1.154 18,256,897 2002 1.391 0.904 22,916,965 2001 2.205 1.391 31,323,073 2000 2.793 2.205 38,334,240 1999 1.599 2.793 38,199,495 1998 1.204 1.599 29,936,769 1997 1.005 1.204 17,294,943 1996 1.000 1.005 2,505,629 Travelers Series Fund Inc. AIM Capital Appreciation Portfolio (11/95)............... 2004 1.267 1.333 23,560,997 2003 0.991 1.267 29,554,141 2002 1.317 0.991 36,609,088 2001 1.748 1.317 48,759,536
B-4 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- AIM Capital Appreciation Portfolio (continued).......... 2000 1.974 1.748 58,458,248 1999 1.397 1.974 59,794,915 1998 1.206 1.397 59,823,732 1997 1.088 1.206 48,942,402 1996 0.958 1.088 29,460,488 1995 1.000 0.958 2,536,733 MFS Total Return Portfolio (11/95)....................... 2004 2.268 2.498 28,712,973 2003 1.969 2.268 36,279,044 2002 2.103 1.969 44,055,402 2001 2.127 2.103 51,925,016 2000 1.845 2.127 55,043,368 1999 1.819 1.845 64,327,238 1998 1.648 1.819 58,653,278 1997 1.376 1.648 34,927,832 1996 1.216 1.376 16,650,570 1995 1.113 1.216 912,547 Pioneer Strategic Income Portfolio (11/95)............... 2004 1.661 1.822 12,908,237 2003 1.406 1.661 17,359,087 2002 1.344 1.406 20,779,858 2001 1.304 1.344 24,095,134 2000 1.325 1.304 27,997,652 1999 1.326 1.325 31,303,028 1998 1.332 1.326 29,566,111 1997 1.252 1.332 19,504,257 1996 1.170 1.252 10,424,494 1995 1.109 1.170 823,783 Salomon Brothers Strategic Total Return Bond Portfolio (11/95)........................................ 2004 1.739 1.827 3,246,313 2003 1.553 1.739 4,620,468 2002 1.450 1.553 6,048,142 2001 1.378 1.450 5,041,930 2000 1.319 1.378 4,408,007 1999 1.359 1.319 5,149,182 1998 1.397 1.359 5,481,141 1997 1.316 1.397 5,016,054 1996 1.121 1.316 1,832,502 1995 1.038 1.121 32,765
B-5 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Smith Barney High Income Portfolio (11/95)............... 2004 1.534 1.675 10,157,755 2003 1.217 1.534 14,004,456 2002 1.273 1.217 17,052,242 2001 1.338 1.273 22,082,482 2000 1.472 1.338 25,994,496 1999 1.452 1.472 30,633,089 1998 1.463 1.452 31,054,135 1997 1.300 1.463 21,213,238 1996 1.162 1.300 7,719,068 1995 1.098 1.162 242,593 Smith Barney International All Cap Growth Portfolio (11/95)........................................ 2004 1.026 1.195 16,816,603 2003 0.814 1.026 19,996,518 2002 1.109 0.814 31,080,395 2001 1.630 1.109 37,365,581 2000 2.164 1.630 39,840,894 1999 1.305 2.164 40,313,454 1998 1.240 1.305 38,529,419 1997 1.222 1.240 31,311,119 1996 1.050 1.222 16,854,894 1995 1.077 1.050 556,129 Smith Barney Large Cap Value Portfolio (11/95)........... 2004 1.937 2.118 18,635,245 2003 1.536 1.937 23,230,901 2002 2.083 1.536 28,614,647 2001 2.296 2.083 36,896,310 2000 2.053 2.296 41,043,900 1999 2.076 2.053 45,773,195 1998 1.913 2.076 40,967,323 1997 1.528 1.913 27,117,422 1996 1.291 1.528 11,905,953 1995 1.167 1.291 596,201 Smith Barney Large Capitalization Growth Portfolio (5/98) ........................................ 2004 1.379 1.368 24,244,756 2003 0.945 1.379 29,762,936 2002 1.272 0.945 32,882,101 2001 1.471 1.272 41,629,754 2000 1.599 1.471 48,151,480
B-6 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Smith Barney Large Capitalization Growth Portfolio (continued).............................................. 1999 1.237 1.599 46,287,883 1998 1.000 1.237 12,176,408 Smith Barney Money Market Portfolio (11/95).............. 2004 1.311 1.308 12,688,242 2003 1.318 1.311 24,151,440 2002 1.317 1.318 45,287,737 2001 1.285 1.317 49,324,087 2000 1.226 1.285 45,585,702 1999 1.184 1.226 48,631,112 1998 1.140 1.184 41,370,187 1997 1.098 1.140 25,661,233 1996 1.058 1.098 22,961,508 1995 1.040 1.058 2,373,923 Strategic Equity Portfolio (11/95)....................... 2004 2.259 2.461 28,494,540 2003 1.724 2.259 35,580,777 2002 2.627 1.724 43,888,761 2001 3.068 2.627 61,361,661 2000 3.795 3.068 72,884,231 1999 2.903 3.795 76,734,335 1998 2.276 2.903 67,639,943 1997 1.785 2.276 47,935,239 1996 1.396 1.785 24,031,009 1995 1.325 1.396 1,573,668 Travelers Managed Income Portfolio (11/95)............... 2004 1.590 1.616 8,132,897 2003 1.483 1.590 11,247,672 2002 1.469 1.483 15,554,389 2001 1.392 1.469 18,765,083 2000 1.306 1.392 18,462,379 1999 1.309 1.306 20,425,251 1998 1.261 1.309 11,544,261 1997 1.163 1.261 4,488,528 1996 1.142 1.163 2,635,535 1995 1.080 1.142 225,876 Van Kampen Enterprise Portfolio (11/95).................. 2004 1.842 1.891 14,731,756 2003 1.484 1.842 18,474,416 2002 2.125 1.484 22,699,674
B-7 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.17% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Van Kampen Enterprise Portfolio (continued)............. 2001 2.731 2.125 30,008,237 2000 3.238 2.731 37,059,764 1999 2.601 3.238 39,297,380 1998 2.103 2.601 35,643,545 1997 1.655 2.103 24,635,450 1996 1.362 1.655 11,360,286 1995 1.318 1.362 764,534 Variable Annuity Portfolios Smith Barney Small Cap Growth Opportunities Portfolio (6/01)......................................... 2004 0.976 1.115 1,045,618 2003 0.696 0.976 1,327,911 2002 0.947 0.696 565,103 2001 1.000 0.947 471,861
B-8 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45%
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- AIM Variable Insurance Funds, Inc. AIM V.I. Premier Equity Fund -- Series I (5/01).......... 2004 0.750 0.782 5,619 2003 0.608 0.750 6,618 2002 0.885 0.608 -- 2001 1.000 0.885 2,179 AllianceBernstein Variable Product Series Fund, Inc. AllianceBernstein Premier Growth Portfolio -- Class B (5/01)........................................... 2004 0.709 0.757 -- 2003 0.583 0.709 2,909 2002 0.855 0.583 8,838 2001 1.000 0.855 234,311 American Funds Insurance Series Global Growth Fund -- Class 2 Shares (5/01).............. 2004 0.980 1.097 521,068 2003 0.735 0.980 469,609 2002 0.874 0.735 326,225 2001 1.000 0.874 78,492 Growth Fund -- Class 2 Shares (5/01)..................... 2004 0.854 0.947 2,269,374 2003 0.633 0.854 1,931,622 2002 0.850 0.633 1,310,595 2001 1.000 0.850 438,782 Growth-Income Fund -- Class 2 Shares (5/01).............. 2004 1.014 1.103 2,183,878 2003 0.777 1.014 1,786,396 2002 0.965 0.777 1,645,336 2001 1.000 0.965 719,119 Dreyfus Variable Investment Fund Dreyfus Variable Investment Fund -- Developing Leaders Portfolio -- Initial Shares (5/98)....................... 2004 1.104 1.212 919,115 2003 0.851 1.104 1,032,557 2002 1.067 0.851 963,891 2001 1.153 1.067 739,152 2000 1.033 1.153 804,861 1999 0.851 1.033 449,652 1998 1.000 0.851 252,461
B-9 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Greenwich Street Series Fund Equity Index Portfolio -- Class II Shares (5/99)......... 2004 0.808 0.878 301,119 2003 0.642 0.808 357,783 2002 0.839 0.642 367,027 2001 0.971 0.839 98,319 2000 1.086 0.971 88,601 1999 1.000 1.086 157,335 Fundamental Value Portfolio (11/95)...................... 2004 2.595 2.767 5,059,922 2003 1.899 2.595 5,716,998 2002 2.448 1.899 6,612,767 2001 2.622 2.448 7,518,471 2000 2.208 2.622 7,852,821 1999 1.836 2.208 8,588,178 1998 1.775 1.836 9,424,781 1997 1.541 1.775 5,975,192 Salomon Brothers Variable Series Funds Inc. Investors Fund -- Class I (5/98)......................... 2004 1.182 1.286 964,242 2003 0.906 1.182 1,037,658 2002 1.195 0.906 1,141,039 2001 1.265 1.195 1,342,374 2000 1.114 1.265 858,755 1999 1.012 1.114 529,114 1998 1.000 1.012 199,078 Total Return Fund -- Class I (5/98)...................... 2004 1.078 1.156 393,577 2003 0.944 1.078 423,845 2002 1.028 0.944 461,333 2001 1.052 1.028 241,087 2000 0.989 1.052 214,225 1999 0.996 0.989 208,331 1998 1.000 0.996 127,726 Smith Barney Allocation Series Inc. Select Balanced Portfolio (3/97)......................... 2004 1.370 1.453 1,499,876 2003 1.155 1.370 1,614,838 2002 1.253 1.155 1,984,327 2001 1.290 1.253 2,337,583 2000 1.248 1.290 2,325,059
B-10 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Select Balanced Portfolio (continued)................... 1999 1.177 1.248 2,374,648 1998 1.091 1.177 2,594,418 1997 1.000 1.091 1,788,610 Select Growth Portfolio (3/97)........................... 2004 1.216 1.302 1,155,771 2003 0.950 1.216 1,298,046 2002 1.176 0.950 1,312,996 2001 1.323 1.176 1,443,925 2000 1.410 1.323 1,580,482 1999 1.232 1.410 2,157,254 1998 1.097 1.232 2,329,431 1997 1.000 1.097 1,191,019 Select High Growth Portfolio (3/97)...................... 2004 1.242 1.354 113,957 2003 0.921 1.242 117,971 2002 1.225 0.921 107,009 2001 1.414 1.225 389,634 2000 1.546 1.414 403,429 1999 1.236 1.546 447,062 1998 1.087 1.236 622,357 1997 1.000 1.087 391,357 Smith Barney Investment Series Smith Barney Dividend Strategy Portfolio (5/01).......... 2004 0.793 0.808 87,461 2003 0.652 0.793 88,642 2002 0.893 0.652 26,571 2001 1.000 0.893 10,809 Smith Barney Premier Selections All Cap Growth Portfolio (5/01)......................................... 2004 0.854 0.866 378,955 2003 0.645 0.854 359,910 2002 0.894 0.645 506,203 2001 1.000 0.894 80,062 The Travelers Series Trust Convertible Securities Portfolio (5/98).................. 2004 1.446 1.515 325,676 2003 1.162 1.446 399,307 2002 1.267 1.162 418,382 2001 1.297 1.267 293,689 2000 1.169 1.297 425,068
B-11 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Convertible Securities Portfolio (continued)............ 1999 0.999 1.169 429,444 1998 1.000 0.999 22,352 Disciplined Mid Cap Stock Portfolio (5/98)............... 2004 1.438 1.651 939,042 2003 1.091 1.438 1,049,421 2002 1.292 1.091 1,005,471 2001 1.366 1.292 856,513 2000 1.188 1.366 833,708 1999 1.063 1.188 256,491 1998 1.000 1.063 28,077 Merrill Lynch Large Cap Core Portfolio (5/98)............ 2004 0.790 0.903 901,192 2003 0.662 0.790 1,017,738 2002 0.897 0.662 1,168,058 2001 1.174 0.897 1,505,832 2000 1.261 1.174 1,788,003 1999 1.035 1.261 1,494,593 1998 1.000 1.035 1,243,396 MFS Emerging Growth Portfolio (11/96).................... 2004 1.131 1.256 3,486,788 2003 0.888 1.131 4,137,961 2002 1.371 0.888 4,731,917 2001 2.180 1.371 6,228,366 2000 2.769 2.180 7,629,810 1999 1.589 2.769 7,824,809 1998 1.200 1.589 7,521,739 1997 1.005 1.200 4,255,983 1996 1.000 1.005 466,025 Travelers Series Fund Inc. AIM Capital Appreciation Portfolio (11/95)............... 2004 1.238 1.299 5,178,947 2003 0.971 1.238 6,091,107 2002 1.294 0.971 7,425,616 2001 1.723 1.294 9,242,361 2000 1.951 1.723 10,759,671 1999 1.385 1.951 10,757,693 1998 1.198 1.385 11,522,469 1997 1.084 1.198 8,844,768 1996 0.957 1.084 4,246,308 1995 1.000 0.957 908,266
B-12 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- MFS Total Return Portfolio (11/95)....................... 2004 2.208 2.426 5,979,649 2003 1.922 2.208 7,337,522 2002 2.059 1.922 8,750,063 2001 2.089 2.059 9,333,303 2000 1.817 2.089 10,057,270 1999 1.796 1.817 11,574,413 1998 1.632 1.796 11,645,845 1997 1.366 1.632 6,138,961 1996 1.211 1.366 1,810,076 1995 1.109 1.211 101,549 Pioneer Strategic Income Portfolio (11/95)............... 2004 1.618 1.769 2,775,587 2003 1.373 1.618 3,349,980 2002 1.316 1.373 4,163,745 2001 1.281 1.316 4,654,411 2000 1.304 1.281 5,666,775 1999 1.309 1.304 7,148,635 1998 1.319 1.309 7,312,474 1997 1.243 1.319 3,953,118 1996 1.165 1.243 1,460,865 1995 1.106 1.165 126,460 Salomon Brothers Strategic Total Return Bond Portfolio (11/95)........................................ 2004 1.694 1.774 644,955 2003 1.516 1.694 842,127 2002 1.420 1.516 946,999 2001 1.353 1.420 659,392 2000 1.299 1.353 733,479 1999 1.342 1.299 849,705 1998 1.383 1.342 973,254 1997 1.306 1.383 953,563 1996 1.116 1.306 463,308 1995 1.035 1.116 79,526 Smith Barney High Income Portfolio (11/95)............... 2004 1.494 1.626 2,066,353 2003 1.189 1.494 2,608,457 2002 1.246 1.189 2,717,395 2001 1.314 1.246 3,063,554 2000 1.450 1.314 3,605,109 1999 1.434 1.450 4,266,126
B-13 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Smith Barney High Income Portfolio (continued).......... 1998 1.448 1.434 4,739,592 1997 1.291 1.448 2,639,907 1996 1.157 1.291 970,188 1995 1.095 1.157 331,521 Smith Barney International All Cap Growth Portfolio (11/95)........................................ 2004 0.999 1.161 3,021,620 2003 0.795 0.999 3,711,209 2002 1.086 0.795 4,109,540 2001 1.601 1.086 5,041,565 2000 2.131 1.601 5,396,144 1999 1.289 2.131 5,906,915 1998 1.228 1.289 6,198,702 1997 1.213 1.228 4,871,826 1996 1.046 1.213 2,009,974 1995 1.074 1.046 200,939 Smith Barney Large Cap Value Portfolio (11/95)........... 2004 1.886 2.056 3,761,665 2003 1.499 1.886 4,212,320 2002 2.040 1.499 5,136,381 2001 2.254 2.040 6,460,230 2000 2.022 2.254 7,279,633 1999 2.050 2.022 8,114,092 1998 1.894 2.050 8,248,925 1997 1.517 1.894 4,645,333 1996 1.285 1.517 1,606,074 1995 1.164 1.285 146,470 Smith Barney Large Capitalization Growth Portfolio (5/98) ........................................ 2004 1.357 1.343 2,809,530 2003 0.933 1.357 3,173,664 2002 1.259 0.933 3,026,159 2001 1.460 1.259 3,755,140 2000 1.592 1.460 4,219,549 1999 1.234 1.592 3,491,177 1998 1.000 1.234 1,447,309 Smith Barney Money Market Portfolio (11/95).............. 2004 1.277 1.270 2,442,193 2003 1.287 1.277 3,608,001 2002 1.289 1.287 4,582,342
B-14 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Smith Barney Money Market Portfolio (continued)......... 2001 1.262 1.289 4,926,672 2000 1.207 1.262 3,371,813 1999 1.169 1.207 5,840,571 1998 1.129 1.169 6,023,674 1997 1.090 1.129 2,416,649 1996 1.054 1.090 2,362,442 1995 1.037 1.054 819,856 Strategic Equity Portfolio (11/95)....................... 2004 2.200 2.390 5,922,162 2003 1.684 2.200 7,124,931 2002 2.572 1.684 8,423,446 2001 3.012 2.572 10,948,574 2000 3.737 3.012 12,646,207 1999 2.867 3.737 13,423,385 1998 2.254 2.867 13,083,045 1997 1.772 2.254 8,482,408 1996 1.390 1.772 3,613,086 1995 1.321 1.390 452,738 Travelers Managed Income Portfolio (11/95)............... 2004 1.548 1.569 2,072,462 2003 1.448 1.548 2,400,924 2002 1.438 1.448 2,934,020 2001 1.367 1.438 3,093,511 2000 1.286 1.367 2,585,253 1999 1.293 1.286 2,551,368 1998 1.248 1.293 2,823,113 1997 1.154 1.248 1,001,269 1996 1.137 1.154 265,598 1995 1.077 1.137 89,569 Van Kampen Enterprise Portfolio (11/95).................. 2004 1.794 1.836 3,074,771 2003 1.449 1.794 3,635,892 2002 2.081 1.449 4,362,576 2001 2.682 2.081 5,412,388 2000 3.188 2.682 6,225,353 1999 2.568 3.188 6,615,143 1998 2.083 2.568 6,741,005 1997 1.643 2.083 4,384,827 1996 1.356 1.643 1,644,330 1995 1.314 1.356 329,130
B-15 ACCUMULATION UNIT VALUES (IN DOLLARS) SEPARATE ACCOUNT CHARGES 1.45% (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS BEGINNING OF UNIT VALUE AT OUTSTANDING AT PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR - -------------- ------- ---------------- --------------- --------------------- Variable Annuity Portfolios Smith Barney Small Cap Growth Opportunities Portfolio (6/01)......................................... 2004 0.969 1.104 118,451 2003 0.692 0.969 64,522 2002 0.945 0.692 45,580 2001 1.000 0.945 8,130
NOTES Effective 11/01/2004 Smith Barney Investment Series: Smith Barney Large Cap Core Portfolio changed its name to Smith Barney Investment Series: Smith Barney Dividend Strategy Portfolio. The date next to each funding option's name reflects the date money first came into the funding option through the Separate Account. Funding options not listed above had no amount allocated to them or were not available as of December 31, 2004. "Number of Units Outstanding at End of Year" may include units for Contracts Owners in payout phase, where appropriate. If an accumulation unit value has no assets and units across all sub-accounts within the Separate Account, and has had no assets and units for the history displayed on the Condensed Financial Information in the past, then it may not be displayed. B-16 APPENDIX C - -------------------------------------------------------------------------------- THE FIXED ACCOUNT The Fixed Account is part of the Company's general account assets. These general account assets include all assets of the Company other than those held in the Separate Accounts sponsored by the Company or its affiliates. The staff of the SEC does not generally review the disclosure in the prospectus relating to the Fixed Account. Disclosure regarding the Fixed Account and the general account may, however, be subject to certain provisions of the federal securities laws relating to the accuracy and completeness of statements made in the prospectus. Under the Fixed Account, the Company assumes the risk of investment gain or loss, guarantees a specified interest rate, and guarantees a specified periodic Annuity Payment. The investment gain or loss of the Separate Account or any of the funding options does not affect the Fixed Account Contract Value, or the dollar amount of fixed Annuity Payments made under any payout option. We guarantee that, at any time, the Fixed Account Contract Value will not be less than the amount of the Purchase Payments allocated to the Fixed Account, plus interest credited as described below, less any applicable premium taxes or prior withdrawals. Purchase Payments allocated to the Fixed Account and any transfers made to the Fixed Account become part of the Company's general account, which supports insurance and annuity obligations. The general account and any interest therein is not registered under, or subject to the provisions of, the Securities Act of 1933 or Investment Company Act of 1940. We will invest the assets of the Fixed Account at our discretion. Investment income from such Fixed Account assets will be allocated to us and to the Contracts participating in the Fixed Account. Investment income from the Fixed Account allocated to us includes compensation for mortality and expense risks borne by us in connection with Fixed Account Contracts. The amount of such investment income allocated to the Contracts will vary from year to year in our sole discretion at such rate or rates as we prospectively declare from time to time. We guarantee the initial rate for any allocations into the Fixed Account for one year from the date of such allocation. We guarantee subsequent renewal rates for the calendar quarter. We also guarantee that for the life of the Contract we will credit interest at not less than 3% per year. We will determine any interest we credit to amounts allocated to the Fixed Account in excess of 3% per year in our sole discretion. You assume the risk that interest credited to the Fixed Account may not exceed the minimum guarantee of 3% for any given year. TRANSFERS You may make transfers from the Fixed Account to any other available Variable Funding Option(s) twice a year during the 30 days following the semiannual anniversary of the Contract Date. We limit transfers to an amount of up to 15% of the Fixed Account Contract Value on the semiannual Contract Date anniversary. (This restriction does not apply to transfers under the Dollar Cost Averaging Program.) Amounts previously transferred from the Fixed Account to Variable Funding Options may not be transferred back to the Fixed Account for a period of at least six months from the date of transfer. We reserve the right to waive either of these restrictions. Automated transfers from the Fixed Account to any of the Variable Funding Options may begin at any time. Automated transfers from the Fixed Account may not deplete your Fixed Account value in a period of less than twelve months from your enrollment in the Dollar Cost Averaging Program. C-1 APPENDIX D - -------------------------------------------------------------------------------- ENHANCED DEATH BENEFIT FOR CONTRACTS ISSUED BEFORE JUNE 1, 1997 IF THE ANNUITANT DIES BEFORE AGE 75 AND BEFORE THE MATURITY DATE, the Company will pay to the beneficiary a death benefit equal to the greater of (1) the guaranteed death benefit, or (2) the Contract Value less any applicable premium tax or outstanding loans. IF THE ANNUITANT DIES ON OR AFTER AGE 75 AND BEFORE THE MATURITY DATE, the Company will pay to the beneficiary a death benefit in an amount equal to the greater of (1) the guaranteed death benefit as of the Annuitant's 75th birthday, plus additional Purchase Payments, minus surrenders, outstanding loans and applicable premium tax; or (2) the Contract Value less any applicable premium tax and outstanding loans. The guaranteed death benefit is equal to the Purchase Payments made to the Contract (minus surrenders, outstanding loans and applicable premium tax) increased by 5% on each Contract Date anniversary, but not beyond the Contract Date anniversary following the Annuitant's 75th birthday, with a maximum guaranteed death benefit of 200% of the total Purchase Payments minus surrenders and outstanding loans and applicable premium tax. D-1 APPENDIX E - -------------------------------------------------------------------------------- CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION The Statement of Additional Information contains more specific information and financial statements relating to The Travelers Insurance Company or The Travelers Life and Annuity Company. A list of the contents of the Statement of Additional Information is set forth below: The Insurance Company Principal Underwriter Distribution and Principal Underwriting Agreement Valuation of Assets Federal Tax Considerations Independent Accountants Financial Statements - -------------------------------------------------------------------------------- Copies of the Statement of Additional Information dated May 2, 2005 are available without charge. To request a copy, please clip this coupon on the line above, enter your name and address in the spaces provided below, and mail to: Travelers Life & Annuity, Annuity Investor Services, One Cityplace, 3 CP Hartford, Connecticut 06103-3415. The Travelers Insurance Company Statement of Additional Information is printed on Form L-12253S, and The Travelers Life and Annuity Statement of Additional Information is printed on Form L-12540S. Name: ----------------------------------------------------------------------- Address: ----------------------------------------------------------------------- ----------------------------------------------------------------------- E-1 THIS PAGE INTENTIONALLY LEFT BLANK. L-12253 May 2, 2005 PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION VINTAGE STATEMENT OF ADDITIONAL INFORMATION DATED MAY 2, 2005 FOR THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES ISSUED BY THE TRAVELERS LIFE AND ANNUITY COMPANY This Statement of Additional Information ("SAI") is not a prospectus but relates to, and should be read in conjunction with, the Individual Variable Annuity Contract Prospectus dated May 2, 2005. A copy of the Prospectus may be obtained by writing to The Travelers Life and Annuity Company, Annuity Investor Services, One Cityplace, Hartford, Connecticut 06103-3415, or by calling (800) 842-8573 or by accessing the Securities and Exchange Commission's website at http://www.sec.gov. TABLE OF CONTENTS THE INSURANCE COMPANY.................................................... 2 PRINCIPAL UNDERWRITER.................................................... 2 DISTRIBUTION AND PRINCIPAL UNDERWRITING AGREEMENT........................ 2 VALUATION OF ASSETS...................................................... 3 FEDERAL TAX CONSIDERATIONS............................................... 4 INDEPENDENT REGISTERERD PUBLIC ACCOUNTING FIRM........................... 7 FINANCIAL STATEMENTS..................................................... F-1 1 THE INSURANCE COMPANY The Travelers Life and Annuity Company (the "Company") is a stock insurance company chartered in 1973 in Connecticut and continuously engaged in the insurance business since that time. The Company is licensed to conduct a life insurance business in all states (except New York) and the District of Columbia and Puerto Rico. The Company's Home Office is located at One Cityplace Hartford, Connecticut 06103-3415 and its telephone number is (860) 308-1000. The Company is a wholly owned subsidiary of The Travelers Insurance Company, an indirect, wholly owned subsidiary of Citigroup Inc. ("Citigroup"), a diversified holding company whose businesses provide a broad range of financial services to consumer and corporate customers around the world. Citigroup's activities are conducted through the Global Consumer, Global Corporate and Investment Bank, Global Investment Management and Private Banking, and Investment Activities segments. On January 31, 2005, CITIGROUP INC. announced that it has agreed to sell its life insurance and annuity businesses to METLIFE, INC. The proposed sale would include the following insurance companies that issue the variable annuity or variable life insurance contract described in your prospectus: o The Travelers Insurance Company ("TIC") o The Travelers Life and Annuity Company ("TLAC") The proposed sale would also include TIC and TLAC's affiliated investment advisory companies, Travelers Asset Management International Company LLC, and Travelers Investment Adviser Inc., each of which serves as the investment advisor for certain of the funding options that may be available under your variable contract. The transaction is subject to certain domestic and international regulatory approvals, as well as other customary conditions to closing. The transaction is expected to close this summer. Under the terms of the transaction, The Travelers Insurance Company will distribute its ownership of Primerica Life Insurance Company and certain other assets, including shares of Citigroup preferred stock, to Citigroup Inc., or its subsidiaries prior to the closing. The Travelers Insurance Company has filed a current report on Form 8-K on February 2, 2005 with additional information about the transaction, including pro forma financial information. The filing can be found at the SEC's Internet website at http://www.sec.gov. The transaction will not affect the terms or conditions of your variable annuity or variable life insurance contract, and The Travelers Insurance Company or The Travelers Life and Annuity Company will remain fully responsible for their respective contractual obligations to variable annuity or variable life insurance contract owners. STATE REGULATION. The Company is subject to the laws of the state of Connecticut governing insurance companies and to regulation by the Insurance Commissioner of the state of Connecticut (the "Commissioner"). An annual statement covering the operations of the Company for the preceding year, as well as its financial conditions as of December 31 of such year, must be filed with the Commissioner in a prescribed format on or before March 1 of each year. The Company's books and assets are subject to review or examination by the Commissioner or his agents at all times, and a full examination of its operations is conducted at least once every four years. The Company is also subject to the insurance laws and regulations of all other states in which it is licensed to operate. However, the insurance departments of each of these states generally apply the laws of the home state (jurisdiction of domicile) in determining the field of permissible investments. THE SEPARATE ACCOUNT. The Travelers Fund BD II for Variable Annuities (the "Separate Account" meets the definition of a separate account under the federal securities laws, and complies with the provisions of the 1940 Act. Additionally, the operations of the Separate Account are subject to the provisions of Section 38a-433 of the Connecticut General Statutes, which authorizes the Commissioner to adopt regulations under it. Section 38a-433 contains no restrictions on the investments of the Separate Account, and the Commissioner has adopted no regulations under the Section that affect the Separate Account. The Company holds title to the assets of the Separate Account. The assets are kept physically segregated and are held separate and apart from the Company's general corporate assets. Records are maintained of all purchases and redemptions of the Underlying Funds held in each of the Variable Funding Options. 2 PRINCIPAL UNDERWRITER Travelers Distribution LLC ("TDLLC") serves as principal underwriter for the Separate Account and the Contracts. The offering is continuous. TDLLC's principal executive offices are located at One Cityplace, Hartford, Connecticut. TDLLC is affiliated with the Company and the Separate Account. DISTRIBUTION AND PRINCIPAL UNDERWRITING AGREEMENT Under the terms of the Distribution and Principal Underwriting Agreement among the Separate Account, TDLLC and the Company, TDLLC acts as agent for the distribution of the Contracts and as principal underwriter for the Contracts. The Company reimburses TDLLC for certain sales and overhead expenses connected with sales functions. The following table shows the amount of commissions paid to and the amount of commissions retained by TDLLC over the past three years. TDLLC UNDERWRITING COMMISSIONS
- ------------------------------------------- ------------------------------------------ -------------------------------------- UNDERWRITING COMMISSIONS PAID TO TDLLC AMOUNT OF UNDERWRITING COMMISSIONS YEAR BY THE COMPANY RETAINED BY TDLLC - ------------------------------------------- ------------------------------------------ -------------------------------------- 2004 $125,706 $0 - ------------------------------------------- ------------------------------------------ -------------------------------------- 2003 $121,903 $0 - ------------------------------------------- ------------------------------------------ -------------------------------------- 2002 $103,960 $0 - ------------------------------------------- ------------------------------------------ --------------------------------------
VALUATION OF ASSETS FUNDING OPTIONS: The value of the assets of each Funding Option is determined at 4:00 p.m. eastern time on each business day, unless we need to close earlier due to an emergency. A business day is any day the New York Stock Exchange is open. It is expected that the Exchange will be closed on Saturdays and Sundays and on the observed holidays of New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Each security traded on a national securities exchange is valued at the last reported sale price on the business day. If there has been no sale on that day, then the value of the security is taken to be the mean between the reported bid and asked prices on the business day or on the basis of quotations received from a reputable broker or any other recognized source. Any security not traded on a securities exchange but traded in the over-the-counter-market and for which market quotations are readily available is valued at the mean between the quoted bid and asked prices on the business day or on the basis of quotations received from a reputable broker or any other recognized source. Securities traded on the over-the-counter-market and listed securities with no reported sales are valued at the mean between the last reported bid and asked prices or on the basis of quotations received from a reputable broker or other recognized source. Short-term investments for which a quoted market price is available are valued at market. Short-term investments maturing in more than sixty days for which there is no reliable quoted market price are valued by "marking to market" (computing a market value based upon quotations from dealers or issuers for securities of a similar type, quality and maturity.) "Marking to market" takes into account unrealized appreciation or depreciation due to changes in interest rates or other factors which would influence the current fair values of such securities. Short-term investments maturing in sixty days or less for which there is no reliable quoted market price are valued at amortized cost which approximates market. THE CONTRACT VALUE: The value of an Accumulation Unit on any business day is determined by multiplying the value on the preceding business day by the net investment factor for the valuation period just ended. The net investment factor is used to measure the investment performance of a Funding Option from one valuation period to the next. The net investment factor for a Funding Option for any valuation period is equal to the sum of 1.000000 plus the net investment rate (the gross investment rate less any applicable Funding Option deductions during the valuation period relating to the mortality and expense risk charge and the administrative expense charge). The gross investment rate of a Funding Option is equal to (a) minus (b), divided by (c) where: 3 (a) = investment income plus capital gains and losses (whether realized or unrealized); (b) = any deduction for applicable taxes (presently zero); and (c) = the value of the assets of the funding option at the beginning of the valuation period. The gross investment rate may be either positive or negative. A Funding Option's investment income includes any distribution whose ex-dividend date occurs during the valuation period. ACCUMULATION UNIT VALUE. The value of the Accumulation Unit for each Funding Option was initially established at $1.00. The value of an Accumulation Unit on any business day is determined by multiplying the value on the preceding business day by the net investment factor for the valuation period just ended. The net investment factor is calculated for each Funding Option and takes into account the investment performance, expenses and the deduction of certain expenses. ANNUITY UNIT VALUE. The initial Annuity Unit value applicable to each Funding Option was established at $1.00. An Annuity Unit Value as of any business day is equal to (a) the value of the Annuity unit on the preceding business day, multiplied by (b) the corresponding net investment factor for the business day just ended, divided by (c) the assumed net investment factor for the valuation period. (For example, the assumed net investment factor based on an annual assumed net investment rate of 3.0% for a valuation period of one day is 1.000081 and, for a period of two days, is 1.000081 x 1.000081.) FEDERAL TAX CONSIDERATIONS The following description of the federal income tax consequences under this Contract is general in nature and is therefore not exhaustive and is not intended to cover all situations. Because of the complexity of the law and the fact that the tax results will vary according to the factual status of the individual involved, a person contemplating purchase of an annuity contract and by a Contract Owner or beneficiary who may make elections under a Contract should consult with a qualified tax or legal adviser. MANDATORY DISTRIBUTIONS FOR QUALIFIED PLANS Federal tax law requires that minimum annual distributions begin by April 1st of the calendar year following the later of calendar year in which a participant under a qualified plan or a Section 403(b) annuity attains age 70 1/2 or retires. Minimum annual distributions under an IRA must begin by April 1st of the calendar year in which the Contract Owner attains 70 1/2 regardless of when he or she retires. Distributions must also begin or be continued according to the minimum distribution rules under the Code following the death of the Contract Owner or the annuitant. You should note that the U.S. Treasury recently issued regulations clarifying the operation of the required minimum distribution rules. NONQUALIFIED ANNUITY CONTRACTS Individuals may purchase tax-deferred annuities without any limits. The purchase payments receive no tax benefit, deduction or deferral, but taxes on the increases in the value of the contract are generally deferred until distribution and transfers between the various investment options are not subject to tax. Generally, if an annuity contract is owned by other than an individual (or an entity such as a trust or other "look-through" entity which owns for an individual's benefit), the owner will be taxed each year on the increase in the value of the contract. An exception applies for purchase payments made before March 1, 1986. The benefits of tax deferral of income earned under a non-qualified annuity should be compared with the relative federal tax rates on income from other types of investments (dividends and capital gains, taxable at 15% or less) relative to the ordinary income treatment received on annuity income and interest received on fixed instruments (notes, bonds, etc.). If two or more annuity contracts are purchased from the same insurer within the same calendar year, such annuity contract will be aggregated for federal income tax purposes. As a result, distributions from any of them will be taxed based upon the amount of income in all of the same calendar year series of annuities. This will generally have the effect of causing taxes to be paid sooner on the deferred gain in the contracts. Those receiving partial distributions made before the maturity date will generally be taxed on an income-first basis to the extent of income in the contract. If you are exchanging another annuity contract for this annuity, certain pre-August 14, 1982 deposits into an annuity contract that have been placed in the contract by means of a tax-deferred exchange under Section 1035 of the Code may be withdrawn first without income tax liability. 4 This information on deposits must be provided to the Company by the other insurance company at the time of the exchange. There is income in the contract generally to the extent the cash value exceeds the investment in the contract. The investment in the contract is equal to the amount of premiums paid less any amount received previously which was excludable from gross income. Any direct or indirect borrowing against the value of the contract or pledging of the contract as security for a loan will be treated as a cash distribution under the tax law. In order to be treated as an annuity contract for federal income tax purposes, Section 72(s) of the Code requires any non-qualified contract to contain certain provisions specifying how your interest in the contract will be distributed in the event of the death of an owner of the contract. Specifically, Section 72(s) requires that (a) if an owner dies on or after the annuity starting date, but prior to the time the entire interest in the contract has been distributed, the entire interest in the contract will be distributed at least as rapidly as under the method of distribution being used as of the date of such owner's death; and (b) if any owner dies prior to the annuity starting date, the entire interest in the contract will be distributed within five years after the date of such owner's death. These requirements will be considered satisfied as to any portion of an owner's interest which is payable to or for the benefit of a designated beneficiary and which is distributed over the life of such designated beneficiary or over a period not extending beyond the life expectancy of that beneficiary, provided that such distributions begin within one year of the owner's death. The designated beneficiary refers to a natural person designated by the owner as a beneficiary and to whom ownership of the contract passes by reason of death. However, if the designated beneficiary is the surviving spouse of the deceased owner, the contract may be continued with the surviving spouse as the successor-owner. Contracts will be administered by the Company in accordance with these rules and the Company will make a notification when payments should be commenced. Special rules apply regarding distribution requirements when an annuity is owned by a trust or other entity for the benefit of one or more individuals. INDIVIDUAL RETIREMENT ANNUITIES To the extent of earned income for the year and not exceeding the applicable limit for the taxable year, an individual may make deductible contributions to an individual retirement annuity (IRA). The applicable limit ($2,000 per year prior to 2002) has been increased by the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). The limit is $3,000 for calendar years 2002 - 2004, $4,000 for calendar years 2005-2007, and $5,000 for 2008, and will be indexed for inflation in years subsequent to 2008. Additional "catch-up" contributions may be made to an IRA by individuals age 50 or over. There are certain limits on the deductible amount based on the adjusted gross income of the individual and spouse and based on their participation in a retirement plan. If an individual is married and the spouse does not have earned income, the individual may establish IRAs for the individual and spouse. Purchase payments may then be made annually into IRAs for both spouses in the maximum amount of 100% of earned income up to a combined limit based on the individual limits outlined above. The Code provides for the purchase of a Simplified Employee Pension (SEP) plan. A SEP is funded through an IRA with an annual employer contribution limit of up to $40,000 for each participant. The Internal Revenue Services has not reviewed the contract for qualifications as an IRA, and has not addressed in a ruling of general applicability whether a death benefit provision such as the optional enhanced death benefit in the contract comports with IRA qualification requirements. SIMPLE PLAN IRA FORM Effective January 1, 1997, employers may establish a savings incentive match plan for employees ("SIMPLE plan") under which employees can make elective salary reduction contributions to an IRA based on a percentage of compensation of up to the applicable limit for the taxable year. The applicable limit was increased under EGTRRA. The applicable limit was increased under EGTRRA to $7,000 for 2002, $8,000 for 2003, $9,000 in 2004, $10,000 in 2005 (which will be indexed for inflation for years after 2005. (Alternatively, the employer can establish a SIMPLE cash or deferred arrangement under IRS Section 401(k)). Under a SIMPLE plan IRA, the employer must either make a matching contribution or a nonelective contribution based on the prescribed formulas for all eligible employees. Early withdrawals are subject to the 10% early withdrawal penalty generally applicable to IRAs, except that an early withdrawal by an employee under a SIMPLE plan IRA, within the first two years of participation, shall be subject to a 25% early withdrawal tax. 5 ROTH IRAS Effective January 1, 1998, Section 408A of the Code permits certain individuals to contribute to a Roth IRA. Eligibility to make contributions is based upon income, and the applicable limits vary based on marital status and/or whether the contribution is a rollover contribution from another IRA or an annual contribution. Contributions to a Roth IRA, which are subject to certain limitations (similar to the annual limits for the traditional IRA's), are not deductible and must be made in cash or as a rollover or transfer from another Roth IRA or other IRA. A conversion of a "traditional" IRA to a Roth IRA may be subject to tax and other special rules apply. You should consult a tax adviser before combining any converted amounts with other Roth IRA contributions, including any other conversion amounts from other tax years. Qualified distributions from a Roth IRA are tax-free. A qualified distribution requires that the Roth IRA has been held for at least 5 years, and the distribution is made after age 59 1/2, on death or disability of the owner, or for a limited amount ($10,000) for a qualified first time home purchase for the owner or certain relatives. Income tax and a 10% penalty tax may apply to distributions made (1) before age 59 1/2 (subject to certain exceptions) or (2) during five taxable years starting with the year in which the first contribution is made to any Roth IRA of the individual. QUALIFIED PENSION AND PROFIT-SHARING PLANS Like most other contributions made under a qualified pension or profit-sharing plan, purchase payments made by an employer are not currently taxable to the participant and increases in the value of a contract are not subject to taxation until received by a participant or beneficiary. Distributions are generally taxable to the participant or beneficiary as ordinary income in the year of receipt. Any distribution that is considered the participant's "investment in the contract" is treated as a return of capital and is not taxable. Under a qualified plan, the investment in the contract may be zero. The annual limits that apply to the amounts that may be contributed to a defined contribution plan each year were increased by EGTRRA. The maximum total annual limit was increased from $35,000 to $40,000 ($42,000 for 2005). The limit on employee salary reduction deferrals (commonly referred to as "401(k) contributions") increase on a graduated basis; $11,000 in 2002, $12,000 in 2003, $13,000 in 2004, $14,000 in 2005 and $15,000 in 2006. The $15,000 annual limit will be indexed for inflation after 2006. Additional "catch-up contributions" may be made by individuals age 50 or over. Amounts attributable to salary reduction contributions under Code Section 401(k) and income thereon may not be withdrawn prior to severance from employment, death, total and permanent disability, attainment of age 59 1/2, or in the case of hardship. SECTION 403(B) PLANS Under Code section 403(b), payments made by public school systems and certain tax exempt organizations to purchase annuity contracts for their employees are excludable from the gross income of the employee, subject to certain limitations. However, these payments may be subject to FICA (Social Security) taxes. A qualified contract issued as a tax-sheltered annuity under section 403(b) will be amended as necessary to conform to the requirements of the Code. The annual limits under Code Section 403(b) for employee salary reduction deferrals are increased under the same rules applicable to 401(k) plans ($14,000 in 2005). Code section 403(b)(11) restricts this distribution under Code section 403(b) annuity contracts of: (1) elective contributions made in years beginning after December 31, 1998; (2) earnings on those contributions; and (3) earnings in such years on amounts held as of the last year beginning before January 1, 1989. Distribution of those amounts may only occur upon death of the employee, attainment of age 59 1/2, separation from service, disability, or financial hardship. In addition, income attributable to elective contributions may not be distributed in the case of hardship. FEDERAL INCOME TAX WITHHOLDING The portion of a distribution, which is taxable income to the recipient, will be subject to federal income tax withholding as follows: 6 1. ELIGIBLE ROLLOVER DISTRIBUTION FROM SECTION 403(B) PLANS OR ARRANGEMENTS, FROM QUALIFIED PENSION AND PROFIT-SHARING PLANS, OR FROM 457 PLANS SPONSORED BY GOVERNMENTAL ENTITIES There is a mandatory 20% tax withholding for plan distributions that are eligible for rollover to an IRA or to another qualified retirement plan (including a 457 plan sponsored by a governmental entity) but that are not directly rolled over. A distribution made directly to a participant or beneficiary may avoid this result if: (a) a periodic settlement distribution is elected based upon a life or life expectancy calculation, or (b) a term-for-years settlement distribution is elected for a period of ten years or more, payable at least annually, or (c) a minimum required distribution as defined under the tax law is taken after the attainment of the age of 70 1/2 or as otherwise required by law, or (d) the distribution is a hardship distribution. A distribution including a rollover that is not a direct rollover will be subject to the 20% withholding, and the 10% additional tax penalty on premature withdrawals may apply to any amount not added back in the rollover. The 20% withholding may be recovered when the participant or beneficiary files a personal income tax return for the year if a rollover was completed within 60 days of receipt of the funds, except to the extent that the participant or spousal beneficiary is otherwise underwithheld or short on estimated taxes for that year. 2. OTHER NON-PERIODIC DISTRIBUTIONS (FULL OR PARTIAL REDEMPTIONS) To the extent not subject to 20% mandatory withholding as described in 1. above, the portion of a non-periodic distribution, which constitutes taxable income, will be subject to federal income tax withholding, if the aggregate distributions exceed $200 for the year, unless the recipient elects not to have taxes withheld. If no such election is made, 10% of the taxable portion of the distribution will be withheld as federal income tax; provided that the recipient may elect any other percentage. Election forms will be provided at the time distributions are requested. This form of withholding applies to all annuity programs. 3. PERIODIC DISTRIBUTIONS (DISTRIBUTIONS PAYABLE OVER A PERIOD GREATER THAN ONE YEAR) The portion of a periodic distribution, which constitutes taxable income, will be subject to federal income tax withholding under the wage withholding tables as if the recipient were married claiming three exemptions. A recipient may elect not to have income taxes withheld or have income taxes withheld at a different rate by providing a completed election form. Election forms will be provided at the time distributions are requested. This form of withholding applies to all annuity programs. Recipients who elect not to have withholding made are liable for payment of federal income tax on the taxable portion of the distribution. Recipients may also be subject to penalties under the estimated tax payment rules if withholding and estimated tax payments are not sufficient to cover tax liabilities. Recipients who do not provide a social security number or other taxpayer identification number will not be permitted to elect out of withholding. Additionally, U.S citizens residing outside of the country, or U.S. legal residents temporarily residing outside the country, are subject to different withholding rules and generally cannot elect out of withholding. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The financial statements and schedules of The Travelers Life and Annuity Company as of December 31, 2004 and 2003, and for each of the years in the three-year period ended December 31, 2004, included herein, and the financial statements of The Travelers Separate Account Fund BD II for Variable Annuities as of December 31, 2004, and for each of the years in the two-year period ended December 31, 2004, also included herein, have been included in reliance upon the reports of KPMG LLP, independent registered public accounting firm , appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The audit reports on The Travelers Life and Annuity Company refer to changes in the Company's methods of accounting and reporting for certain nontraditional long-duration contracts and for separate accounts in 2004 and for goodwill and intangible assets in 2002. 7 ANNUAL REPORT DECEMBER 31, 2004 THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES [TRAVELERS LOGO] The Travelers Insurance Company The Travelers Life and Annuity Company One Tower Square Hartford, CT 06183 THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004
AIM V.I. PREMIER ALLIANCEBERNSTEIN EQUITY FUND - PREMIER GROWTH GLOBAL GROWTH FUND - GROWTH FUND - SERIES I PORTFOLIO - CLASS B CLASS 2 SHARES CLASS 2 SHARES -------------------- -------------------- -------------------- -------------------- ASSETS: Investments at market value: $ 179,906 $ 422,043 $ 3,976,545 $ 9,404,025 Receivables: Dividends .......................... -- -- -- -- -------------------- -------------------- -------------------- -------------------- Total Assets ..................... 179,906 422,043 3,976,545 9,404,025 -------------------- -------------------- -------------------- -------------------- LIABILITIES: Total Liabilities ................ -- -- -- -- -------------------- -------------------- -------------------- -------------------- NET ASSETS: $ 179,906 $ 422,043 $ 3,976,545 $ 9,404,025 ==================== ==================== ==================== ====================
See Notes to Financial Statements -1- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES - CONTINUED DECEMBER 31, 2004
DREYFUS VIF DEVELOPING LEADERS EQUITY INDEX GROWTH-INCOME FUND - PORTFOLIO - INITIAL PORTFOLIO - FUNDAMENTAL VALUE CLASS 2 SHARES SHARES CLASS II SHARES PORTFOLIO -------------------- -------------------- -------------------- -------------------- ASSETS: Investments at market value: $ 12,668,926 $ 7,140,200 $ 3,941,127 $ 67,334,926 Receivables: Dividends .......................... -- -- -- -- -------------------- -------------------- -------------------- -------------------- Total Assets ..................... 12,668,926 7,140,200 3,941,127 67,334,926 -------------------- -------------------- -------------------- -------------------- LIABILITIES: Total Liabilities ................ -- -- -- -- -------------------- -------------------- -------------------- -------------------- NET ASSETS: $ 12,668,926 $ 7,140,200 $ 3,941,127 $ 67,334,926 ==================== ==================== ==================== ====================
See Notes to Financial Statements -2- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES - CONTINUED DECEMBER 31, 2004
SMITH BARNEY INVESTORS FUND - TOTAL RETURN FUND - SELECT BALANCED SELECT GROWTH SELECT HIGH GROWTH DIVIDEND STRATEGY CLASS I CLASS I PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- $ 7,104,975 $ 1,902,983 $ 9,278,064 $ 4,311,514 $ 1,042,219 $ 314,640 -- -- -- -- -- -- - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 7,104,975 1,902,983 9,278,064 4,311,514 1,042,219 314,640 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- -- -- -- -- -- -- - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- $ 7,104,975 $ 1,902,983 $ 9,278,064 $ 4,311,514 $ 1,042,219 $ 314,640 ===================== ==================== =================== ==================== ==================== ====================
See Notes to Financial Statements -3- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES - CONTINUED DECEMBER 31, 2004
SMITH BARNEY PREMIER SELECTIONS ALL CAP CONVERTIBLE DISCIPLINED MID CAP MERRILL LYNCH LARGE GROWTH PORTFOLIO SECURITIES PORTFOLIO STOCK PORTFOLIO CAP CORE PORTFOLIO -------------------- -------------------- -------------------- -------------------- ASSETS: Investments at market value: $ 1,573,042 $ 4,985,343 $ 10,500,088 $ 4,040,116 Receivables: Dividends .......................... -- -- -- -- -------------------- -------------------- -------------------- -------------------- Total Assets ..................... 1,573,042 4,985,343 10,500,088 4,040,116 -------------------- -------------------- -------------------- -------------------- LIABILITIES: Total Liabilities ................ -- -- -- -- -------------------- -------------------- -------------------- -------------------- NET ASSETS: $ 1,573,042 $ 4,985,343 $ 10,500,088 $ 4,040,116 ==================== ==================== ==================== ====================
See Notes to Financial Statements -4- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES - CONTINUED DECEMBER 31, 2004
SALOMON BROTHERS AIM CAPITAL STRATEGIC MFS EMERGING APPRECIATION MFS TOTAL RETURN PIONEER STRATEGIC TOTAL RETURN SMITH BARNEY HIGH GROWTH PORTFOLIO PORTFOLIO PORTFOLIO INCOME PORTFOLIO BOND PORTFOLIO INCOME PORTFOLIO - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- $ 22,568,010 $ 38,143,456 $ 86,231,464 $ 28,423,640 $ 7,076,474 $ 20,373,781 -- -- -- -- -- -- - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 22,568,010 38,143,456 86,231,464 28,423,640 7,076,474 20,373,781 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- -- -- -- -- -- -- - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- $ 22,568,010 $ 38,143,456 $ 86,231,464 $ 28,423,640 $ 7,076,474 $ 20,373,781 ===================== ==================== =================== ==================== ==================== ====================
See Notes to Financial Statements -5- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES - CONTINUED DECEMBER 31, 2004
SMITH BARNEY SMITH BARNEY LARGE INTERNATIONAL ALL SMITH BARNEY LARGE CAPITALIZATION SMITH BARNEY MONEY CAP GROWTH PORTFOLIO CAP VALUE PORTFOLIO GROWTH PORTFOLIO MARKET PORTFOLIO -------------------- -------------------- -------------------- -------------------- ASSETS: Investments at market value: $ 23,606,153 $ 47,199,901 $ 36,934,897 $ 19,675,882 Receivables: Dividends .......................... -- -- -- 15,780 -------------------- -------------------- -------------------- -------------------- Total Assets ..................... 23,606,153 47,199,901 36,934,897 19,691,662 -------------------- -------------------- -------------------- -------------------- LIABILITIES: Total Liabilities ................ -- -- -- -- -------------------- -------------------- -------------------- -------------------- NET ASSETS: $ 23,606,153 $ 47,199,901 $ 36,934,897 $ 19,691,662 ==================== ==================== ==================== ====================
See Notes to Financial Statements -6- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES - CONTINUED DECEMBER 31, 2004
SMITH BARNEY SMALL VAN KAMPEN CAP GROWTH STRATEGIC EQUITY TRAVELERS MANAGED ENTERPRISE OPPORTUNITIES PORTFOLIO INCOME PORTFOLIO PORTFOLIO PORTFOLIO COMBINED - --------------------- -------------------- ------------------- -------------------- -------------------- $ 84,281,534 $ 16,396,118 $ 33,510,797 $ 1,296,901 $ 615,839,690 -- -- -- -- 15,780 - --------------------- -------------------- ------------------- -------------------- -------------------- 84,281,534 16,396,118 33,510,797 1,296,901 615,855,470 - --------------------- -------------------- ------------------- -------------------- -------------------- -- -- -- -- -- - --------------------- -------------------- ------------------- -------------------- -------------------- $ 84,281,534 $ 16,396,118 $ 33,510,797 $ 1,296,901 $ 615,855,470 ===================== ==================== =================== ==================== ====================
See Notes to Financial Statements -7- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004
ALLIANCE BERNSTEIN AIM V.I. PREMIER PREMIER GROWTH GLOBAL GROWTH FUND - GROWTH FUND - EQUITY FUND - SERIES I PORTFOLIO - CLASS B CLASS 2 SHARES CLASS 2 SHARES ---------------------- -------------------- -------------------- -------------------- INVESTMENT INCOME: Dividends ............................ $ 814 $ -- $ 15,484 $ 15,264 ---------------------- -------------------- -------------------- -------------------- EXPENSES: Insurance charges .................... 2,972 4,292 36,145 94,411 Administrative fees .................. 435 631 5,124 13,079 ---------------------- -------------------- -------------------- -------------------- Total expenses ..................... 3,407 4,923 41,269 107,490 ---------------------- -------------------- -------------------- -------------------- Net investment income (loss) ..... (2,593) (4,923) (25,785) (92,226) ---------------------- -------------------- -------------------- -------------------- REALIZED GAIN (LOSS) AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Realized gain distribution ......... -- -- -- -- Realized gain (loss) on sale of investments ...................... (12,967) 4,406 171,356 290,286 ---------------------- -------------------- -------------------- -------------------- Realized gain (loss) ............. (12,967) 4,406 171,356 290,286 ---------------------- -------------------- -------------------- -------------------- Change in unrealized gain (loss) on investments ................... 18,092 23,946 219,557 722,146 ---------------------- -------------------- -------------------- -------------------- Net increase (decrease) in net assets resulting from operations .......... $ 2,532 $ 23,429 $ 365,128 $ 920,206 ====================== ==================== ==================== ====================
See Notes to Financial Statements -8- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS - CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2004
DREYFUS VIF DEVELOPING LEADERS EQUITY FUNDAMENTAL INVESTORS TOTAL GROWTH-INCOME FUND - PORTFOLIO - INITIAL INDEX PORTFOLIO VALUE FUND - RETURN FUND - CLASS 2 SHARES SHARES - CLASS II SHARES PORTFOLIO CLASS I CLASS I - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- $ 106,937 $ 13,858 $ 51,313 $ 432,820 $ 100,796 $ 34,086 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 133,380 81,534 42,331 764,706 81,162 21,475 18,708 11,520 6,116 106,550 11,439 2,974 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 152,088 93,054 48,447 871,256 92,601 24,449 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- (45,151) (79,196) 2,866 (438,436) 8,195 9,637 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- -- -- -- 1,520,902 -- 34,347 491,284 (252,773) (81,409) 2,189,962 110,785 43,033 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 491,284 (252,773) (81,409) 3,710,864 110,785 77,380 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 608,193 1,050,867 404,249 1,272,886 517,925 52,531 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- $ 1,054,326 $ 718,898 $ 325,706 $ 4,545,314 $ 636,905 $ 139,548 ===================== ==================== =================== ==================== ==================== ====================
See Notes to Financial Statements -9- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS - CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2004
SMITH BARNEY SELECT BALANCED SELECT GROWTH SELECT HIGH GROWTH DIVIDEND STRATEGY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO -------------------- -------------------- -------------------- -------------------- INVESTMENT INCOME: Dividends $ 214,587 $ 65,516 $ 3,956 $ 2,932 -------------------- -------------------- -------------------- -------------------- EXPENSES: Insurance charges .................... 106,299 50,371 14,881 4,193 Administrative fees .................. 14,739 6,807 2,128 586 -------------------- -------------------- -------------------- -------------------- Total expenses ..................... 121,038 57,178 17,009 4,779 -------------------- -------------------- -------------------- -------------------- Net investment income (loss) ..... 93,549 8,338 (13,053) (1,847) -------------------- -------------------- -------------------- -------------------- REALIZED GAIN (LOSS) AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Realized gain distribution ......... -- -- -- -- Realized gain (loss) on sale of investments ...................... 38,114 (129,945) 21,962 24,294 -------------------- -------------------- -------------------- -------------------- Realized gain (loss) ............. 38,114 (129,945) 21,962 24,294 -------------------- -------------------- -------------------- -------------------- Change in unrealized gain (loss) on investments ................... 445,407 428,533 107,766 (14,740) -------------------- -------------------- -------------------- -------------------- Net increase (decrease) in net assets resulting from operations .......... $ 577,070 $ 306,926 $ 116,675 $ 7,707 ==================== ==================== ==================== ====================
See Notes to Financial Statements -10- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS - CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2004
SMITH BARNEY PREMIER CONVERTIBLE AIM CAPITAL SELECTIONS ALL CAP SECURITIES DISCIPLINED MID CAP MERRILL LYNCH LARGE MFS EMERGING APPRECIATION GROWTH PORTFOLIO PORTFOLIO STOCK PORTFOLIO CAP CORE PORTFOLIO GROWTH PORTFOLIO PORTFOLIO - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- $ -- $ 105,597 $ 27,368 $ 20,941 $ -- $ 50,286 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 16,144 57,660 112,262 41,777 250,422 429,199 2,248 8,252 15,884 5,829 35,013 60,293 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 18,392 65,912 128,146 47,606 285,435 489,492 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- (18,392) 39,685 (100,778) (26,665) (285,435) (439,206) - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- -- -- 284,892 -- -- -- 37,746 87,101 489,891 (213,134) (3,305,117) (1,927,068) - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 37,746 87,101 774,783 (213,134) (3,305,117) (1,927,068) - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 3,827 125,620 766,848 767,077 5,985,667 4,200,087 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- $ 23,181 $ 252,406 $ 1,440,853 $ 527,278 $ 2,395,115 $ 1,833,813 ===================== ==================== =================== ==================== ==================== ====================
See Notes to Financial Statements -11- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS - CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2004
SALOMON BROTHERS STRATEGIC MFS TOTAL RETURN PIONEER STRATEGIC TOTAL RETURN SMITH BARNEY HIGH PORTFOLIO INCOME PORTFOLIO BOND PORTFOLIO INCOME PORTFOLIO -------------------- -------------------- -------------------- -------------------- INVESTMENT INCOME: Dividends ............................ $ 2,219,374 $ 1,866,422 $ 411,601 $ 1,629,936 -------------------- -------------------- -------------------- -------------------- EXPENSES: Insurance charges .................... 962,188 326,599 85,821 239,682 Administrative fees .................. 135,371 45,955 12,115 33,781 -------------------- -------------------- -------------------- -------------------- Total expenses ..................... 1,097,559 372,554 97,936 273,463 -------------------- -------------------- -------------------- -------------------- Net investment income (loss) ..... 1,121,815 1,493,868 313,665 1,356,473 -------------------- -------------------- -------------------- -------------------- REALIZED GAIN (LOSS) AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Realized gain distribution ......... 2,263,331 -- -- -- Realized gain (loss) on sale of investments ...................... 1,583,673 (1,314,197) 34,093 (1,976,366) -------------------- -------------------- -------------------- -------------------- Realized gain (loss) ............. 3,847,004 (1,314,197) 34,093 (1,976,366) -------------------- -------------------- -------------------- -------------------- Change in unrealized gain (loss) on investments ................... 3,440,821 2,518,375 7,066 2,524,942 -------------------- -------------------- -------------------- -------------------- Net increase (decrease) in net assets resulting from operations .......... $ 8,409,640 $ 2,698,046 $ 354,824 $ 1,905,049 ==================== ==================== ==================== ====================
See Notes to Financial Statements -12- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS - CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2004
SMITH BARNEY LARGE SMITH BARNEY CAPITALIZATION INTERNATIONAL ALL CAP SMITH BARNEY LARGE GROWTH SMITH BARNEY MONEY STRATEGIC EQUITY TRAVELERS MANAGED GROWTH PORTFOLIO CAP VALUE PORTFOLIO PORTFOLIO MARKET PORTFOLIO PORTFOLIO INCOME PORTFOLIO - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- $ 204,281 $ 863,698 $ 132,188 $ 216,509 $ 1,137,509 $ 758,638 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 243,332 523,854 425,161 277,426 927,283 199,605 34,418 73,896 60,885 39,137 130,427 27,949 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 277,750 597,750 486,046 316,563 1,057,710 227,554 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- (73,469) 265,948 (353,858) (100,054) 79,799 531,084 - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- -- -- -- -- -- -- 1,013,950 (645,432) 513,463 -- (6,449,463) (72,883) - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 1,013,950 (645,432) 513,463 -- (6,449,463) (72,883) - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- 2,538,778 4,629,899 (766,445) -- 13,370,751 (172,282) - --------------------- -------------------- ------------------- -------------------- -------------------- -------------------- $ 3,479,259 $ 4,250,415 $ (606,840) $ (100,054) $ 7,001,087 $ 285,919 ===================== ==================== =================== ==================== ==================== ====================
See Notes to Financial Statements -13- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS - CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2004
SMITH BARNEY SMALL CAP GROWTH VAN KAMPEN OPPORTUNITIES ENTERPRISE PORTFOLIO PORTFOLIO COMBINED -------------------- -------------------- -------------------- INVESTMENT INCOME: Dividends ............................ $ 180,439 $ 878 $ 10,884,028 -------------------- -------------------- -------------------- EXPENSES: Insurance charges .................... 382,848 13,598 6,953,013 Administrative fees .................. 53,889 1,954 978,132 -------------------- -------------------- -------------------- Total expenses ..................... 436,737 15,552 7,931,145 -------------------- -------------------- -------------------- Net investment income (loss) ..... (256,298) (14,674) 2,952,883 -------------------- -------------------- -------------------- REALIZED GAIN (LOSS) AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Realized gain distribution ......... -- 27,308 4,130,780 Realized gain (loss) on sale of investments ...................... (5,705,152) 80,451 (14,860,056) -------------------- -------------------- -------------------- Realized gain (loss) ............. (5,705,152) 107,759 (10,729,276) -------------------- -------------------- -------------------- Change in unrealized gain (loss) on investments ................... 6,659,088 62,966 52,520,443 -------------------- -------------------- -------------------- Net increase (decrease) in net assets resulting from operations .......... $ 697,638 $ 156,051 $ 44,744,050 ==================== ==================== ====================
See Notes to Financial Statements -14- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AIM V.I. PREMIER ALLIANCEBERNSTEIN GLOBAL GROWTH FUND EQUITY FUND - PREMIER GROWTH - CLASS 2 SERIES I PORTFOLIO - CLASS B SHARES -------------------------- -------------------------- -------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- OPERATIONS: Net investment income (loss) ......... $ (2,593) $ (3,286) $ (4,923) $ (4,357) $ (25,785) $ (15,444) Realized gain (loss) ................. (12,967) (52,775) 4,406 (11,080) 171,356 18,709 Change in unrealized gain (loss) on investments ..................... 18,092 139,779 23,946 91,169 219,557 608,485 ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations ........ 2,532 83,718 23,429 75,732 365,128 611,750 ------------ ------------ ------------ ------------ ------------ ------------ UNIT TRANSACTIONS: Participant purchase payments ........ -- -- -- 650 875 7,951 Participant transfers from other funding options .................... 13,451 254,612 135,563 172,977 2,439,489 1,303,741 Administrative charges ............... (98) (95) (127) (179) (803) (494) Contract surrenders .................. (252,815) (75,646) (89,348) (83,989) (810,942) (248,286) Participant transfers to other funding options .................... (3,229) (119,231) (8,020) (127,855) (745,355) (225,873) Other payments to participants ....... -- -- (28,118) -- (41,757) (50,130) ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from unit transactions . (242,691) 59,640 9,950 (38,396) 841,507 786,909 ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in net assets ........................... (240,159) 143,358 33,379 37,336 1,206,635 1,398,659 NET ASSETS: Beginning of year .................. 420,065 276,707 388,664 351,328 2,769,910 1,371,251 ------------ ------------ ------------ ------------ ------------ ------------ End of year ........................ $179,906 $ 420,065 $ 422,043 $ 388,664 $ 3,976,545 $ 2,769,910 ============ ============ ============ ============ ============ ============
See Notes to Financial Statements -15- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
DREYFUS VIF GROWTH-INCOME DEVELOPING LEADERS GROWTH FUND - FUND - CLASS PORTFOLIO CLASS 2 SHARES 2 SHARES - INITIAL SHARES -------------------------- -------------------------- -------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- OPERATIONS: Net investment income (loss) ......... $ (92,226) $ (63,648) $ (45,151) $ (10,289) $ (79,196) $ (88,707) Realized gain (loss) ................. 290,286 (57,709) 491,284 15,850 (252,773) (695,274) Change in unrealized gain (loss) on investments ..................... 722,146 1,865,178 608,193 2,791,125 1,050,867 2,795,818 ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations ........ 920,206 1,743,821 1,054,326 2,796,686 718,898 2,011,837 ------------ ------------ ------------ ------------ ------------ ------------ UNIT TRANSACTIONS: Participant purchase payments ........ 8,338 10,000 21,187 37,005 -- 650 Participant transfers from other funding options .................... 2,725,770 4,319,353 3,569,473 4,871,413 306,816 832,158 Administrative charges ............... (2,157) (1,653) (2,851) (2,449) (1,879) (2,163) Contract surrenders .................. (2,131,861) (1,091,803) (3,403,545) (1,693,766) (1,428,026) (723,059) Participant transfers to other funding options .................... (432,726) (627,284) (972,339) (921,817) (733,496) (941,562) Other payments to participants ....... (108,591) (68,427) (91,241) (151,749) (71,959) (162,171) ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from unit transactions . 58,773 2,540,186 (879,316) 2,138,637 (1,928,544) (996,147) ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in net assets .. 978,979 4,284,007 175,010 4,935,323 (1,209,646) 1,015,690 NET ASSETS: Beginning of year .................. 8,425,046 4,141,039 12,493,916 7,558,593 8,349,846 7,334,156 ------------ ------------ ------------ ------------ ------------ ------------ End of year ........................ $ 9,404,025 $ 8,425,046 $12,668,926 $12,493,916 $ 7,140,200 $ 8,349,846 ============ ============ ============ ============ ============ ============
See Notes to Financial Statements -16- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
EQUITY INDEX PORTFOLIO - CLASS II SHARES FUNDAMENTAL VALUE PORTFOLIO INVESTORS FUND - CLASS I TOTAL RETURN FUND - CLASS I - ----------------------------- ------------------------------ ------------------------------ ------------------------------ 2004 2003 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- ---- ---- $ 2,866 $ (5,047) $ (438,436) $ (444,955) $ 8,195 $ 7,919 $ 9,637 $ 6,969 (81,409) (237,033) 3,710,864 (1,318,199) 110,785 (304,599) 77,380 23,066 404,249 1,100,070 1,272,886 23,515,956 517,925 2,376,481 52,531 279,114 ------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- 325,706 857,990 4,545,314 21,752,802 636,905 2,079,801 139,548 309,149 ------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- -- -- 86,128 86,020 9,875 25,500 14,033 25,593 234,927 622,543 2,922,118 3,067,033 308,117 609,968 103,327 348,583 (946) (940) (18,190) (20,735) (2,032) (2,396) (442) (625) (414,644) (191,905) (13,267,711) (11,392,560) (1,504,926) (1,283,260) (246,569) (177,500) (378,101) (403,136) (1,820,221) (3,718,608) (474,191) (768,886) (255,281) (326,892) (153,709) (48,943) (1,191,696) (1,692,641) (47,889) (104,740) (27,557) (26,385) ------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- (712,473) (22,381) (13,289,572) (13,671,491) (1,711,046) (1,523,814) (412,489) (157,226) ------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- (386,767) 835,609 (8,744,258) 8,081,311 (1,074,141) 555,987 (272,941) 151,923 4,327,894 3,492,285 76,079,184 67,997,873 8,179,116 7,623,129 2,175,924 2,024,001 ------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- $ 3,941,127 $ 4,327,894 $ 67,334,926 $ 76,079,184 $ 7,104,975 $ 8,179,116 $ 1,902,983 $ 2,175,924 ============= ============= ============== ============== ============== ============== ============== ==============
See Notes to Financial Statements -17- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
SELECT BALANCED PORTFOLIO SELECT GROWTH PORTFOLIO SELECT HIGH GROWTH PORTFOLIO ----------------------------- -------------------------- ---------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- OPERATIONS: Net investment income (loss) .......... $ 93,549 $ 133,077 $ 8,338 $ 16,402 $ (13,053) $ (14,783) Realized gain (loss) .................. 38,114 (168,031) (129,945) (206,567) 21,962 (180,800) Change in unrealized gain (loss) on investments ...................... 445,407 1,863,220 428,533 1,408,604 107,766 802,888 ------------- ------------- ------------ ------------ ------------ ------------- Net increase (decrease) in net assets resulting from operations ......... 577,070 1,828,266 306,926 1,218,439 116,675 607,305 ------------- ------------- ------------ ------------ ------------ ------------- UNIT TRANSACTIONS: Participant purchase payments ......... -- 11,275 6,800 11,087 -- -- Participant transfers from other funding options ..................... 200,833 392,030 66,749 84,364 5,012 85,364 Administrative charges ................ (1,333) (1,646) (1,150) (1,536) (450) (541) Contract surrenders ................... (1,676,662) (1,543,321) (825,965) (508,070) (528,372) (1,296,444) Participant transfers to other funding options ..................... (270,612) (395,476) (187,796) (328,909) (42,982) (9,768) Other payments to participants ........ (220,549) (152,167) (115,400) (19,050) -- -- ------------- ------------- ------------ ------------ ------------ ------------- Net increase (decrease) in net assets resulting from unit transactions .. (1,968,323) (1,689,305) (1,056,762) (762,114) (566,792) (1,221,389) ------------- ------------- ------------ ------------ ------------ ------------- Net increase (decrease) in net assets (1,391,253) 138,961 (749,836) 456,325 (450,117) (614,084) NET ASSETS: Beginning of year ................... 10,669,317 10,530,356 5,061,350 4,605,025 1,492,336 2,106,420 ------------- ------------- ------------ ------------ ------------ ------------- End of year ......................... $ 9,278,064 $ 10,669,317 $ 4,311,514 $ 5,061,350 $ 1,042,219 $ 1,492,336 ============= ============= ============ ============ ============ =============
See Notes to Financial Statements -18- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
SMITH BARNEY DIVIDEND SMITH BARNEY PREMIER SELECTIONS CONVERTIBLE SECURITIES DISCIPLINED MID CAP STOCK STRATEGY PORTFOLIO ALL CAP GROWTH PORTFOLIO PORTFOLIO PORTFOLIO - ----------------------------- ------------------------------ ------------------------------ ------------------------------ 2004 2003 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- ---- ---- $ (1,847) $ (1,419) $ (18,392) $ (14,767) $ 39,685 $ 82,852 $ (100,778) $ (90,889) 24,294 (5,962) 37,746 (22,801) 87,101 (46,269) 774,783 (92,114) (14,740) 63,854 3,827 376,023 125,620 867,826 766,848 3,035,050 ------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- 7,707 56,473 23,181 338,455 252,406 904,409 1,440,853 2,852,047 ------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- -- -- 3,674 2,338 15,187 13,450 -- 7,600 120,797 316,325 358,553 754,098 461,079 2,001,294 1,152,144 1,735,151 (138) (49) (220) (238) (764) (666) (3,028) (3,219) (192,639) (1,520) (249,192) (113,795) (1,120,335) (532,496) (2,451,305) (1,466,376) (54,731) (25,316) (103,904) (379,309) (286,038) (251,047) (866,009) (895,620) -- -- -- -- (172,452) (123,082) (116,848) (313,975) ------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- (126,711) 289,440 8,911 263,094 (1,103,323) 1,107,453 (2,285,046) (936,439) ------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- (119,004) 345,913 32,092 601,549 (850,917) 2,011,862 (844,193) 1,915,608 433,644 87,731 1,540,950 939,401 5,836,260 3,824,398 11,344,281 9,428,673 ------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- $ 314,640 $ 433,644 $ 1,573,042 $ 1,540,950 $ 4,985,343 $ 5,836,260 $ 10,500,088 $ 11,344,281 ============= ============= ============== ============== ============== ============== ============== ==============
See Notes to Financial Statements -19- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
MERRILL LYNCH LARGE CAP MFS EMERGING GROWTH AIM CAPITAL CORE PORTFOLIO PORTFOLIO APPRECIATION PORTFOLIO ---------------------------- -------------------------- --------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- OPERATIONS: Net investment income (loss) .......... $ (26,665) $ (24,105) $ (285,435) $ (305,372) $ (439,206) $ (518,942) Realized gain (loss) .................. (213,134) (566,057) (3,305,117) (5,058,018) (1,927,068) (4,217,501) Change in unrealized gain (loss) on investments ...................... 767,077 1,305,309 5,985,667 11,429,818 4,200,087 15,162,126 ------------- ------------- ------------ ------------ ------------ ------------- Net increase (decrease) in net assets resulting from operations ......... 527,278 715,147 2,395,115 6,066,428 1,833,813 10,425,683 ------------- ------------- ------------ ------------ ------------ ------------- UNIT TRANSACTIONS: Participant purchase payments ......... -- -- 17,720 4,981 2,789 18,473 Participant transfers from other funding options ..................... 127,695 83,986 162,370 866,318 111,685 478,904 Administrative charges ................ (1,325) (1,523) (9,435) (11,518) (14,867) (18,087) Contract surrenders ................... (313,805) (484,074) (4,209,652) (3,612,220) (6,332,950) (5,964,785) Participant transfers to other funding options ..................... (267,691) (434,050) (1,133,125) (1,784,835) (1,671,265) (2,306,127) Other payments to participants ........ (57,805) (100,075) (397,904) (703,484) (760,127) (1,153,617) ------------- ------------- ------------ ------------ ------------ ------------- Net increase (decrease) in net assets resulting from unit transactions .. (512,931) (935,736) (5,570,026) (5,240,758) (8,664,735) (8,945,239) ------------- ------------- ------------ ------------ ------------ ------------- Net increase (decrease) in net assets 14,347 (220,589) (3,174,911) 825,670 (6,830,922) 1,480,444 NET ASSETS: Beginning of year ................... 4,025,769 4,246,358 25,742,921 24,917,251 44,974,378 43,493,934 ------------- ------------- ------------ ------------ ------------ ------------- End of year ......................... $ 4,040,116 $ 4,025,769 $22,568,010 $25,742,921 $38,143,456 $ 44,974,378 ============= ============= ============ ============ ============ =============
See Notes to Financial Statements -20- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
PIONEER STRATEGIC INCOME SALOMON BROTHERS STRATEGIC SMITH BARNEY HIGH INCOME MFS TOTAL RETURN PORTFOLIO PORTFOLIO TOTAL RETURN BOND PORTFOLIO PORTFOLIO - ----------------------------- ------------------------------ ------------------------------ ------------------------------ 2004 2003 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- ---- ---- $ 1,121,815 $ 872,050 $ 1,493,868 $ 2,467,707 $ 313,665 $ 428,963 $ 1,356,473 $ 1,448,395 3,847,004 (755,462) (1,314,197) (1,529,217) 34,093 68,126 (1,976,366) (3,866,211) 3,440,821 13,610,994 2,518,375 4,863,952 7,066 776,325 2,524,942 8,247,427 - -------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- 8,409,640 13,727,582 2,698,046 5,802,442 354,824 1,273,414 1,905,049 5,829,611 - -------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- 40,018 110,514 8,791 2,418 8,338 22,675 500 5,460 2,201,862 3,545,767 685,429 1,652,480 379,038 3,131,260 634,288 5,568,162 (22,534) (26,139) (7,118) (8,572) (2,248) (2,874) (5,923) (6,860) (19,105,166) (14,387,328) (6,776,452) (5,237,019) (1,998,824) (2,361,791) (5,525,974) (3,962,348) (1,946,728) (5,328,676) (1,413,531) (2,092,044) (1,000,042) (3,283,944) (1,345,099) (5,308,795) (1,809,040) (2,730,074) (1,029,799) (797,094) (128,032) (140,877) (671,936) (730,999) - -------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- (20,641,588) (18,815,936) (8,532,680) (6,479,831) (2,741,770) (2,635,551) (6,914,144) (4,435,380) - -------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- (12,231,948) (5,088,354) (5,834,634) (677,389) (2,386,946) (1,362,137) (5,009,095) 1,394,231 98,463,412 103,551,766 34,258,274 34,935,663 9,463,420 10,825,557 25,382,876 23,988,645 - -------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- $ 86,231,464 $ 98,463,412 $ 28,423,640 $ 34,258,274 $ 7,076,474 $ 9,463,420 $ 20,373,781 $ 25,382,876 ============== ============= ============== ============== ============== ============== ============== ==============
See Notes to Financial Statements -21- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
SMITH BARNEY LARGE SMITH BARNEY INTERNATIONAL SMITH BARNEY LARGE CAPITALIZATION GROWTH ALL CAP GROWTH PORTFOLIO CAP VALUE PORTFOLIO PORTFOLIO ---------------------------- -------------------------- --------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- OPERATIONS: Net investment income (loss) .......... $ (73,469) $ (62,706) $ 265,948 $ 203,926 $ (353,858) $ (440,250) Realized gain (loss) .................. 1,013,950 1,876,983 (645,432) (3,153,027) 513,463 (1,186,594) Change in unrealized gain (loss) on investments ...................... 2,538,778 4,264,993 4,629,899 14,508,051 (766,445) 15,796,775 ------------- ------------- ------------ ------------ ------------ ------------- Net increase (decrease) in net assets resulting from operations ......... 3,479,259 6,079,270 4,250,415 11,558,950 (606,840) 14,169,931 ------------- ------------- ------------ ------------ ------------ ------------- UNIT TRANSACTIONS: Participant purchase payments ......... 388 34,946 9,133 42,845 20,124 165,681 Participant transfers from other funding options ..................... 1,442,668 126,246,187 980,092 1,005,222 2,084,395 5,904,763 Administrative charges ................ (7,782) (8,927) (15,432) (17,968) (14,087) (15,358) Contract surrenders ................... (3,734,448) (3,338,296) (8,263,608) (6,304,294) (6,325,303) (4,006,093) Participant transfers to other funding options ..................... (1,299,612) (133,015,500) (1,526,804) (3,547,917) (2,448,303) (4,033,495) Other payments to participants ........ (497,361) (354,292) (1,171,372) (1,445,655) (1,126,577) (747,416) ------------- ------------- ------------ ------------ ------------ ------------- Net increase (decrease) in net assets resulting from unit transactions .. (4,096,147) (10,435,882) (9,987,991) (10,267,767) (7,809,751) (2,731,918) ------------- ------------- ------------ ------------ ------------ ------------- Net increase (decrease) in net assets (616,888) (4,356,612) (5,737,576) 1,291,183 (8,416,591) 11,438,013 NET ASSETS: Beginning of year ................... 24,223,041 28,579,653 52,937,477 51,646,294 45,351,488 33,913,475 ------------- ------------- ------------ ------------ ------------ ------------- End of year ......................... $ 23,606,153 $ 24,223,041 $47,199,901 $52,937,477 $36,934,897 $ 45,351,488 ============= ============= ============ ============ ============ =============
See Notes to Financial Statements -22- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
SMITH BARNEY MONEY MARKET TRAVELERS MANAGED INCOME VAN KAMPEN ENTERPRISE PORTFOLIO STRATEGIC EQUITY PORTFOLIO PORTFOLIO PORTFOLIO - ----------------------------- ------------------------------ ------------------------------ ------------------------------ 2004 2003 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- ---- ---- $ (100,054) $ (289,777) $ 79,799 $ (1,102,352) $ 531,084 $ 564,340 $ (256,298) (421,665) -- -- (6,449,463) (11,740,704) (72,883) (181,879) (5,705,152) (7,619,920) -- -- 13,370,751 37,232,924 (172,282) 1,398,153 6,659,088 16,516,925 - -------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- (100,054) (289,777) 7,001,087 24,389,868 285,919 1,780,614 697,638 8,475,340 - -------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- 55,898 78,306 19,361 36,423 -- 5,921 1,078 16,161 10,500,838 145,171,185 296,961 1,265,105 1,023,570 4,439,475 509,858 254,018 (5,533) (8,143) (33,723) (40,359) (3,154) (4,057) (12,773) (15,759) (13,425,042) (24,737,051) (13,956,191) (12,367,076) (3,800,074) (4,999,285) (5,673,326) (4,627,428) (13,142,792) 148,625,995) (3,719,419) (5,079,855) (2,414,793) (6,470,918) (1,963,559) (2,331,190) (469,398) (902,265) (1,378,351) (2,018,894) (292,434) (478,173) (604,747) (1,217,731) - -------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- (16,486,029) (29,023,963) (18,771,362) (18,204,656) (5,486,885) (7,507,037) (7,743,469) (7,921,929) - -------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- (16,586,083) (29,313,740) (11,770,275) 6,185,212 (5,200,966) (5,726,423) (7,045,831) 553,411 36,277,745 65,591,485 96,051,809 89,866,597 21,597,084 27,323,507 40,556,628 40,003,217 - -------------- ------------- -------------- -------------- -------------- -------------- -------------- -------------- $ 19,691,662 $ 36,277,745 $ 84,281,534 $ 96,051,809 $ 16,396,118 $ 21,597,084 $ 33,510,797 $ 40,556,628 ============== ============= ============== ============== ============== ============== ============== ==============
See Notes to Financial Statements -23- THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
SMITH BARNEY SMALL CAP GROWTH OPPORTUNITIES PORTFOLIO COMBINED ---------------------------- ----------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- OPERATIONS: Net investment income (loss) .......... $ (14,674) $ (8,070) $ 2,952,883 $ 2,301,770 Realized gain (loss) .................. 107,759 (3,856) (10,729,276) (41,274,925) Change in unrealized gain (loss) on investments ...................... 62,966 264,241 52,520,443 189,358,653 ------------- ------------- ------------- -------------- Net increase (decrease) in net assets resulting from operations ......... 156,051 252,315 44,744,050 150,385,498 ------------- ------------- ------------- -------------- UNIT TRANSACTIONS: Participant purchase payments ......... -- 750 350,235 784,673 Participant transfers from other funding options ..................... 631,766 871,152 36,896,733 322,254,991 Administrative charges ................ (385) (190) (192,927) (225,958) Contract surrenders ................... (446,281) (122,291) (130,481,953) (118,935,175) Participant transfers to other funding options ..................... (402,856) (56,032) (43,330,650) (334,165,962) Other payments to participants ........ -- (11,708) (12,782,649) (16,445,814) ------------- ------------- ------------- -------------- Net increase (decrease) in net assets resulting from unit transactions .. (217,756) 681,681 (149,541,211) (146,733,245) ------------- ------------- ------------- -------------- Net increase (decrease) in net assets (61,705) 933,996 (104,797,161) 3,652,253 NET ASSETS: Beginning of year ................... 1,358,606 424,610 720,652,631 717,000,378 ------------- ------------- ------------- -------------- End of year ......................... $ 1,296,901 $ 1,358,606 $615,855,470 $ 720,652,631 ============= ============= ============= ==============
See Notes to Financial Statements -24- NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Fund BD II for Variable Annuities ("Fund BD II") is a separate account of The Travelers Life and Annuity Company ("The Company"), an indirect wholly owned subsidiary of Citigroup Inc., and is available for funding certain variable annuity contracts issued by The Company. Fund BD II is registered under the Investment Company Act of 1940, as amended, as a unit investment trust. Fund BD II is comprised of the Travelers Vintage Annuity product. Participant purchase payments applied to Fund BD II are invested in one or more sub-accounts in accordance with the selection made by the contract owner. As of December 31, 2004, the investments comprising Fund BD II were: AIM Variable Insurance Funds, Inc., Delaware business trust AIM V.I. Premier Equity Fund - Series I AllianceBernstein Variable Product Series Fund, Inc., Maryland business trust AllianceBernstein Premier Growth Portfolio - Class B American Funds Insurance Series, Massachusetts business trust Global Growth Fund - Class 2 Shares Growth Fund - Class 2 Shares Growth-Income Fund - Class 2 Shares Dreyfus Variable Investment Fund, Maryland business trust Dreyfus Variable Investment Fund Developing Leaders Portfolio - Initial Shares Greenwich Street Series Fund, Massachusetts business trust, Affiliate of The Company Equity Index Portfolio - Class II Shares Fundamental Value Portfolio Salomon Brothers Variable Series Funds Inc., Maryland business trust, Affiliate of The Company Investors Fund - Class I Total Return Fund - Class I Smith Barney Allocation Series Inc., Maryland business trust, Affiliate of The Company Select Balanced Portfolio Select Growth Portfolio Select High Growth Portfolio Smith Barney Investment Series, Massachusetts business trust, Affiliate of The Company Smith Barney Dividend Strategy Portfolio (Formerly Smith Barney Large Cap Core Portfolio) Smith Barney Premier Selections All Cap Growth Portfolio The Travelers Series Trust, Massachusetts business trust, Affiliate of The Company Convertible Securities Portfolio Disciplined Mid Cap Stock Portfolio Merrill Lynch Large Cap Core Portfolio MFS Emerging Growth Portfolio Travelers Series Fund Inc., Maryland business trust, Affiliate of The Company AIM Capital Appreciation Portfolio MFS Total Return Portfolio Pioneer Strategic Income Portfolio Salomon Brothers Strategic Total Return Bond Portfolio Smith Barney High Income Portfolio Smith Barney International All Cap Growth Portfolio Smith Barney Large Cap Value Portfolio Smith Barney Large Capitalization Growth Portfolio Smith Barney Money Market Portfolio Strategic Equity Portfolio Travelers Managed Income Portfolio Van Kampen Enterprise Portfolio Variable Annuity Portfolios, Massachusetts business trust, Affiliate of The Company Smith Barney Small Cap Growth Opportunities Portfolio Not all funds may be available in all states or to all contract owners. -25- NOTES TO FINANCIAL STATEMENTS - CONTINUED 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following is a summary of significant accounting policies consistently followed by Fund BD II 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. Income from dividends and realized gain (loss) distributions, are recorded on the ex-distribution date FEDERAL INCOME TAXES. The operations of Fund BD II form a part of the total operations of Travelers Life and are not taxed separately. Travelers Life is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended (the "Code"). Under existing federal income tax law, no taxes are payable on the investment income of Fund BD II. Fund BD II is not taxed as a "regulated investment company" under Subchapter M of the Code. FINANCIAL HIGHLIGHTS. In 2001, Fund BD II adopted the financial highlights disclosure recommended by the American Institute of Certified Public Accountants Audit Guide ("AICPA Guide") for Investment Companies. The AICPA Guide allows for the prospective application of this disclosure, which will ultimately display a five year period. It is comprised of the units, unit values, investment income ratio, expense ratios and total returns for each sub-account. Since each sub-account offers multiple contract charges, certain information is provided in the form of a range. The range information may reflect varying time periods if assets did not exist with all contract charge options of the sub-account for the entire year. OTHER. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 $38,190,368 and $180,774,383, respectively, for the year ended December 31, 2004. Realized gains and losses from investment transactions are reported on an average cost basis. The cost of investments in eligible funds was $642,967,004 at December 31, 2004. Gross unrealized appreciation for all investments at December 31, 2004 was $37,045,826. Gross unrealized depreciation for all investments at December 31, 2004 was $64,173,140. 3. CONTRACT CHARGES The asset-based charges listed below are deducted, as appropriate, each business day and are assessed through the calculation of accumulation and annuity unit values; - Mortality and Expense Risks assumed by The Company (M&E) - Administrative fees paid for administrative expenses (ADM) Below is a table displaying separate account charges with their associated products offered in this Separate Account for each funding option. The table displays Standard (S), and Enhanced (E) Death Benefit (Dth Ben) designations.
- ------------------------------------------------------------------------------------------------------------------------------------ SEPARATE ACCOUNT BD II - ------------------------------------------------------------------------------------------------------------------------------------ Asset-based Charges -------------------------------------- Separate Account Charge (1) Dth Total (as identified in Note 5) Ben Product M&E ADM Charge - ------------------------------------------------------------------------------------------------------------------------------------ Separate Account Charge 1.17% S Vintage Annuity 1.02% 0.15% 1.17% Separate Account Charge 1.45% E Vintage Annuity 1.30% 0.15% 1.45% - ------------------------------------------------------------------------------------------------------------------------------------ (1) Certain accumulation and annuity unit values displayed in Note 5 may not be available through certain sub-accounts. If a unit value has no assets and units across all sub-accounts within the Separate Account, it will not be displayed in Note 5. - ------------------------------------------------------------------------------------------------------------------------------------
-26- NOTES TO FINANCIAL STATEMENTS - CONTINUED 3. CONTRACT CHARGES (CONTINUED) For contracts in the accumulation phase with a contract value less than $40,000, an annual charge of $30 (prorated for partial periods) is assessed through the redemption of units and paid to The Company to cover administrative charges. No sales charges are deducted from participant purchase payments when they are received. However, a withdrawal charge will apply if Purchase Payments are withdrawn before they have been in the contract for seven years. The maximum charge, applied to the amount withdrawn, is 6% decreasing to 0% in years seven and later and assessed through the redemption of units. Withdrawal charges for BD II include $199,393 and $534,578 for the years ended December 31, 2004 and 2003, respectively. These changes are included in contract surrenders on the Statement of Changes in Net Assets. For a full explanation of product charges and associated product features and benefits please refer to your product prospectus. 4. SUBSEQUENT EVENT NOTE On January 31, 2005, Citigroup Inc. ("Citigroup") announced that it had agreed to sell The Travelers Insurance Company ("TIC"), The Travelers Life and Annuity Company, Citicorp Life Insurance Company, First Citicorp Life Insurance Company, Citicorp International Life Insurance Company, The Travelers Life and Annuity Reinsurance Company, and certain other domestic and international insurance businesses (the "Life Insurance and Annuity Businesses") to MetLife, Inc. ("MetLife") pursuant to an Acquisition Agreement (the "Agreement"). The transaction is subject to certain regulatory approvals, as well as other customary conditions to closing. Citigroup currently anticipates that the intended sale would be closed this summer. The transaction contemplates that TIC's Primerica Life segment and certain other assets will remain with Citigroup. Accordingly, prior to the closing, TIC will distribute to its parent company by way of dividend (i) all of the outstanding shares of common stock of the Company's 100% owned subsidiary, Primerica Life Insurance Company ("Primerica Life"), (ii) all shares of Citigroup's Series YYY and Series YY preferred stock held by the Company and (iii) certain other assets, including certain assets and liabilities related to the Company's share of the non-qualified pension plan, and post retirement benefits related to inactive employees of the former Travelers Insurance entities, assumed during Citigroup's 2002 spin-off of the Travelers Property Casualty operations (collectively, the "Dispositions"). The Dispositions require certain regulatory approvals. Subject to closing adjustments described in the Agreement, the contemplated sale price would be $11.5 billion. In connection with the consummation of the sale of the Life Insurance and Annuity Business, Citigroup and MetLife will also enter into multi-year distribution agreements. -27- NOTES TO FINANCIAL STATEMENTS - CONTINUED 5. NET CONTRACT OWNERS' EQUITY
DECEMBER 31, 2004 ----------------------------------------------------------------------------- ACCUMULATION ANNUITY UNIT ACCUMULATION ANNUITY UNITS UNITS VALUE NET ASSETS NET ASSETS ---------------- -------------- ---------- -------------- --------------- AIM Variable Insurance Funds, Inc. AIM V.I. Premier Equity Fund - Series I Separate Account Charges 1.17% ..................... 222,287 -- $ 0.790 $ 175,515 $ -- Separate Account Charges 1.45% ..................... 5,619 -- 0.782 4,391 -- AllianceBernstein Variable Product Series Fund, Inc. AllianceBernstein Premier Growth Portfolio - Class B Separate Account Charges 1.17% ..................... 552,089 -- 0.764 422,043 -- Separate Account Charges 1.45% ..................... -- -- 0.757 -- -- American Funds Insurance Series Global Growth Fund - Class 2 Shares Separate Account Charges 1.17% ..................... 3,073,714 -- 1.108 3,405,184 -- Separate Account Charges 1.45% ..................... 521,068 -- 1.097 571,361 -- Growth Fund - Class 2 Shares Separate Account Charges 1.17% ..................... 7,585,044 -- 0.957 7,255,483 -- Separate Account Charges 1.45% ..................... 2,269,374 -- 0.947 2,148,542 -- Growth-Income Fund - Class 2 Shares Separate Account Charges 1.17% ..................... 9,204,918 -- 1.115 10,259,682 -- Separate Account Charges 1.45% ..................... 2,183,878 -- 1.103 2,409,244 -- Dreyfus Variable Investment Fund Dreyfus VIF Developing Leaders Portfolio - Initial Shares Separate Account Charges 1.17% ..................... 4,881,409 -- 1.235 6,026,443 -- Separate Account Charges 1.45% ..................... 919,115 -- 1.212 1,113,757 -- Greenwich Street Series Fund Equity Index Portfolio - Class II Shares Separate Account Charges 1.17% ..................... 4,122,866 -- 0.892 3,676,813 -- Separate Account Charges 1.45% ..................... 301,119 -- 0.878 264,314 -- Fundamental Value Portfolio Separate Account Charges 1.17% ..................... 18,731,408 -- 2.847 53,330,800 -- Separate Account Charges 1.45% ..................... 5,043,588 16,334 2.767 13,958,919 45,207 Salomon Brothers Variable Series Funds Inc. Investors Fund - Class I Separate Account Charges 1.17% ..................... 4,471,871 3,975 1.310 5,859,617 5,208 Separate Account Charges 1.45% ..................... 964,242 -- 1.286 1,240,150 -- Total Return Fund - Class I Separate Account Charges 1.17% ..................... 1,229,680 -- 1.178 1,448,069 -- Separate Account Charges 1.45% ..................... 393,577 -- 1.156 454,914 -- Smith Barney Allocation Series Inc. Select Balanced Portfolio Separate Account Charges 1.17% ..................... 4,780,579 -- 1.485 7,099,016 -- Separate Account Charges 1.45% ..................... 1,499,876 -- 1.453 2,179,048 -- Select Growth Portfolio Separate Account Charges 1.17% ..................... 2,108,022 -- 1.331 2,806,211 -- Separate Account Charges 1.45% ..................... 1,155,771 -- 1.302 1,505,303 -- Select High Growth Portfolio Separate Account Charges 1.17% ..................... 641,406 -- 1.384 887,883 -- Separate Account Charges 1.45% ..................... 113,957 -- 1.354 154,336 --
-28- NOTES TO FINANCIAL STATEMENTS - CONTINUED 5. NET CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 2004 ----------------------------------------------------------------------------- ACCUMULATION ANNUITY UNIT ACCUMULATION ANNUITY UNITS UNITS VALUE NET ASSETS NET ASSETS ---------------- -------------- ---------- -------------- --------------- Smith Barney Investment Series Smith Barney Dividend Strategy Portfolio Separate Account Charges 1.17% ..................... 298,839 -- $ 0.816 $ 243,968 $ -- Separate Account Charges 1.45% ..................... 87,460 -- 0.808 70,672 -- Smith Barney Premier Selections All Cap Growth Portfolio Separate Account Charges 1.17% ..................... 1,422,862 -- 0.875 1,244,880 -- Separate Account Charges 1.45% ..................... 378,955 -- 0.866 328,162 -- The Travelers Series Trust Convertible Securities Portfolio Separate Account Charges 1.17% ..................... 2,910,835 -- 1.543 4,492,034 -- Separate Account Charges 1.45% ..................... 325,676 -- 1.515 493,309 -- Disciplined Mid Cap Stock Portfolio Separate Account Charges 1.17% ..................... 5,322,574 -- 1.682 8,950,135 -- Separate Account Charges 1.45% ..................... 939,042 -- 1.651 1,549,953 -- Merrill Lynch Large Cap Core Portfolio Separate Account Charges 1.17% ..................... 3,507,945 -- 0.920 3,226,544 -- Separate Account Charges 1.45% ..................... 901,191 -- 0.903 813,572 -- MFS Emerging Growth Portfolio Separate Account Charges 1.17% ..................... 14,148,258 -- 1.285 18,187,217 -- Separate Account Charges 1.45% ..................... 3,486,788 -- 1.256 4,380,793 -- Travelers Series Fund Inc. AIM Capital Appreciation Portfolio Separate Account Charges 1.17% ..................... 23,560,997 -- 1.333 31,414,457 -- Separate Account Charges 1.45% ..................... 5,178,947 -- 1.299 6,728,999 -- MFS Total Return Portfolio Separate Account Charges 1.17% ..................... 28,711,124 1,849 2.498 71,722,917 4,618 Separate Account Charges 1.45% ..................... 5,963,254 16,395 2.426 14,464,161 39,768 Pioneer Strategic Income Portfolio Separate Account Charges 1.17% ..................... 12,908,237 -- 1.822 23,514,395 -- Separate Account Charges 1.45% ..................... 2,754,034 21,553 1.769 4,871,124 38,121 Salomon Brothers Strategic Total Return Bond Portfolio Separate Account Charges 1.17% ..................... 3,246,313 -- 1.827 5,932,153 -- Separate Account Charges 1.45% ..................... 644,955 -- 1.774 1,144,321 -- Smith Barney High Income Portfolio Separate Account Charges 1.17% ..................... 10,157,755 -- 1.675 17,013,434 -- Separate Account Charges 1.45% ..................... 2,046,500 19,852 1.626 3,328,063 32,284 Smith Barney International All Cap Growth Portfolio Separate Account Charges 1.17% ..................... 16,816,603 -- 1.195 20,099,628 -- Separate Account Charges 1.45% ..................... 2,998,141 23,480 1.161 3,479,277 27,248 Smith Barney Large Cap Value Portfolio Separate Account Charges 1.17% ..................... 18,633,250 1,995 2.118 39,460,945 4,224 Separate Account Charges 1.45% ..................... 3,746,811 14,853 2.056 7,704,190 30,542 Smith Barney Large Capitalization Growth Portfolio Separate Account Charges 1.17% ..................... 24,240,945 3,811 1.368 33,157,661 5,213 Separate Account Charges 1.45% ..................... 2,809,530 -- 1.343 3,772,023 -- Smith Barney Money Market Portfolio Separate Account Charges 1.17% ..................... 12,688,242 -- 1.308 16,591,133 -- Separate Account Charges 1.45% ..................... 2,442,193 -- 1.270 3,100,529 --
-29- NOTES TO FINANCIAL STATEMENTS - CONTINUED 5. NET CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 2004 ----------------------------------------------------------------------------- ACCUMULATION ANNUITY UNIT ACCUMULATION ANNUITY UNITS UNITS VALUE NET ASSETS NET ASSETS ---------------- -------------- ---------- -------------- --------------- Travelers Series Fund Inc. (continued) Strategic Equity Portfolio Separate Account Charges 1.17% ..................... 28,484,090 10,450 $ 2.461 $ 70,104,162 $ 25,720 Separate Account Charges 1.45% ..................... 5,922,163 -- 2.390 14,151,652 -- Travelers Managed Income Portfolio Separate Account Charges 1.17% ..................... 8,132,897 -- 1.616 13,143,885 -- Separate Account Charges 1.45% ..................... 2,050,950 21,512 1.569 3,218,475 33,758 Van Kampen Enterprise Portfolio Separate Account Charges 1.17% ..................... 14,731,756 -- 1.891 27,864,146 -- Separate Account Charges 1.45% ..................... 3,061,838 12,932 1.836 5,622,901 23,750 Variable Annuity Portfolios Smith Barney Small Cap Growth Opportunities Portfolio Separate Account Charges 1.17% ..................... 1,045,618 -- 1.115 1,166,149 -- Separate Account Charges 1.45% ..................... 118,451 -- 1.104 130,752 -- ------------- ----------- Net Contract Owners' Equity $ 615,539,809 $ 315,661 ============= ===========
-30- NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. STATEMENT OF INVESTMENTS FOR THE YEAR ENDED DECEMBER 31, 2004 --------------------------------------------------------- INVESTMENTS NO. OF MARKET COST OF PROCEEDS SHARES VALUE PURCHASES FROM SALES ------------ ------------ ----------- ------------ AIM VARIABLE INSURANCE FUNDS, INC. (0.0%) AIM V.I. Premier Equity Fund - Series I Total (Cost $176,903) 8,446 $ 179,906 $ 13,653 $ 259,005 ------------ ------------ ------------ ------------ ALLIANCEBERNSTEIN VARIABLE PRODUCT SERIES FUND, INC. (0.1%) AllianceBernstein Premier Growth Portfolio - Class B Total (Cost $371,436) 18,262 422,043 135,181 130,216 ------------ ------------ ------------ ------------ AMERICAN FUNDS INSURANCE SERIES (4.2%) Global Growth Fund - Class 2 Shares (Cost $3,245,409) 230,792 3,976,545 2,174,604 1,359,341 Growth Fund - Class 2 Shares (Cost $7,565,239) 184,032 9,404,025 2,191,955 2,226,808 Growth-Income Fund - Class 2 Shares (Cost $10,427,435) 345,768 12,668,926 2,739,651 3,666,172 ------------ ------------ ------------ ------------ Total (Cost $21,238,083) 760,592 26,049,496 7,106,210 7,252,321 ------------ ------------ ------------ ------------ DREYFUS VARIABLE INVESTMENT FUND (1.2%) Dreyfus VIF Developing Leaders Portfolio - Initial Shares Total (Cost $7,445,979) 171,846 7,140,200 253,849 2,262,970 ------------ ------------ ------------ ------------ GREENWICH STREET SERIES FUND (11.6%) Equity Index Portfolio - Class II Shares (Cost $3,971,232) 133,507 3,941,127 274,745 985,050 Fundamental Value Portfolio (Cost $56,563,953) 3,191,229 67,334,926 3,224,247 15,443,986 ------------ ------------ ------------ ------------ Total (Cost $60,535,185) 3,324,736 71,276,053 3,498,992 16,429,036 ------------ ------------ ------------ ------------ SALOMON BROTHERS VARIABLE SERIES FUNDS INC. (1.5%) Investors Fund - Class I (Cost $6,404,052) 514,480 7,104,975 327,958 2,032,153 Total Return Fund - Class I (Cost $1,734,051) 168,854 1,902,983 181,771 550,640 ------------ ------------ ------------ ------------ Total (Cost $8,138,103) 683,334 9,007,958 509,729 2,582,793 ------------ ------------ ------------ ------------ SMITH BARNEY ALLOCATION SERIES INC. (2.4%) Select Balanced Portfolio (Cost $8,880,093) 780,982 9,278,064 599,677 2,476,261 Select Growth Portfolio (Cost $4,457,752) 414,569 4,311,514 501,381 1,550,676 Select High Growth Portfolio (Cost $964,970) 84,118 1,042,219 8,969 589,079 ------------ ------------ ------------ ------------ Total (Cost $14,302,815) 1,279,669 14,631,797 1,110,027 4,616,016 ------------ ------------ ------------ ------------ SMITH BARNEY INVESTMENT SERIES (0.3%) Smith Barney Dividend Strategy Portfolio (Cost $283,525) 35,432 314,640 122,406 251,036 Smith Barney Premier Selections All Cap Growth Portfolio (Cost $1,388,562) 129,682 1,573,042 359,025 368,753 ------------ ------------ ------------ ------------ Total (Cost $1,672,087) 165,114 1,887,682 481,431 619,789 ------------ ------------ ------------ ------------ THE TRAVELERS SERIES TRUST (6.8%) Convertible Securities Portfolio (Cost $4,626,312) 403,672 4,985,343 471,788 1,536,249 Disciplined Mid Cap Stock Portfolio (Cost $8,280,726) 531,381 10,500,088 1,102,184 3,204,992 Merrill Lynch Large Cap Core Portfolio (Cost $4,714,759) 446,422 4,040,116 165,936 706,203 MFS Emerging Growth Portfolio (Cost $31,790,688) 2,141,177 22,568,010 123,877 5,983,632 ------------ ------------ ------------ ------------ Total (Cost $49,412,485) 3,522,652 42,093,557 1,863,785 11,431,076 ------------ ------------ ------------ ------------ TRAVELERS SERIES FUND INC. (71.7%) AIM Capital Appreciation Portfolio (Cost $43,310,096) 3,564,809 38,143,456 107,376 9,218,768 MFS Total Return Portfolio (Cost $78,556,820) 5,031,007 86,231,464 5,026,235 22,298,941 Pioneer Strategic Income Portfolio (Cost $32,094,903) 3,030,239 28,423,640 2,034,538 9,078,982 Salomon Brothers Strategic Total Return Bond Portfolio (Cost $7,081,030) 661,353 7,076,474 727,718 3,157,415 Smith Barney High Income Portfolio (Cost $25,588,037) 2,698,514 20,373,781 2,139,841 7,701,731 Smith Barney International All Cap Growth Portfolio (Cost $17,210,710) 1,820,058 23,606,153 1,196,127 5,369,689 Smith Barney Large Cap Value Portfolio (Cost $47,319,350) 2,616,403 47,199,901 1,487,706 11,218,443
-31- NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. STATEMENT OF INVESTMENTS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2004 ----------------------------------------------------------- INVESTMENTS NO. OF MARKET COST OF PROCEEDS SHARES VALUE PURCHASES FROM SALES ------------ ------------ ----------- ------------ TRAVELERS SERIES FUND INC. (CONTINUED) Smith Barney Large Capitalization Growth Portfolio (Cost $33,958,550) 2,570,278 $ 36,934,897 $ 1,051,391 $ 9,222,212 Smith Barney Money Market Portfolio (Cost $19,675,882) 19,675,882 19,675,882 5,738,245 22,337,953 Strategic Equity Portfolio (Cost $103,650,985) 4,805,105 84,281,534 1,156,866 19,864,316 Travelers Managed Income Portfolio (Cost $17,034,015) 1,452,269 16,396,118 1,482,017 6,441,438 Van Kampen Enterprise Portfolio (Cost $53,120,982) 2,835,093 33,510,797 525,752 8,532,233 ------------ ------------- ------------ ------------- Total (Cost $478,601,360) 50,761,010 441,854,097 22,673,812 134,442,121 ------------ ------------- ------------ ------------- VARIABLE ANNUITY PORTFOLIOS (0.2%) Smith Barney Small Cap Growth Opportunities Portfolio Total (Cost $1,072,568) 113,763 1,296,901 543,699 749,040 ------------ ------------- ------------ ------------- TOTAL INVESTMENTS (100%) (COST $642,967,004) $ 615,839,690 $ 38,190,368 $ 180,774,383 ============= ============ =============
-32- NOTES TO FINANCIAL STATEMENTS - CONTINUED 7. FINANCIAL HIGHLIGHTS
EXPENSE TOTAL YEAR UNIT VALUE NET INVESTMENT(1) RATIO(2) RETURN(3) ENDED UNITS LOWEST TO ASSETS INCOME LOWEST TO LOWEST TO DEC 31 (000S) HIGHEST ($) ($000S) RATIO (%) HIGHEST (%) HIGHEST (%) -------- -------- --------------- --------- ------------ -------------- ---------------- AIM VARIABLE INSURANCE FUNDS, INC. AIM V.I. Premier Equity Fund - Series I 2004 228 0.782 - 0.790 180 0.28 1.17 - 1.45 4.27 - 4.64 2003 556 0.750 - 0.755 420 0.31 1.17 - 1.45 23.36 - 23.57 2002 453 0.611 277 0.23 1.17 (31.04) 2001 787 0.885 - 0.886 697 0.14 1.17 - 1.45 (10.95) - 4.49 ALLIANCEBERNSTEIN VARIABLE PRODUCT SERIES FUND, INC. AllianceBernstein Premier Growth Portfolio - Class B 2004 552 0.757 - 0.764 422 -- 1.17 - 1.45 6.77 - 7.00 2003 544 0.709 - 0.714 389 -- 1.17 - 1.45 21.61 - 22.05 2002 600 0.583 - 0.585 351 -- 1.17 - 1.45 (31.81) - (31.74) 2001 1,834 0.855 - 0.857 1,570 -- 1.17 - 1.45 (16.55) - (7.17) AMERICAN FUNDS INSURANCE SERIES Global Growth Fund - Class 2 Shares 2004 3,595 1.097 - 1.108 3,977 0.45 1.17 - 1.45 11.94 - 12.15 2003 2,808 0.980 - 0.988 2,770 0.41 1.17 - 1.45 33.33 - 33.69 2002 1,858 0.735 - 0.739 1,371 1.12 1.17 - 1.45 (15.90) - (15.64) 2001 381 0.874 - 0.876 333 0.20 1.17 - 1.45 (11.43) - (6.32) Growth Fund - Class 2 Shares 2004 9,854 0.947 - 0.957 9,404 0.18 1.17 - 1.45 10.89 - 11.28 2003 9,808 0.854 - 0.860 8,425 0.13 1.17 - 1.45 34.91 - 35.22 2002 6,515 0.633 - 0.636 4,141 0.04 1.17 - 1.45 (25.53) - (25.35) 2001 2,214 0.850 - 0.852 1,887 0.29 1.17 - 1.45 (15.59) - (15.39) Growth-Income Fund - Class 2 Shares 2004 11,389 1.103 - 1.115 12,669 0.86 1.17 - 1.45 8.78 - 9.10 2003 12,242 1.014 - 1.022 12,494 1.11 1.17 - 1.45 30.50 - 30.86 2002 9,691 0.777 - 0.781 7,559 1.22 1.17 - 1.45 (19.48) - (19.23) 2001 4,901 0.965 - 0.967 4,739 0.77 1.17 - 1.45 (3.11) - (2.33) DREYFUS VARIABLE INVESTMENT FUND Dreyfus VIF Developing Leaders Portfolio - Initial Shares 2004 5,801 1.212 - 1.235 7,140 0.18 1.17 - 1.45 9.78 - 10.07 2003 7,459 1.104 - 1.122 8,350 0.03 1.17 - 1.45 29.73 - 30.16 2002 8,522 0.851 - 0.862 7,334 0.04 1.17 - 1.45 (20.24) - (20.04) 2001 9,107 1.067 - 1.078 9,811 0.44 1.17 - 1.45 (7.46) - (7.23) GREENWICH STREET SERIES FUND Equity Index Portfolio - Class II Shares 2004 4,424 0.878 - 0.892 3,941 1.26 1.17 - 1.45 8.66 - 9.05 2003 5,292 0.808 - 0.818 4,328 1.05 1.17 - 1.45 25.86 - 26.23 2002 5,391 0.642 - 0.648 3,492 1.77 1.17 - 1.45 (23.48) - (23.31) 2001 5,389 0.839 - 0.845 4,553 0.67 1.17 - 1.45 (13.59) - (13.42) Fundamental Value Portfolio 2004 23,791 2.767 - 2.847 67,335 0.61 1.17 - 1.45 6.63 - 6.95 2003 28,725 2.595 - 2.662 76,079 0.58 1.17 - 1.45 36.65 - 37.08 2002 35,154 1.899 - 1.942 67,998 0.96 1.17 - 1.45 (22.43) - (22.23) 2001 43,455 2.448 - 2.497 108,154 0.68 1.17 - 1.45 (6.64) - (6.37) SALOMON BROTHERS VARIABLE SERIES FUNDS INC. Investors Fund - Class I 2004 5,440 1.286 - 1.310 7,105 1.32 1.17 - 1.45 8.80 - 9.08 2003 6,826 1.182 - 1.201 8,179 1.31 1.17 - 1.45 30.46 - 30.83 2002 8,316 0.906 - 0.918 7,623 1.03 1.17 - 1.45 (24.18) - (23.94) 2001 9,972 1.195 - 1.207 12,025 0.99 1.17 - 1.45 (5.53) - (5.33) Total Return Fund - Class I 2004 1,623 1.156 - 1.178 1,903 1.72 1.17 - 1.45 7.24 - 7.48 2003 1,993 1.078 - 1.096 2,176 1.55 1.17 - 1.45 14.19 - 14.64 2002 2,122 0.944 - 0.956 2,024 1.48 1.17 - 1.45 (8.17) - (7.99) 2001 2,017 1.028 - 1.039 2,093 2.04 1.17 - 1.45 (2.28) - (1.98)
-33- NOTES TO FINANCIAL STATEMENTS - CONTINUED 7. FINANCIAL HIGHLIGHTS (CONTINUED)
EXPENSE TOTAL YEAR UNIT VALUE NET INVESTMENT(1) RATIO(2) RETURN(3) ENDED UNITS LOWEST TO ASSETS INCOME LOWEST TO LOWEST TO DEC 31 (000S) HIGHEST ($) ($000S) RATIO (%) HIGHEST (%) HIGHEST (%) -------- -------- --------------- --------- ------------ -------------- ---------------- SMITH BARNEY ALLOCATION SERIES INC. Select Balanced Portfolio 2004 6,280 1.453 - 1.485 9,278 2.18 1.17 - 1.45 6.06 - 6.38 2003 7,673 1.370 - 1.396 10,669 2.48 1.17 - 1.45 18.61 - 18.91 2002 9,000 1.155 - 1.174 10,530 6.47 1.17 - 1.45 (7.82) - (7.56) 2001 10,859 1.253 - 1.270 13,756 3.70 1.17 - 1.45 (2.87) - (2.53) Select Growth Portfolio 2004 3,264 1.302 - 1.331 4,312 1.44 1.17 - 1.45 7.07 - 7.43 2003 4,109 1.216 - 1.239 5,061 1.59 1.17 - 1.45 28.00 - 28.39 2002 4,791 0.950 - 0.965 4,605 10.56 1.17 - 1.45 (19.22) - (19.04) 2001 5,502 1.176 - 1.192 6,537 -- 1.17 - 1.45 (11.11) - (10.91) Select High Growth Portfolio 2004 755 1.354 - 1.384 1,042 0.28 1.17 - 1.45 9.02 - 9.32 2003 1,181 1.242 - 1.266 1,492 0.45 1.17 - 1.45 34.85 - 35.26 2002 2,252 0.921 - 0.936 2,106 1.07 1.17 - 1.45 (24.82) - (24.64) 2001 2,922 1.225 - 1.242 3,622 5.05 1.17 - 1.45 (13.37) - (13.09) SMITH BARNEY INVESTMENT SERIES Smith Barney Dividend Strategy Portfolio 2004 386 0.808 - 0.816 315 0.75 1.17 - 1.45 1.89 - 2.13 2003 543 0.793 - 0.799 434 0.66 1.17 - 1.45 21.63 - 21.98 2002 134 0.652 - 0.655 88 0.77 1.17 - 1.45 (26.99) - (26.82) 2001 60 0.893 - 0.895 54 -- 1.17 - 1.45 (11.65) - (3.46) Smith Barney Premier Selections All Cap Growth Portfolio 2004 1,802 0.866 - 0.875 1,573 -- 1.17 - 1.45 1.41 - 1.74 2003 1,794 0.854 - 0.860 1,541 -- 1.17 - 1.45 32.40 - 32.72 2002 1,451 0.645 - 0.648 939 0.07 1.17 - 1.45 (27.85) - (27.68) 2001 246 0.894 - 0.896 220 -- 1.17 - 1.45 (10.13) - (4.79) THE TRAVELERS SERIES TRUST Convertible Securities Portfolio 2004 3,237 1.515 - 1.543 4,985 1.92 1.17 - 1.45 4.77 - 5.04 2003 3,979 1.446 - 1.469 5,836 3.21 1.17 - 1.45 24.44 - 24.81 2002 3,254 1.162 - 1.177 3,824 7.24 1.17 - 1.45 (8.29) - (8.05) 2001 3,523 1.267 - 1.280 4,508 1.85 1.17 - 1.45 (2.31) - (1.99) Disciplined Mid Cap Stock Portfolio 2004 6,262 1.651 - 1.682 10,500 0.26 1.17 - 1.45 14.81 - 15.13 2003 7,781 1.438 - 1.461 11,344 0.29 1.17 - 1.45 31.81 - 32.22 2002 8,545 1.091 - 1.105 9,429 0.55 1.17 - 1.45 (15.56) - (15.33) 2001 8,321 1.292 - 1.305 10,848 0.29 1.17 - 1.45 (5.42) - (5.16) Merrill Lynch Large Cap Core Portfolio 2004 4,409 0.903 - 0.920 4,040 0.54 1.17 - 1.45 14.30 - 14.57 2003 5,029 0.790 - 0.803 4,026 0.63 1.17 - 1.45 19.34 - 19.67 2002 6,348 0.662 - 0.671 4,246 0.51 1.17 - 1.45 (26.20) - (25.94) 2001 8,801 0.897 - 0.906 7,962 0.04 1.17 - 1.45 (23.59) - (23.42) MFS Emerging Growth Portfolio 2004 17,635 1.256 - 1.285 22,568 -- 1.17 - 1.45 11.05 - 11.35 2003 22,395 1.131 - 1.154 25,743 -- 1.17 - 1.45 27.36 - 27.65 2002 27,649 0.888 - 0.904 24,917 -- 1.17 - 1.45 (35.23) - (35.01) 2001 37,551 1.371 - 1.391 52,101 -- 1.17 - 1.45 (37.11) - (36.92) TRAVELERS SERIES FUND INC. AIM Capital Appreciation Portfolio 2004 28,740 1.299 - 1.333 38,143 0.13 1.17 - 1.45 4.93 - 5.21 2003 35,645 1.238 - 1.267 44,974 -- 1.17 - 1.45 27.50 - 27.85 2002 44,035 0.971 - 0.991 43,494 -- 1.17 - 1.45 (24.96) - (24.75) 2001 58,002 1.294 - 1.317 76,194 -- 1.17 - 1.45 (24.90) - (24.66)
-34- NOTES TO FINANCIAL STATEMENTS - CONTINUED 7. FINANCIAL HIGHLIGHTS (CONTINUED)
EXPENSE TOTAL YEAR UNIT VALUE NET INVESTMENT(1) RATIO(2) RETURN(3) ENDED UNITS LOWEST TO ASSETS INCOME LOWEST TO LOWEST TO DEC 31 (000S) HIGHEST ($) ($000S) RATIO (%) HIGHEST (%) HIGHEST (%) -------- -------- --------------- --------- ------------ -------------- ---------------- TRAVELERS SERIES FUND INC. (CONTINUED) MFS Total Return Portfolio 2004 34,693 2.426 - 2.498 86,231 2.46 1.17 - 1.45 9.87 - 10.14 2003 43,617 2.208 - 2.268 98,463 2.10 1.17 - 1.45 14.88 - 15.19 2002 52,805 1.922 - 1.969 103,552 5.58 1.17 - 1.45 (6.65) - (6.37) 2001 61,258 2.059 - 2.103 128,388 2.76 1.17 - 1.45 (1.44) - (1.13) Pioneer Strategic Income Portfolio 2004 15,684 1.769 - 1.822 28,424 6.10 1.17 - 1.45 9.33 - 9.69 2003 20,709 1.618 - 1.661 34,258 8.29 1.17 - 1.45 17.84 - 18.14 2002 24,944 1.373 - 1.406 34,936 22.32 1.17 - 1.45 4.33 - 4.61 2001 28,750 1.316 - 1.344 38,496 7.80 1.17 - 1.45 2.73 - 3.07 Salomon Brothers Strategic Total Return Bond Portfolio 2004 3,891 1.774 - 1.827 7,076 5.10 1.17 - 1.45 4.72 - 5.06 2003 5,463 1.694 - 1.739 9,463 5.08 1.17 - 1.45 11.74 - 11.98 2002 6,995 1.516 - 1.553 10,826 12.12 1.17 - 1.45 6.76 - 7.10 2001 5,701 1.420 - 1.450 8,246 6.20 1.17 - 1.45 4.95 - 5.22 Smith Barney High Income Portfolio 2004 12,224 1.626 - 1.675 20,374 7.24 1.17 - 1.45 8.84 - 9.19 2003 16,613 1.494 - 1.534 25,383 6.91 1.17 - 1.45 25.65 - 26.05 2002 19,770 1.189 - 1.217 23,989 22.09 1.17 - 1.45 (4.57) - (4.40) 2001 25,146 1.246 - 1.273 31,930 11.74 1.17 - 1.45 (5.18) - (4.86) Smith Barney International All Cap Growth Portfolio 2004 19,838 1.161 - 1.195 23,606 0.89 1.17 - 1.45 16.22 - 16.47 2003 23,708 0.999 - 1.026 24,223 0.94 1.17 - 1.45 25.66 - 26.04 2002 35,190 0.795 - 0.814 28,580 0.88 1.17 - 1.45 (26.80) - (26.60) 2001 42,407 1.086 - 1.109 46,910 -- 1.17 - 1.45 (32.17) - (31.96) Smith Barney Large Cap Value Portfolio 2004 22,397 2.056 - 2.118 47,200 1.75 1.17 - 1.45 9.01 - 9.34 2003 27,443 1.886 - 1.937 52,937 1.62 1.17 - 1.45 25.82 - 26.11 2002 33,751 1.499 - 1.536 51,646 3.53 1.17 - 1.45 (26.52) - (26.26) 2001 43,357 2.040 - 2.083 90,046 1.37 1.17 - 1.45 (9.49) - (9.28) Smith Barney Large Capitalization Growth Portfolio 2004 27,054 1.343 - 1.368 36,935 0.33 1.17 - 1.45 (1.03) - (0.80) 2003 32,937 1.357 - 1.379 45,351 0.02 1.17 - 1.45 45.44 - 45.93 2002 35,908 0.933 - 0.945 33,913 0.31 1.17 - 1.45 (25.89) - (25.71) 2001 45,385 1.259 - 1.272 57,662 -- 1.17 - 1.45 (13.77) - (13.53) Smith Barney Money Market Portfolio 2004 15,130 1.270 - 1.308 19,692 0.83 1.17 - 1.45 (0.55) - (0.23) 2003 27,759 1.277 - 1.311 36,278 0.68 1.17 - 1.45 (0.78) - (0.53) 2002 49,870 1.287 - 1.318 65,591 1.26 1.17 - 1.45 (0.16) - 0.08 2001 54,251 1.289 - 1.317 71,305 3.50 1.17 - 1.45 2.14 - 2.49 Strategic Equity Portfolio 2004 34,417 2.390 - 2.461 84,282 1.31 1.17 - 1.45 8.64 - 8.94 2003 42,706 2.200 - 2.259 96,052 -- 1.17 - 1.45 30.64 - 31.03 2002 52,312 1.684 - 1.724 89,867 0.52 1.17 - 1.45 (34.53) - (34.37) 2001 72,310 2.572 - 2.627 189,341 0.20 1.17 - 1.45 (14.61) - (14.37) Travelers Managed Income Portfolio 2004 10,205 1.569 - 1.616 16,396 4.07 1.17 - 1.45 1.36 - 1.64 2003 13,649 1.548 - 1.590 21,597 3.47 1.17 - 1.45 6.91 - 7.22 2002 18,488 1.448 - 1.483 27,324 10.83 1.17 - 1.45 0.70 - 0.95 2001 21,859 1.438 - 1.469 32,009 4.01 1.17 - 1.45 5.19 - 5.53 Van Kampen Enterprise Portfolio 2004 17,807 1.836 - 1.891 33,511 0.50 1.17 - 1.45 2.34 - 2.66 2003 22,110 1.794 - 1.842 40,557 0.14 1.17 - 1.45 23.81 - 24.12 2002 27,062 1.449 - 1.484 40,003 0.69 1.17 - 1.45 (30.37) - (30.16) 2001 35,421 2.081 - 2.125 75,043 -- 1.17 - 1.45 (22.41) - (22.19)
-35- NOTES TO FINANCIAL STATEMENTS - CONTINUED 7. FINANCIAL HIGHLIGHTS (CONTINUED)
EXPENSE TOTAL YEAR UNIT VALUE NET INVESTMENT(1) RATIO(2) RETURN(3) ENDED UNITS LOWEST TO ASSETS INCOME LOWEST TO LOWEST TO DEC 31 (000S) HIGHEST ($) ($000S) RATIO (%) HIGHEST (%) HIGHEST (%) -------- -------- --------------- --------- ------------ -------------- ---------------- VARIABLE ANNUITY PORTFOLIOS Smith Barney Small Cap Growth Opportunities Portfolio 2004 1,164 1.104 - 1.115 1,297 0.07 1.17 - 1.45 13.93 - 14.24 2003 1,392 0.969 - 0.976 1,359 -- 1.17 - 1.45 40.03 - 40.23 2002 611 0.692 - 0.696 425 -- 1.17 - 1.45 (26.77) - (26.50) 2001 480 0.945 - 0.947 454 -- 1.17 - 1.45 (2.17) - 20.38
(1) These amounts represent the dividends, excluding distributions of capital gains, received by the subaccount from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that are assessed against contract owner accounts either through reductions in the unit values or the redemption of units. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccount invests. (2) These amounts represent the annualized contract expenses of the separate account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying fund have been excluded. (3) These amounts represent the total return for the period indicated, including changes in the value of the underlying fund, and expenses assessed through the reduction of unit values. These ratios do not include any expenses assessed through the redemption of units. The total return is calculated for each period indicated or from the effective date through the end of the reporting period. As the total return is presented as a range of minimum to maximum values, based on the product grouping representing the minimum and maximum expense ratio amounts, some individual contract total returns are not within the ranges presented. -36- NOTES TO FINANCIAL STATEMENTS - CONTINUED 8. SCHEDULE OF ACCUMULATION AND ANNUITY UNITS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AIM V.I. PREMIER EQUITY ALLIANCEBERNSTEIN PREMIER GLOBAL GROWTH FUND FUND - SERIES I GROWTH PORTFOLIO - CLASS B - CLASS 2 SHARES ------------------------- ------------------------- ------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Accumulation and annuity units beginning of year ......................... 556,199 452,916 544,472 600,139 2,808,025 1,857,898 Accumulation units purchased and transferred from other funding options .... 17,543 395,349 188,109 275,483 2,392,111 1,586,580 Accumulation units redeemed and transferred to other funding options ...... (345,836) (292,066) (180,492) (331,150) (1,605,354) (636,453) Annuity units ............................... -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Accumulation and annuity units end of year ............................... 227,906 556,199 552,089 544,472 3,594,782 2,808,025 =========== =========== =========== =========== =========== ===========
DREYFUS VIF DEVELOPING GROWTH FUND - GROWTH-INCOME FUND LEADERS PORTFOLIO - CLASS 2 SHARES - CLASS 2 SHARES INITIAL SHARES ------------------------- ------------------------- ------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Accumulation and annuity units beginning of year ....................... 9,807,746 6,515,117 12,241,895 9,691,067 7,459,135 8,521,936 Accumulation units purchased and transferred from other funding options .. 3,108,641 5,795,328 3,444,086 5,679,704 262,142 891,057 Accumulation units redeemed and transferred to other funding options .... (3,061,969) (2,502,699) (4,297,185) (3,128,876) (1,920,753) (1,953,858) Annuity units ............................. -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Accumulation and annuity units end of year ............................. 9,854,418 9,807,746 11,388,796 12,241,895 5,800,524 7,459,135 =========== =========== =========== =========== =========== ===========
EQUITY INDEX PORTFOLIO FUNDAMENTAL VALUE - CLASS II SHARES PORTFOLIO INVESTORS FUND - CLASS I ------------------------- ------------------------- ------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Accumulation and annuity units beginning of year ....................... 5,292,306 5,390,856 28,725,142 35,153,853 6,825,984 8,316,159 Accumulation units purchased and transferred from other funding options .. 281,629 863,379 1,111,785 1,402,795 259,537 647,185 Accumulation units redeemed and transferred to other funding options .... (1,149,950) (961,929) (6,043,205) (7,828,875) (1,643,593) (2,135,473) Annuity units ............................. -- -- (2,392) (2,631) (1,840) (1,887) ----------- ----------- ----------- ----------- ----------- ----------- Accumulation and annuity units end of year ............................. 4,423,985 5,292,306 23,791,330 28,725,142 5,440,088 6,825,984 =========== =========== =========== =========== =========== ===========
TOTAL RETURN FUND - CLASS I SELECT BALANCED PORTFOLIO SELECT GROWTH PORTFOLIO ------------------------- ------------------------- ------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Accumulation and annuity units beginning of year ....................... 1,992,538 2,122,348 7,673,459 9,000,485 4,108,502 4,790,775 Accumulation units purchased and transferred from other funding options .. 103,787 397,001 142,730 316,729 57,550 84,163 Accumulation units redeemed and transferred to other funding options .... (473,068) (526,811) (1,535,734) (1,643,755) (902,259) (766,436) Annuity units ............................. -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Accumulation and annuity units end of year ............................. 1,623,257 1,992,538 6,280,455 7,673,459 3,263,793 4,108,502 =========== =========== =========== =========== =========== ===========
-37- NOTES TO FINANCIAL STATEMENTS - CONTINUED 8. SCHEDULE OF ACCUMULATION AND ANNUITY UNITS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (CONTINUED)
SMITH BARNEY PREMIER SELECT HIGH GROWTH SMITH BARNEY DIVIDEND SELECTIONS ALL CAP PORTFOLIO STRATEGY PORTFOLIO GROWTH PORTFOLIO ------------------------- ------------------------- ------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Accumulation and annuity units beginning of year ....................... 1,181,255 2,252,461 543,416 134,123 1,793,653 1,451,494 Accumulation units purchased and transferred from other funding options .. 4,068 75,192 149,031 452,368 420,962 1,027,249 Accumulation units redeemed and transferred to other funding options .... (429,960) (1,146,398) (306,148) (43,075) (412,798) (685,090) Annuity units ............................. -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Accumulation and annuity units end of year ............................. 755,363 1,181,255 386,299 543,416 1,801,817 1,793,653 =========== =========== =========== =========== =========== ===========
CONVERTIBLE SECURITIES DISCIPLINED MID CAP MERRILL LYNCH LARGE PORTFOLIO STOCK PORTFOLIO CAP CORE PORTFOLIO ------------------------- ------------------------- ------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Accumulation and annuity units beginning of year ....................... 3,979,435 3,254,464 7,781,072 8,544,699 5,029,347 6,347,763 Accumulation units purchased and transferred from other funding options .. 319,213 1,426,125 759,165 1,421,959 150,514 121,668 Accumulation units redeemed and transferred to other funding options .... (1,062,137) (701,154) (2,278,621) (2,185,586) (770,725) (1,440,084) Annuity units ............................. -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Accumulation and annuity units end of year ............................. 3,236,511 3,979,435 6,261,616 7,781,072 4,409,136 5,029,347 =========== =========== =========== =========== =========== ===========
MFS EMERGING GROWTH AIM CAPITAL APPRECIATION MFS TOTAL RETURN PORTFOLIO PORTFOLIO PORTFOLIO ------------------------- ------------------------- ------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Accumulation and annuity units beginning of year ....................... 22,394,858 27,648,883 35,645,248 44,034,704 43,616,566 52,805,466 Accumulation units purchased and transferred from other funding options .. 150,091 832,715 90,041 470,372 957,217 1,764,497 Accumulation units redeemed and transferred to other funding options .... (4,909,903) (6,086,740) (6,992,178) (8,856,290) (9,877,555) (10,949,490) Annuity units ............................. -- -- (3,167) (3,538) (3,606) (3,907) ----------- ----------- ----------- ----------- ----------- ----------- Accumulation and annuity units end of year ............................. 17,635,046 22,394,858 28,739,944 35,645,248 34,692,622 43,616,566 =========== =========== =========== =========== =========== ===========
SALOMON BROTHERS PIONEER STRATEGIC INCOME STRATEGIC TOTAL RETURN SMITH BARNEY HIGH INCOME PORTFOLIO BOND PORTFOLIO PORTFOLIO ------------------------- ------------------------- ------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Accumulation and annuity units beginning of year ....................... 20,709,068 24,943,603 5,462,595 6,995,140 16,612,913 19,769,637 Accumulation units purchased and transferred from other funding options .. 409,239 1,081,971 221,516 1,946,448 404,259 4,196,206 Accumulation units redeemed and transferred to other funding options .... (5,433,506) (5,315,471) (1,792,843) (3,478,993) (4,792,165) (7,351,976) Annuity units ............................. (977) (1,035) -- -- (900) (954) ----------- ----------- ----------- ----------- ----------- ----------- Accumulation and annuity units end of year ............................. 15,683,824 20,709,068 3,891,268 5,462,595 12,224,107 16,612,913 =========== =========== =========== =========== =========== ===========
-38- NOTES TO FINANCIAL STATEMENTS - CONTINUED 8. SCHEDULE OF ACCUMULATION AND ANNUITY UNITS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (CONTINUED)
SMITH BARNEY SMITH BARNEY LARGE INTERNATIONAL ALL CAP SMITH BARNEY LARGE CAP CAPITALIZATION GROWTH GROWTH PORTFOLIO VALUE PORTFOLIO PORTFOLIO ------------------------- ------------------------- ------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Accumulation and annuity units beginning of year ....................... 23,707,728 35,189,934 27,443,221 33,751,027 32,936,600 35,908,260 Accumulation units purchased and transferred from other funding options .. 1,362,104 157,257,426 496,487 632,569 1,539,179 4,944,984 Accumulation units redeemed and transferred to other funding options .... (5,229,869) (168,738,504) (5,539,308) (6,936,599) (7,419,729) (7,914,835) Annuity units ............................. (1,739) (1,128) (3,491) (3,776) (1,764) (1,809) ----------- ----------- ----------- ----------- ----------- ----------- Accumulation and annuity units end of year ............................. 19,838,224 23,707,728 22,396,909 27,443,221 27,054,286 32,936,600 =========== =========== =========== =========== =========== ===========
SMITH BARNEY MONEY STRATEGIC EQUITY TRAVELERS MANAGED MARKET PORTFOLIO PORTFOLIO INCOME PORTFOLIO ------------------------- ------------------------- ------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Accumulation and annuity units beginning of year ....................... 27,759,441 49,870,080 42,705,708 52,312,207 13,648,596 18,488,409 Accumulation units purchased and transferred from other funding options .. 8,097,116 110,488,578 138,154 663,788 642,050 2,918,692 Accumulation units redeemed and transferred to other funding options .... (20,726,122) (132,599,217) (8,425,302) (10,268,020) (4,084,313) (7,757,472) Annuity units ............................. -- -- (1,857) (2,267) (974) (1,033) ----------- ----------- ----------- ----------- ----------- ----------- Accumulation and annuity units end of year ............................. 15,130,435 27,759,441 34,416,703 42,705,708 10,205,359 13,648,596 =========== =========== =========== =========== =========== ===========
SMITH BARNEY SMALL CAP VAN KAMPEN ENTERPRISE GROWTH OPPORTUNITIES PORTFOLIO PORTFOLIO COMBINED ------------------------- ------------------------- ------------------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Accumulation and annuity units beginning of year ....................... 22,110,308 27,062,251 1,392,432 610,683 444,488,863 543,788,837 Accumulation units purchased and transferred from other funding options .. 286,721 172,975 626,115 1,009,505 28,592,892 311,240,040 Accumulation units redeemed and transferred to other funding options .... (4,588,404) (5,122,606) (854,478) (227,756) (119,085,462) (410,513,737) Annuity units ............................. (2,099) (2,312) -- -- (24,806) (26,277) ----------- ----------- ----------- ----------- ----------- ----------- Accumulation and annuity units end of year ............................. 17,806,526 22,110,308 1,164,069 1,392,432 353,971,487 444,488,863 =========== =========== =========== =========== =========== ===========
-39- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors of the Travelers Life and Annuity Company and Owners of Variable Annuity Contracts of The Travelers Fund BD II for Variable Annuities: We have audited the accompanying statement of assets and liabilities of The Travelers Fund BD II for Variable Annuities as of December 31, 2004 and the related statement of operations for the year then ended, the statement of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the four-year period then ended. These financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights 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 securities owned as of December 31, 2004, 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 and financial highlights referred to above present fairly, in all material respects, the financial position of The Travelers Fund BD II for Variable Annuities as of December 31, 2004, the results of its operations for the year then ended, the changes in the net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the four-year period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP - ------------ Hartford, Connecticut March 21, 2005 -40- INDEPENDENT AUDITORS KPMG LLP Hartford, Connecticut This report is prepared for the general information of contract owners and is not an offer of units of The Travelers Fund BD II for Variable Annuities or shares of Fund BD II's underlying funds. It should not be used in connection with any offer except in conjunction with the Prospectus for The Travelers Fund BD II for Variable Annuities product(s) offered by The Travelers Life and Annuity Company and the Prospectuses of the underlying funds, which collectively contain all pertinent information, including additional information on charges and expenses. FNDBDII (Annual) (12-04) Printed in U.S.A. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholder The Travelers Life and Annuity Company: We have audited the accompanying balance sheets of The Travelers Life and Annuity Company as of December 31, 2004 and 2003, and the related statements of income, changes in shareholder's equity, and cash flows for each of the years in the three-year period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in all material respects, the financial position of The Travelers Life and Annuity Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the financial statements, the Company changed its methods of accounting and reporting for certain nontraditional long-duration contracts and for separate accounts in 2004 and for goodwill and intangible assets in 2002. /s/ KPMG LLP Hartford, Connecticut March 28, 2005 1 THE TRAVELERS LIFE AND ANNUITY COMPANY STATEMENTS OF INCOME ($ IN MILLIONS) FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002 ---- ---- ---- REVENUES Premiums $ 40 $ 41 $ 43 Net investment income 389 356 312 Net realized investment gains (losses) 17 (7) (31) Fee income 371 237 190 Other revenues 5 19 19 - ------------------------------------------------------------------------------- Total Revenues 822 646 533 - ------------------------------------------------------------------------------- BENEFITS AND EXPENSES Current and future insurance benefits 85 90 94 Interest credited to contractholders 241 217 181 Amortization of deferred acquisition costs 226 136 67 General and administrative expenses 63 49 32 - ------------------------------------------------------------------------------- Total Benefits and Expenses 615 492 374 - ------------------------------------------------------------------------------- Income before federal income taxes 207 154 159 - ------------------------------------------------------------------------------- Federal income taxes Current 96 74 (31) Deferred (47) (39) 87 - ------------------------------------------------------------------------------- Total Federal Income Taxes 49 35 56 - ------------------------------------------------------------------------------- Net Income $ 158 $ 119 $ 103 =============================================================================== See Notes to Financial Statements. 2 THE TRAVELERS LIFE AND ANNUITY COMPANY BALANCE SHEETS ($IN MILLIONS)
AT DECEMBER 31, 2004 2003 - ------------------------------------------------------------------------------------------------------------ ASSETS Fixed maturities, available for sale at fair value (including $133 and $131 subject to securities lending agreements) (cost $5,929 and $5,034) $ 6,261 $ 5,357 Equity securities, at fair value (cost $16 and $8) 19 8 Mortgage loans 212 136 Short-term securities 420 195 Other invested assets 417 393 - ------------------------------------------------------------------------------------------------------------ Total Investments 7,329 6,089 - ------------------------------------------------------------------------------------------------------------ Separate and variable accounts 11,631 9,690 Deferred acquisition costs 1,522 1,279 Premiums and fees receivable 75 67 Other assets 268 313 - ------------------------------------------------------------------------------------------------------------ Total Assets $20,825 $17,438 - ------------------------------------------------------------------------------------------------------------ LIABILITIES Future policy benefits and claims $ 1,079 $ 1,098 Contractholder funds 5,227 4,512 Separate and variable accounts 11,631 9,690 Deferred federal income taxes 180 225 Other liabilities 747 515 - ------------------------------------------------------------------------------------------------------------ Total Liabilities 18,864 16,039 - ------------------------------------------------------------------------------------------------------------ SHAREHOLDER'S EQUITY Common stock, par value $100; 100,000 shares authorized, 30,000 issued and outstanding 3 3 Additional paid-in capital 817 417 Retained earnings 922 764 Accumulated other changes in equity from nonowner sources 219 215 - ------------------------------------------------------------------------------------------------------------ Total Shareholder's Equity 1,961 1,399 - ------------------------------------------------------------------------------------------------------------ Total Liabilities and Shareholder's Equity $20,825 $17,438 ============================================================================================================
See Notes to Financial Statements. 3 THE TRAVELERS LIFE AND ANNUITY COMPANY STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY ($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------- COMMON STOCK 2004 2003 2002 - ----------------------------------------------------------------------------------------- Balance, beginning of year $ 3 $ 3 $ 3 Changes in common stock -- -- -- - ----------------------------------------------------------------------------------------- Balance, end of year $ 3 $ 3 $ 3 ========================================================================================= - ----------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL - ----------------------------------------------------------------------------------------- Balance, beginning of year $ 417 $ 417 $ 417 Capital contributed by parent 400 -- -- - ----------------------------------------------------------------------------------------- Balance, end of year $ 817 $ 417 $ 417 ========================================================================================= - ----------------------------------------------------------------------------------------- RETAINED EARNINGS - ----------------------------------------------------------------------------------------- Balance, beginning of year $ 764 $ 645 $ 542 Net income 158 119 103 - ----------------------------------------------------------------------------------------- Balance, end of year $ 922 $ 764 $ 645 ========================================================================================= - ----------------------------------------------------------------------------------------- ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES - ----------------------------------------------------------------------------------------- Balance, beginning of year $ 215 $ 95 $ 16 Unrealized gains, net of tax 9 123 72 Derivative instrument hedging activity gains (losses), net of tax (5) (3) 7 - ----------------------------------------------------------------------------------------- Balance, end of year $ 219 $ 215 $ 95 ========================================================================================= - ----------------------------------------------------------------------------------------- SUMMARY OF CHANGES IN EQUITY FROM NONOWNER SOURCES - ----------------------------------------------------------------------------------------- Net income $ 158 $ 119 $ 103 Other changes in equity from nonowner sources 4 120 79 - ----------------------------------------------------------------------------------------- Total changes in equity from nonowner sources $ 162 $ 239 $ 182 ========================================================================================= - ----------------------------------------------------------------------------------------- TOTAL SHAREHOLDER'S EQUITY - ----------------------------------------------------------------------------------------- Balance, beginning of year $ 1,399 $ 1,160 $ 978 Changes in total shareholder's equity 562 239 182 - ----------------------------------------------------------------------------------------- Balance, end of year $ 1,961 $ 1,399 $ 1,160 =========================================================================================
See Notes to Financial Statements. 4 THE TRAVELERS LIFE AND ANNUITY COMPANY STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH ($ IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 2004 2003 2002 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Premiums collected $ 39 $ 44 $ 44 Net investment income received 383 320 277 Fee and other income received 399 265 239 Benefits and claims paid (134) (106) (104) Interest paid to contractholders (241) (217) (181) Operating expenses paid (470) (437) (344) Income taxes (paid) received 179 (135) 89 Other (46) 41 (21) - ----------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Operating Activities 109 (225) (1) - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investments Fixed maturities 489 520 255 Mortgage loans 53 23 36 Proceeds from sales of investments Fixed maturities 802 1,658 1,690 Equity securities 19 8 36 Mortgage loans 6 -- -- Real estate held for sale 2 1 -- Purchases of investments Fixed maturities (2,179) (2,824) (3,018) Equity securities (30) (4) (36) Mortgage loans (136) (28) (45) Policy loans, net (5) 1 (11) Short-term securities (purchases) sales, net (225) 280 (269) Other investment purchases, net (43) (46) (21) Securities transactions in course of settlement, net 23 (4) 118 - ----------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (1,224) (415) (1,265) - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Contractholder fund deposits 1,023 914 1,486 Contractholder fund withdrawals (308) (288) (224) Contribution from parent company 400 -- -- - ----------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 1,115 626 1,262 - ----------------------------------------------------------------------------------------------- Net increase (decrease) in cash -- (14) (4) Cash at beginning of year 1 15 19 - ----------------------------------------------------------------------------------------------- Cash at December 31, $ 1 $ 1 $ 15 ===============================================================================================
See Notes to Financial Statements. 5 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO 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 Life and Annuity Company (the Company) is a wholly owned subsidiary of The Travelers Insurance Company (TIC), a wholly owned subsidiary of Citigroup Insurance Holding Corporation (CIHC), an indirect wholly owned subsidiary of Citigroup Inc. (Citigroup), a diversified global financial services holding company whose businesses provide a broad range of financial services to consumer and corporate customers around the world. On January 31, 2005, Citigroup announced its intention to sell its Life Insurance and Annuities business, which includes TIC, the Company and certain other businesses, to MetLife. TIC's Primerica Life Segment will remain part of Citigroup. See Note 14. The financial statements and accompanying footnotes of the Company are prepared in conformity with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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 to the 2004 presentation. ACCOUNTING CHANGES ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS On January 1, 2004, the Company adopted the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" (SOP 03-1). The main components of SOP 03-1 provide guidance on accounting and reporting by insurance enterprises for separate account presentation, accounting for an insurer's interest in a separate account, transfers to a separate account, valuation of certain liabilities, contracts with death or other benefit features, contracts that provide annuitization benefits, and sales inducements to contract holders. 6 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following summarizes the more significant aspects of the Company's adoption of SOP 03-1: VARIABLE ANNUITY CONTRACTS WITH GUARANTEED MINIMUM DEATH BENEFIT FEATURES. For variable annuity contracts with guaranteed minimum death benefit (GMDB), features SOP 03-1 requires the reporting entity to categorize the contract as either an insurance or investment contract based upon the significance of mortality or morbidity risk. SOP 03-1 provides explicit guidance for calculating a reserve for insurance contracts, and provides that the reporting entity does not hold reserves for investment contracts (i.e. there is no significant mortality risk). The Company determined that the mortality risk on its GMDB features was not a significant component of the total variable annuity product, and accordingly continued to classify these products as investment contracts. RESERVING FOR UNIVERSAL LIFE AND VARIABLE UNIVERSAL LIFE CONTRACTS. SOP 03-1 requires that a reserve, in addition to the account balance, be established for certain insurance benefit features provided under universal life (UL) and variable universal life (VUL) products if the amounts assessed against the contract holder each period for the insurance benefit feature are assessed in a manner that is expected to result in profits in earlier years and losses in subsequent years from the insurance benefit function. The Company's UL and VUL products were reviewed to determine if an additional reserve is required under SOP 03-1. The Company determined that SOP 03-1 applied to some of its UL and VUL contracts with these features and established an additional reserve of less than $1 million. SALES INDUCEMENTS TO CONTRACT HOLDERS. SOP 03-1 provides that, prospectively, sales inducements provided to contract holders meeting certain criteria are capitalized and amortized over the expected life of the contract as a component of benefit expense. During 2004, the Company capitalized sales inducements of approximately $24.9 million in accordance with SOP 03-1. These inducements relate to bonuses on certain products offered by the Company. For the twelve months ended December 31, 2004, amortization of these capitalized amounts was insignificant. CONSOLIDATION OF VARIABLE INTEREST ENTITIES On January 1, 2004, the Company adopted the Financial Accounting Standards Board (FASB) Interpretation No. 46, "Consolidation of Variable Interest Entities (revised December 2003)" (FIN 46-R), which includes substantial changes from the original FIN 46. Included in these changes, the calculation of expected losses and expected residual returns has been altered to reduce the impact of decision maker and guarantor fees in the calculation of expected residual returns and expected losses. In addition, the definition of a variable interest has been changed in the revised guidance. FIN 46 and FIN 46-R change the method of determining whether certain entities should be included in the Company's financial statements. The Company has evaluated the impact of applying FIN 46-R to existing variable interest entities in which it has variable interests. The effect of adopting FIN 46-R on the Company's balance sheet is immaterial. An entity is subject to FIN 46 and FIN 46-R and is called a VIE if it has (1) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) equity investors that cannot make significant decisions about the entity's operations or that do not absorb the expected losses or receive the expected returns of the entity. All other entities are evaluated for consolidation under Statement of Financial Accounting Standards (SFAS) No. 94, "Consolidation of All Majority-Owned Subsidiaries" (SFAS 94). A VIE is consolidated by its primary beneficiary, which is the party involved with the VIE that has a majority of the expected losses or a majority of the expected residual returns or both. 7 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) For any VIEs that must be consolidated under FIN 46 that were created before February 1, 2003, the assets, liabilities, and noncontrolling interests of the VIE are initially measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46 first applies may be used to measure the assets, liabilities, and noncontrolling interests of the VIE. In October 2003, the FASB announced that the effective date of FIN 46 was deferred from July 1, 2003 to periods ending after December 15, 2003 for VIEs created prior to February 1, 2003. The Company elected to implement the provisions of FIN 46 in the 2003 third quarter. The implementation of FIN 46 encompassed a review of numerous entities to determine the impact of adoption and considerable judgment was used in evaluating whether or not a VIE should be consolidated. Based upon the implementation guidance, the Company is not considered a primary beneficiary of any VIEs, thus no consolidations were required due to the implementation of FIN 46 on July 1, 2003. The Company does, however, hold a significant interest in other VIEs, none of which were material to the Company's financial statements. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003 and did not have an impact on the Company's financial statements. COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires that a liability for costs associated with exit or disposal activities, other than in a business combination, be recognized when the liability is incurred. Previous generally accepted accounting principles provided for the recognition of such costs at the date of management's commitment to an exit plan. In addition, SFAS 146 requires that the liability be measured at fair value and be adjusted for changes in estimated cash flows. The provisions of the new standard are effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have an impact on the Company's financial statements. STOCK-BASED COMPENSATION On January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation" (SFAS 123), prospectively for all awards granted, modified, or settled after December 31, 2002. The prospective method is one of the adoption methods provided for under SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," issued in December 2002. SFAS 123 requires that compensation cost for all stock awards be calculated and recognized over the service period (generally equal to the vesting period). This compensation cost is determined using option pricing models, intended to estimate the fair value of the awards at the grant date. Similar to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", (APB 25) the alternative method of accounting, an offsetting increase to shareholder's equity under SFAS 123 is recorded equal to the 8 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) amount of compensation expense charged. During the 2004 first quarter, the Company changed its valuation from the Black-Scholes model to the Binomial Method. The impact of this change was insignificant. Compensation expense and proforma compensation expense had the Company applied SFAS 123 prior to 2003 was insignificant for the year ended December 31, 2004 and 2003. BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted SFAS No. 141, "Business Combinations" (SFAS 141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life created by business combinations accounted for using the purchase method of accounting. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. All goodwill was fully amortized at December 31, 2001 and the Company did not have any other intangible assets with an indefinite useful life. Other intangible assets that are not deemed to have an indefinite useful life will continue to be amortized over their useful lives. See Note 4. FUTURE APPLICATION OF ACCOUNTING STANDARDS OTHER-THAN-TEMPORARY IMPAIRMENTS OF CERTAIN INVESTMENTS On September 30, 2004, the FASB voted unanimously to delay the effective date of Emerging Issues Task Force (EITF) No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments" (EITF 03-1). The delay applies to both debt and equity securities and specifically applies to impairments caused by interest rate and sector spreads. In addition, the provisions of EITF 03-1 that have been delayed relate to the requirements that a company declare its intent to hold the security to recovery and designate a recovery period in order to avoid recognizing an other-than-temporary impairment charge through earnings. The FASB will be issuing implementation guidance related to this topic. Once issued, the Company will evaluate the impact of adopting EITF 03-1. The disclosures required by EITF 03-1 are included in Note 2 to the Financial Statements. STOCK-BASED COMPENSATION In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based Payment" (SFAS 123-R), which replaces the existing SFAS 123 and supersedes APB 25. SFAS 123-R requires companies to measure and record compensation expense for stock options and other share-based payment based on the instruments' fair value. SFAS 123-R is effective for interim and annual reporting periods beginning after June 15, 2005. The Company will adopt SFAS 123-R on July 1, 2005 by using a modified prospective approach. For unvested stock-based awards granted before January 1, 2003 (APB 25 awards), the Company will expense the fair value of the awards as at the grant date over the remaining vesting period. The impact of recognizing compensation expense for the unvested APB 25 awards will be immaterial in the third and fourth quarters of 2005. In addition, the amount of additional compensation expense that will be disclosed as the impact in the first and second quarters of 2005, as if the standard had been adopted as of January 1, 2005, but will not be recognized in earnings, will be immaterial. The Company continues to evaluate other aspects of adopting SFAS 123-R. 9 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) ACCOUNTING POLICIES INVESTMENTS Fixed maturities include bonds, notes and redeemable preferred stocks. Fixed maturities, including financial instruments subject to securities lending agreements (see Note 2), are classified as "available for sale" and are reported at fair value, with unrealized investment gains and losses, net of income taxes, credited or charged directly to shareholder's equity. Fair values of investments in fixed maturities are based on quoted market prices or dealer quotes. If these are not available, discounted 22 expected cash flows using market rates commensurate with the credit quality and maturity of the investment are used to determine fair value. Impairments are realized when investment losses in value are deemed other-than-temporary. The Company conducts a rigorous review each quarter to identify and evaluate investments that have indications of impairment. An investment in a debt or equity security is impaired if its fair value falls below its cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been below cost; the financial condition and near-term prospects of the issuer; and the Company's ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. Changing economic conditions - global, regional, or related to specific issuers or industries - could result in other-than-temporary losses. Also included in fixed maturities are loan-backed and structured securities (including beneficial interests in securitized financial assets). Beneficial interests in securitized financial assets that are rated "A" and below are accounted for under the prospective method in accordance with EITF 99-20. Under the prospective method of accounting, the investment's effective yield is based upon projected future cash flows. All other loan-backed and structured securities are amortized using the retrospective method. The effective yield used to determine amortization is calculated based upon actual and projected future cash flows. Equity securities, which include common and non-redeemable preferred stocks, are classified as "available-for-sale" and are 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. Cash received on impaired loans is reported as income. In estimating fair value, the Company uses interest rates reflecting the current real estate financing market. 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 fair value. Other invested assets include trading securities, which are marked to market with the change recognized in net investment income during the current period. Also included are limited partnership and limited liability company interests in investment funds and real estate joint ventures which are accounted for on the equity method of accounting. Undistributed income of these investments is reported in net investment income. Also included in other invested assets are policy loans which 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. 10 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Accrual of investment income, included in other assets, is suspended on fixed maturities or mortgage loans that are in default, or on which it is likely that future payments will not be made as scheduled. Interest income on investments in default is recognized only as payment is received. 25 DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments, including interest rate and equity futures contracts, swaps, interest rate caps, options and forward contracts as a means of hedging exposure to interest rate changes, equity price changes and foreign currency risk. The Company does not hold or issue derivative instruments for trading purposes. (See Note 9 for a more detailed description of the Company's derivative use.) Derivative financial instruments in a gain position are reported in the balance sheet in other assets, derivative financial instruments in a loss position are reported in the balance sheet in other liabilities and derivatives purchased to offset embedded derivatives on variable annuity contracts are reported in other invested assets. To qualify for hedge accounting, the hedge relationship is designated and formally documented at inception detailing the particular risk management objective and strategy for the hedge. This documentation includes the item and risk that is being hedged, the derivative that is being used, as well as how effectiveness is being assessed. A derivative must be highly effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. For fair value hedges, in which derivatives hedge the fair value of assets and liabilities, changes in the fair value of derivatives are reflected in realized investment gains and losses, together with changes in the fair value of the related hedged item. The net amount is reflected in current earnings. The Company primarily hedges available-for-sale securities. For cash flow hedges, the accounting treatment depends on the effectiveness of the hedge. To the extent that derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives' fair value will be reported in accumulated other changes in equity from nonowner sources. These changes in fair value will be included in earnings of future periods when earnings are also affected by the variability of the hedged cash flows. To the extent these derivatives are not effective, the ineffective portion of the changes in fair value is immediately included in realized investment gains and losses. The effectiveness of these hedging relationships is evaluated on a retrospective and prospective basis using quantitative measures of effectiveness. If a hedge relationship is found to be ineffective, it no longer qualifies for hedge accounting and any gains or losses attributable to such ineffectiveness as well as subsequent changes in fair value are recognized in realized investment gains and losses. For those fair value and cash flow hedge relationships that are terminated, hedge designations removed, or forecasted transactions that are no longer expected to occur, the hedge accounting treatment described in the paragraphs above will no longer apply. For fair value hedges, any changes to the hedged item remain as part of the basis of the asset or liability and are ultimately reflected as an element of the yield. For cash flow hedges, any changes in fair value of the derivative remain in the accumulated other changes in equity from nonowner sources in shareholder's equity and are included in earnings of future periods when earnings are also affected by the variability of the hedged cash flow. If the hedged relationship is discontinued because a forecasted transaction will not occur when scheduled, the accumulated changes in fair value of the derivative recorded in shareholder's equity are immediately reflected in realized investment gains and losses. 11 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Company enters into derivative contracts that are economic hedges but do not qualify or are not designated as hedges for accounting purposes. These derivatives are carried at fair value, with changes in value reflected in realized investment gains and losses. FINANCIAL INSTRUMENTS WITH EMBEDDED DERIVATIVES The Company bifurcates an embedded derivative from the host contract where the economic characteristics and risks of the embedded instrument are not clearly and closely related to the economic characteristics and risks of the host contract, the entire instrument would not otherwise be remeasured at fair value and a separate instrument with the same terms of the embedded instrument would meet the definition of a derivative under SFAS 133. The Company purchases investments that have embedded derivatives, primarily convertible debt securities. These embedded derivatives are carried at fair value with changes in value reflected in realized investment gains and losses. Derivatives embedded in convertible debt securities are classified in the balance sheet as fixed maturity securities, consistent with the host instruments. The Company markets certain investment contracts that have embedded derivatives, primarily variable annuity contracts. These embedded derivatives are carried at fair value, with changes in value reflected in realized investment gains and losses. Derivatives embedded in variable annuity contracts are classified in the consolidated balance sheet as future policy benefits and claims. The Company may enter into derivative contracts to hedge the exposures represented by these embedded derivatives. These are economic hedges, however they do not qualify for hedge accounting. These derivatives are carried at fair value, with the changes in value reflected in realized gains and losses. 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. Realized gains and losses also result from fair value changes in derivative contracts that do not qualify, or are not designated, as hedging instruments, and from the application of fair value hedge accounting under SFAS 133. Impairments are recognized as realized losses when investment losses in value are deemed other-than-temporary. The Company conducts regular reviews to assess whether other-than-temporary losses exist. 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. 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 fair value. Amounts assessed to the separate account 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. 12 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) VARIABLE ANNUITY CONTRACTS WITH GUARANTEED MINIMUM DEATH BENEFIT FEATURES. For variable annuity contracts with GMDB features, SOP 03-1 requires the reporting entity to categorize the contract as either an insurance or investment contract based upon the significance of mortality or morbidity risk. SOP 03-1 provides explicit guidance for calculating a reserve for insurance contracts, and provides that the reporting entity does not hold reserves for investment contracts (i.e. there is no significant mortality risk). The Company determined that the mortality risk on its GMDB features was not a significant component of the total variable annuity product, and accordingly continued to classify these products as investment contracts. DEFERRED ACQUISITION COSTS Deferred acquisition costs (DAC) represent costs that are deferred and amortized over the estimated life of the related insurance policies. DAC principally includes 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. The method for determining amortization of DAC varies by product type based upon three different accounting pronouncements: SFAS No. 60, "Accounting and Reporting by Insurance Enterprises" (SFAS 60), SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long Duration Contracts and for Realized Gains and Losses from the Sale of Investments" (SFAS 97). DAC for deferred annuities, both fixed and variable, is amortized employing a level effective yield methodology per SFAS 91 as indicated by AICPA Practice Bulletin 8, generally over 10-15 years. An amortization rate is developed using the outstanding DAC balance and projected account balances. This rate is applied to actual account balances to determine the amount of DAC amortization. The projected account balances are derived using a model that contains assumptions related to investment returns and persistency. The model rate is evaluated at least annually, and changes in underlying lapse and interest rate assumptions are to be treated retrospectively. Variances in expected equity market returns versus actual returns are treated prospectively and a new amortization pattern is developed so that the DAC balances will be amortized over the remaining estimated life of the business. DAC for UL is amortized in relation to estimated gross profits from surrender charges, investment, mortality, and expense margins per SFAS 97, generally over 16-25 years. Actual profits can vary from management's estimates resulting in increases or decreases in the rate of amortization. Re-estimates of gross profits, performed at least annually, result in retrospective adjustments to earnings by a cumulative charge or credit to income. DAC relating to traditional life, including term insurance, is amortized in relation to anticipated premiums per SFAS 60, generally over 5-20 years. Assumptions as to the anticipated premiums are made at the date of policy issuance or acquisition and are consistently applied over the life of the policy. All DAC is reviewed, at least annually, to determine if it is recoverable from future income, including investment income, and, if not recoverable, is charged to expense. All other acquisition expenses are charged to operations as incurred. See Note 4. CASH AND CASH EQUIVALENTS Cash, which is reported in other assets, includes certificates of deposits and other time deposits with original maturities of less than 90 days. 13 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) VALUE OF INSURANCE IN FORCE The value of insurance in force, reported in other assets, is an asset that represents the actuarially determined present value of anticipated profits to be realized from annuity 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 an interest rate of 16% for the annuity business acquired. The annuity contracts are amortized employing a level yield method over 31 years. The value of insurance in force is reviewed periodically for recoverability to determine if any adjustment is required. Adjustments, if any, are charged to income. See Note 4. FUTURE POLICY BENEFITS Future policy benefits represent liabilities for future insurance policy benefits for payout annuities and traditional life products and are prepared in accordance with industry standards and U.S. GAAP. The annuity payout reserves are calculated using the mortality and interest assumptions used in the actual pricing of the benefit. Mortality assumptions are based on Company experience and are adjusted to reflect deviations such as substandard mortality in structured settlement benefits. The interest rates range from 1.5% to 9.2% for these annuity products with a weighted average interest rate of 6.6%, including adverse deviation. Traditional life products include whole life and term insurance. Future policy benefits for traditional life products are estimated on the basis of actuarial assumptions as to mortality, persistency and interest, established at policy issue and are based on the Company's experience, which, together with interest assumptions, include a margin for adverse deviation. Appropriate recognition has been given to experience rating and reinsurance. Interest assumptions applicable to traditional life products range from 3.0% to 7.0%, with a weighted average of 6.3%. CONTRACTHOLDER FUNDS Contractholder funds represent deposits from the issuance of UL pension investment and certain retail annuity and structured settlement contracts. For UL contracts, contractholder fund balances are increased by receipts for mortality coverage, contract administration, surrender charges and interest accrued where one or more elements are not fixed or guaranteed. These balances are decreased by withdrawals, mortality charges and administrative expenses charged to the contractholders where these charges and expenses may not be fixed or guaranteed. Interest rates credited to contractholder funds related to UL range from 4.5% to 5.4%, with a weighted average interest rate of 5.0%. Pension investment and certain annuity contracts do not contain significant insurance risk and are considered investment-type contracts. Contractholder fund balances are increased by receipts and credited interest, and reduced by withdrawals and administrative expenses charged to the contractholder. Interest rates credited to these investment-type contracts range from less than 1.0% to 8.0% with a weighted average interest rate of 5.2%. RESERVING FOR UNIVERSAL LIFE AND VARIABLE UNIVERSAL LIFE CONTRACTS. SOP 03-1 requires that a reserve, in addition to the account balance, be established for certain insurance benefit features provided under UL and VUL products if the amounts assessed against the contract holder each period for the insurance benefit feature are assessed in a manner that is expected to result in profits in earlier years and losses in subsequent years from the insurance benefit function. 14 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Company's UL and VUL products were reviewed to determine if an additional reserve is required under SOP 03-1. The Company determined that SOP 03-1 applied to some of its UL and VUL contracts with these features and established an additional reserve of less than $1 million. GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS Included in other liabilities is the Company's estimate of its liability for guaranty fund and other insurance-related assessments. State guaranty fund assessments are based upon the Company's share of premiums written or received in one or more years prior to an insolvency occurring in the industry. Once an insolvency has occurred, the Company recognizes a liability for such assessments if it is probable that an assessment will be imposed and the amount of the assessment can be reasonably estimated. At December 31, 2004 and 2003, the Company's liability for guaranty fund assessments was not significant. PERMITTED STATUTORY ACCOUNTING PRACTICES The Company, domiciled in the State of Connecticut, prepares statutory financial statements in accordance with the accounting practices prescribed or permitted by the State of Connecticut Insurance Department. Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state. Permitted statutory accounting practices include practices not prescribed by the domiciliary state, but allowed by the domiciliary state regulatory authority. The Company does not have any permitted statutory accounting practices. PREMIUMS Premium income is reported for individual payout annuities, group close-out annuities, whole life and term insurance. The annuities premiums are recognized as revenue when collected. The life premiums are recognized as revenues when due. Premiums for contracts with a limited number of premium payments, due over a significantly shorter period than the period over which benefits are provided, are considered revenue when due. The portion of premium which is not required to provide for benefits and expenses is deferred and recognized in revenues in a constant relationship to insurance benefits in force. FEE INCOME Fee income is recognized on deferred annuity and UL contracts for mortality, administrative and equity protection charges according to contract due dates. Fee income is recognized on variable annuity and universal life separate accounts either daily, monthly, quarterly or annually as per contract terms. OTHER REVENUES Other revenues include surrender penalties collected at the time of a contract surrender, and other miscellaneous charges related to annuity and universal life contracts recognized when received. CURRENT AND FUTURE INSURANCE BENEFITS Current and future insurance benefits represent charges for mortality and morbidity related to fixed annuities, universal life and term life insurance benefits. 15 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) INTEREST CREDITED TO CONTRACTHOLDERS Interest credited to contractholders represents amounts earned by universal life, pension investment and certain retail 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. 16 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. INVESTMENTS FIXED MATURITIES The amortized cost and fair values of investments in fixed maturities were as follows:
GROSS GROSS DECEMBER 31, 2004 AMORTIZED UNREALIZED UNREALIZED FAIR ($ IN MILLIONS) COST GAINS LOSSES VALUE ------------------------------------------------------------------------------------------ AVAILABLE FOR SALE: Mortgage-backed securities - CMOs and pass-through securities $ 906 $ 24 $ 1 $ 929 U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities 154 9 -- 163 Obligations of states and political subdivisions 57 8 -- 65 Debt securities issued by foreign governments 63 6 -- 69 All other corporate bonds 3,565 219 4 3,780 All other debt securities 1,180 71 2 1,249 Redeemable preferred stock 4 2 -- 6 ------------------------------------------------------------------------------------------ Total Available For Sale $5,929 $ 339 $ 7 $6,261 ------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------ GROSS GROSS DECEMBER 31, 2003 AMORTIZED UNREALIZED UNREALIZED FAIR ($ IN MILLIONS) COST GAINS LOSSES VALUE ------------------------------------------------------------------------------------------ AVAILABLE FOR SALE: Mortgage-backed securities - CMOs and pass-through securities $ 645 $ 18 $ 2 $ 661 U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities 192 5 1 196 Obligations of states and political subdivisions 53 6 -- 59 Debt securities issued by foreign governments 58 3 -- 61 All other corporate bonds 3,179 241 5 3,415 All other debt securities 903 59 3 959 Redeemable preferred stock 4 2 -- 6 ------------------------------------------------------------------------------------------ Total Available For Sale $5,034 $ 334 $ 11 $5,357 ------------------------------------------------------------------------------------------
17 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Proceeds from sales of fixed maturities classified as available for sale were $801.9 million, $1.7 billion and $1.7 billion in 2004, 2003 and 2002, respectively. Gross gains of $25.0 million, $48.2 35 million and $85.6 million and gross losses of $24.4 million, $52.4 million and $29.9 million in 2004, 2003 and 2002, respectively, were realized on those sales. Additional losses of $6.9 million, $10.2 million and $66.9 million were realized due to other-than-temporary losses in value in 2004, 2003 and 2002, respectively. The significant impairment activity in 2002 was concentrated in telecommunication and energy company investments. The amortized cost and fair value of fixed maturities available for sale at December 31, 2004, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. ----------------------------------------------------------------- AMORTIZED FAIR ($ IN MILLIONS) COST VALUE ----------------------------------------------------------------- MATURITY: Due in one year or less $ 264 $ 270 Due after 1 year through 5 years 1,675 1,757 Due after 5 years through 10 years 2,365 2,514 Due after 10 years 719 791 ----------------------------------------------------------------- 5,023 5,332 ----------------------------------------------------------------- Mortgage-backed securities 906 929 ----------------------------------------------------------------- Total Maturity $5,929 $6,261 ----------------------------------------------------------------- The Company makes significant investments in collateralized mortgage obligations (CMOs). CMOs typically have high credit quality, offer good liquidity, and provide a significant advantage in yield and total return compared to U.S. Treasury securities. The Company's investment strategy is to purchase CMO tranches which are protected against prepayment risk, including planned amortization class tranches and last cash flow 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 an assessment indicates a favorable risk/return tradeoff. The Company does not purchase residual interests in CMOs. At December 31, 2004 and 2003, the Company held CMOs classified as available for sale with a fair value of $532.6 million and $332.4 million, respectively. Approximately 34% of the Company's CMO holdings were fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 2004 and 2003. In addition, the Company held $396.0 million and $327.7 million of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at December 31, 2004 and 2003, respectively. All of these securities are rated AAA. The Company engages in securities lending transactions whereby certain securities from its portfolio are loaned to other institutions for short periods of time. The Company generally receives cash collateral from the borrower, equal to at least the market value of the loaned securities plus accrued interest, and invests in a short-term investment pool. See Note 11. The loaned securities remain a recorded asset of the Company. The Company records a liability for the amount of the cash collateral held, representing its obligation to return the cash collateral, and reports that liability as part of other liabilities in the balance 18 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) sheet. At December 31, 2004 and 2003, the Company held cash collateral of $113.5 million and $154.0 million, respectively. The Company also had $23.7 million of investments held with a third party used as collateral at December 31, 2004. The Company does not have the right to sell or pledge this collateral and it is not recorded on the balance sheet. No such collateral existed at December 31, 2003. The Company participates in dollar roll repurchase transactions as a way to generate investment income. These transactions involve the sale of mortgage-backed securities with the agreement to repurchase substantially the same securities from the same counterparty. Cash is received from the sale, which is invested in the Company's short-term money market pool. The cash is returned at the end of the roll period when the mortgage-backed securities are repurchased. The Company will generate additional investment income based upon the difference between the sale and repurchase prices. These transactions are recorded as secured borrowings. The mortgage-backed securities remain recorded as assets. The cash proceeds are reflected in short-term investments and a liability is established to reflect the Company's obligation to repurchase the securities at the end of the roll period. This liability is classified as other liabilities in the balance sheets and fluctuates based upon the timing of the repayments. Although these types of transactions occurred during the years, there were no outstanding amounts at December 31, 2004 and 2003. EQUITY SECURITIES The cost and fair values of investments in equity securities were as follows:
-------------------------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED GROSS ($ IN MILLIONS) COST GAINS LOSSES VALUE -------------------------------------------------------------------------------- DECEMBER 31, 2004 Common stocks $12 $ 3 $-- $15 Non-redeemable preferred stocks 4 -- -- 4 -------------------------------------------------------------------------------- Total Equity Securities $16 $ 3 $-- $19 -------------------------------------------------------------------------------- DECEMBER 31, 2003 Common stocks $ 2 $-- $-- $ 2 Non-redeemable preferred stocks 6 -- -- 6 -------------------------------------------------------------------------------- Total Equity Securities $ 8 $-- $-- $ 8 --------------------------------------------------------------------------------
Proceeds from sales of equity securities were $18.5 million, $7.8 million and $35.6 million in 2004, 2003 and 2002, respectively. Gross gains and losses on sales and impairments were insignificant. 19 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) OTHER-THAN-TEMPORARY LOSSES ON INVESTMENTS Management has determined that the unrealized losses on the Company's investments in fixed maturity and equity securities at December 31, 2004 are temporary in nature. The Company conducts a periodic review to identify and evaluate investments that have indications of possible impairment. An investment in a debt or equity security is impaired if its fair value falls below its cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been below cost; the financial condition and near-term prospects of the issuer; and the Company's ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. The Company's review for impairment generally entails: o Identification and evaluation of investments that have possible indications of impairment; o Analysis of individual investments that have fair values less than 80% of amortized cost, including consideration of length of time the investment has been in an unrealized loss position. o Discussion of evidential matter, including an evaluation of factors or triggers that would or could cause individual investments to qualify as having other-than-temporary impairments and those that would not support other-than-temporary impairment; o Documentation of the results of these analyses, as required under business policies. The tables below shows the fair value of investments in fixed maturities and equity securities that are available-for-sale and have been in an unrealized loss position at:
Gross Unrealized Losses ----------------------- Less Than One Year One Year or Longer Total ---------------------------------------------------------------- Gross Gross Gross DECEMBER 31, 2004 Fair Unrealized Fair Unrealized Fair Unrealized ($ IN MILLIONS) Value Losses Value Losses Value Losses - ---------------------------------------------------------------------------------------------------------------- Fixed maturity securities available-for-sale: Mortgage-backed securities-CMO's and pass-through securities $103 $ 1 $ -- $ -- $103 $ 1 U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities 5 -- -- -- 5 -- Debt securities issued by foreign governments 1 -- -- -- 1 -- All other corporate bonds 408 4 15 -- 423 4 All other debt securities 141 1 24 1 165 2 Redeemable preferred stock 1 -- -- -- 1 -- - ---------------------------------------------------------------------------------------------------------------- Total fixed maturities $659 $ 6 $ 39 $ 1 $698 $ 7 Equity securities $ 1 $ -- $ 3 $ -- $ 4 $ -- - ----------------------------------------------------------------------------------------------------------------
At December 31, 2004, the cost of approximately 269 investments in fixed maturity and equity securities exceeded their fair value by $7 million. Of the $6 million which represents fixed maturity investments that have been in a gross unrealized loss position for less than a year and the $1 million in such a position for a year or more, 93% and 82% of these investments are rated investment grade, respectively. 20 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Gross Unrealized Losses ----------------------- Less Than One Year One Year or Longer Total ---------------------------------------------------------------- Gross Gross Gross DECEMBER 31, 2003 Fair Unrealized Fair Unrealized Fair Unrealized ($ IN MILLIONS) Value Losses Value Losses Value Losses - ---------------------------------------------------------------------------------------------------------------- Fixed maturity securities available-for-sale: Mortgage-backed securities-CMO's and pass-through securities $143 $ 2 $ -- $ -- $143 $ 2 U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities 132 1 -- -- 132 1 Debt securities issued by foreign governments 2 -- -- -- 2 -- All other corporate bonds 238 4 19 1 257 5 All other debt securities 123 2 20 1 143 3 Redeemable preferred stock -- -- 1 -- 1 -- - ---------------------------------------------------------------------------------------------------------------- Total fixed maturities $638 $ 9 $ 40 $ 2 $678 $ 11 Equity securities $ 3 $ -- $ 1 $ -- $ 4 $ -- - ----------------------------------------------------------------------------------------------------------------
At December 31, 2003, the cost of approximately 220 investments in fixed maturity and equity securities exceeded their fair value by $11 million. Of the $9 million which represents fixed maturity investments that have been in a gross unrealized loss position for less than a year and the $2 million in such a position for a year or more, 87% and 32% of these investments are rated investment grade, respectively. AGING OF GROSS UNREALIZED LOSSES ON AVAILABLE FOR SALE The aging of gross unrealized losses on fixed maturity investments is as follows:
TOTAL FIXED MATURITIES WITH UNREALIZED LOSS TOTAL FIXED MATURITIES TOTALING 20% OR MORE - ------------------------------------------------------------------------------------------------ DECEMBER 31, 2004 AMORTIZED UNREALIZED AMORTIZED UNREALIZED ($ IN MILLIONS) COST LOSS COST LOSS - ------------------------------------------------------------------------------------------------ Six months or less $505 $ 3 $-- $-- Greater than six months to nine months 134 2 -- -- Greater than nine months to twelve months 26 1 -- -- Greater than twelve months 40 1 -- -- ---- ---- --- --- Total $705 $ 7 $-- $-- ==== ==== === ===
21 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TOTAL FIXED MATURITIES WITH UNREALIZED LOSS TOTAL FIXED MATURITIES TOTALING 20% OR MORE - ------------------------------------------------------------------------------------------------ DECEMBER 31, 2003 AMORTIZED UNREALIZED AMORTIZED UNREALIZED ($ IN MILLIONS) COST LOSS COST LOSS - ------------------------------------------------------------------------------------------------ Six months or less $540 $ 7 $ 1 $ -- Greater than six months to nine months 72 1 -- -- Greater than nine months to twelve months 35 1 -- -- Greater than twelve months 42 2 -- -- ---- ---- ---- ---- Total $689 $ 11 $ 1 $ -- ==== ==== ==== ====
Fair values of investments in fixed maturities and equity securities 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 quoted market prices, third-party broker quotations or validated model prices are not available amounted to $36.0 million and $124.9 million at December 31, 2004 and 2003, respectively. MORTGAGE LOANS At December 31, 2004 and 2003, the Company's mortgage loan portfolios consisted of the following: -------------------------------------------------------------------------- ($ IN MILLIONS) 2004 2003 -------------------------------------------------------------------------- Current Mortgage Loans $209 $136 Underperforming Mortgage Loans 3 -- -------------------------------------------------------------------------- Total $212 $136 -------------------------------------------------------------------------- Underperforming assets include delinquent mortgage loans over 90 days past due, loans in the process of foreclosure and loans modified at interest rates below market. Aggregate annual maturities on mortgage loans at December 31, 2004 are as shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. -------------------------------------------------------------------------- YEAR ENDING DECEMBER 31, ($ IN MILLIONS) -------------------------------------------------------------------------- 2005 $ 9 2006 25 2007 10 2008 8 2009 9 Thereafter 151 -------------------------------------------------------------------- Total $212 ==================================================================== 22 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) OTHER INVESTED ASSETS Other invested assets are composed of the following: -------------------------------------------------------------------------- ($ IN MILLIONS) 2004 2003 -------------------------------------------------------------------------- Private equity and arbitrage investments $219 $203 Derivatives 135 115 Trading Securities 22 33 Policy Loans 32 27 Real estate joint ventures 9 15 -------------------------------------------------------------------------- Total $417 $393 -------------------------------------------------------------------------- CONCENTRATIONS The Company participates in a short-term investment pool maintained by TIC. See Note 11. The Company's industry concentrations of investments, excluding those in federal and government agencies, primarily fixed maturities at fair value, were as follows: -------------------------------------------------------------------------- ($ IN MILLIONS) 2004 2003 -------------------------------------------------------------------------- Finance $918 $555 Banking 515 364 Electric Utilities 430 455 Real Estate Investment Trust 394 241 Media 342 354 Insurance 323 261 Telecommunications 290 288 -------------------------------------------------------------------------- The Company held investments in foreign banks in the amount of $201 million and $152 million at December 31, 2004 and 2003, respectively, which are included in the table above. The Company defines its below investment grade assets as those securities rated Ba1 by Moody's Investor Services (or its equivalent) 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 and notes that are classified as below investment grade. Below investment grade assets included in the preceding table include $119 million and $157 million in Electric Utilities, $25 million and $31 million in Media, and $12 million and $34 million in Telecommunications at December 31, 2004 and 2003, respectively. Below investment grade assets in other categories were insignificant. Total below investment grade fixed maturities were $501 million and $506 million at December 31, 2004 and 2003, respectively. 23 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Included in mortgage loans were the following group concentrations: ($ IN MILLIONS) -------------------------------------------------------------------------- At December 31, 2004 2003 -------------------------------------------------------------------------- STATE ----- California $ 58 $ 34 New York 40 31 -------------------------------------------------------------------------- PROPERTY TYPE ------------- Agricultural $106 $ 64 Office 70 62 -------------------------------------------------------------------------- The Company monitors creditworthiness of counterparties to all financial instruments by using controls that include credit approvals, credit 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 were insignificant at December 31, 2004 and 2003, respectively. RESTRUCTURED INVESTMENTS Mortgage loan and debt securities which were restructured at below market terms at December 31, 2004 and 2003 were insignificant. The new terms of restructured investments typically defer a portion of contract interest payments to varying future periods. Gross interest income on restructured assets that would have been recorded in accordance with the original terms of such assets was insignificant. Interest on these assets, included in net investment income, was insignificant. NET INVESTMENT INCOME -------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, ($ IN MILLIONS) 2004 2003 2002 -------------------------------------------------------------------------- GROSS INVESTMENT INCOME Fixed maturities $346 $317 $277 Other invested assets 30 32 28 Mortgage loans 18 11 11 Other 1 2 1 -------------------------------------------------------------------------- Total gross investment income 395 362 317 -------------------------------------------------------------------------- Investment expenses 6 6 5 -------------------------------------------------------------------------- Net investment income $389 $356 $312 -------------------------------------------------------------------------- 24 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) Net realized capital gains (losses) by asset class for the periods were as follows:
---------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, ($ IN MILLIONS) 2004 2003 2002 ---------------------------------------------------------------------------------- REALIZED INVESTMENT GAINS (LOSSES) Fixed maturities $ (6) $(14) $(11) Derivatives: Guaranteed minimum withdrawal benefit derivatives, net 19 -- -- Other derivatives 2 8 (17) Other invested assets (1) 1 (3) Mortgage loans -- (1) -- Other 3 (1) -- ---------------------------------------------------------------------------------- Total realized investment gains (losses) $ 17 $ (7) $(31) ----------------------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are included as accumulated other changes in equity from nonowner sources in shareholder's equity were as follows: -------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, ($ IN MILLIONS) 2004 2003 2002 -------------------------------------------------------------------------- UNREALIZED INVESTMENT GAINS (LOSSES) Fixed maturities $ 9 $ 189 $ 91 Other invested assets 4 (3) 22 -------------------------------------------------------------------------- Total unrealized investment gains 13 186 113 -------------------------------------------------------------------------- Related taxes 5 65 40 -------------------------------------------------------------------------- Change in unrealized investment gains 8 121 73 Balance beginning of year 207 86 13 -------------------------------------------------------------------------- Balance end of year $ 215 $ 207 $ 86 -------------------------------------------------------------------------- 3. REINSURANCE The Company uses 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 (YRT), coinsurance and modified coinsurance. The Company remains primarily liable as the direct insurer on all risks reinsured. Since 1997 the majority of UL business has been reinsured under an 80% ceded/20% retained YRT quota share reinsurance program and term life business has been reinsured under a 90%/10% YRT quota share reinsurance program. Beginning in September 2002, newly issued term life business has been reinsured under a 90%/10% coinsurance quota share reinsurance program. Subsequently, portions of this term coinsurance has reverted to YRT for new business. Generally, the maximum retention on an ordinary life risk is $2.5 million. Maximum retention of $2.5 million is generally reached on policies in excess of $12.5 million for UL and $25.0 million for term insurance. For other plans of insurance, it is the policy 25 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) of the Company to obtain reinsurance for amounts above certain retention limits on individual life policies, which limits vary with age and underwriting classification. Total life insurance in-force ceded under reinsurance contracts was $44.3 billion and $35.0 billion at December 31, 2004 and 2003, including $3.4 million and $4.5 million, respectively to TIC. Total life insurance premiums ceded were $34.4 million, $24.9 million and $14.9 million in 2004, 2003 and 2002, respectively. Ceded premiums paid to TIC were insignificant for these same periods. During 2004, The Travelers Life and Annuity Reinsurance Company (TLARC) was formed as a pure captive insurer in order to permit the Company to cede 100% of its statutory-based risk associated with the death benefit guarantee rider on certain universal life contracts. The reinsurance transaction related to statutory-only reserves, and had no impact on GAAP premiums and benefits. TLARC is a direct subsidiary of CIHC, TIC's parent. See Note 11. Prior to April 1, 2001, the Company also reinsured substantially all of the GMDB on its variable annuity product. Total variable annuity account balances with GMDB were $11.1 billion, including $4.8 billion or 43% which was reinsured, and $9.9 billion, of which $5.4 billion or 55% is reinsured at December 31, 2004 and 2003, respectively. GMDB is payable upon the death of a contractholder. When the benefit payable is greater than the account value of the variable annuity, the difference is called the net amount at risk (NAR). NAR was $595 million and $887 million at December 31, 2004 and 2003, respectively. NAR included $536 million, or 90%, and $816 million, or 92%, which was reinsured at December 31, 2004 and 2003, respectively. 4. INTANGIBLE ASSETS The Company has two intangible, amortizable assets, DAC and the value of insurance in force.
DAC --- Traditional Deferred ($ IN MILLIONS) Life Annuity UL Total --------------------------------------------------------------------------------- Balance January 1, 2003 $ 55 $ 632 $ 377 $ 1,064 Commissions and expenses deferred 14 172 165 351 Amortization expense (10) (107) (19) (136) --------------------------------------------------------------------------------- Balance December 31, 2003 59 697 523 1,279 Commissions and expenses deferred 11 182 276 469 Amortization expense (10) (147) (43) (200) Underlying lapse and interest rate assumptions -- (2) -- (2) Pattern of estimated gross profit adjustment -- -- (24) (24) --------------------------------------------------------------------------------- Balance December 31, 2004 $ 60 $ 730 $ 732 $ 1,522 ---------------------------------------------------------------------------------
VALUE OF INSURANCE IN FORCE The value of insurance in force totaled $10.8 million and $11.7 million at December 31, 2004 and 2003, respectively, and was reported in other assets. Amortization expense of value of insurance in force was insignificant for 2004, 2003 and 2002. 26 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. DEPOSIT FUNDS AND RESERVES At December 31, 2004 and 2003, the Company had $6.3 billion and $5.6 billion of life and annuity deposit funds and reserves, respectively, as follows.
DECEMBER 31, 2004 DECEMBER 31, 2003 ----------------- ----------------- ($ IN MILLIONS) Subject to discretionary withdrawal: With fair value adjustments $2,594 $2,552 Subject to surrender charges 1,672 1,318 Surrenderable without charge 289 99 ------ ------ Total $4,555 $3,969 Not subject to discretionary withdrawal: $1,744 $1,637 ------ ------ Total $6,299 $5,606 ====== ======
Average surrender charges included in the subject to surrender charge category above were 4.7% in both 2004 and 2003. In addition, during the payout phase, these funds are credited at significantly reduced interest rates. 6. FEDERAL INCOME TAXES EFFECTIVE TAX RATE ($ IN MILLIONS) ------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002 ------------------------------------------------------------------- Income before federal income taxes $ 207 $ 154 $ 159 Statutory tax rate 35% 35% 35% ------------------------------------------------------------------- Expected federal income taxes 72 54 56 Tax effect of: Non-taxable investment income (15) (11) -- Tax reserve release (8) (8) -- ------------------------------------------------------------------- Federal income taxes $ 49 $ 35 $ 56 =================================================================== Effective tax rate 24% 22% 35% ------------------------------------------------------------------- COMPOSITION OF FEDERAL INCOME TAXES ------------------------------------------------------------------- Current: United States $ 96 $ 73 $ (31) Foreign -- 1 -- ------------------------------------------------------------------- Total 96 74 (31) ------------------------------------------------------------------- Deferred: United States (47) (39) 87 Foreign -- -- -- ------------------------------------------------------------------- Total (47) (39) 87 ------------------------------------------------------------------- Federal income taxes $ 49 $ 35 $ 56 =================================================================== 27 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The net deferred tax liabilities at December 31, 2004 and 2003 were comprised of the tax effects of temporary differences related to the following assets and liabilities:
($ IN MILLIONS) 2004 2003 ----------------------------------------------------------------------------- Deferred Tax Assets: Benefit, reinsurance and other reserves $ 372 $ 251 Other 7 6 ----------------------------------------------------------------------------- Total 379 257 ----------------------------------------------------------------------------- Deferred Tax Liabilities: Investments, net (131) (117) Deferred acquisition costs and value of insurance in force (426) (364) Other (2) (1) ----------------------------------------------------------------------------- Total (559) (482) ----------------------------------------------------------------------------- Net Deferred Tax Liability $(180) $(225) -----------------------------------------------------------------------------
TIC and its subsidiaries, including the Company, file a consolidated federal income tax return with Citigroup. Federal income taxes are allocated to each member of the consolidated group, according to a Tax Sharing Agreement (the Agreement), on a separate return basis adjusted for credits and other amounts required by the Agreement. The Company had a $265.3 million payable to TIC at December 31, 2004 and a $9.1 million recoverable from TIC at December 31, 2003 pursuant to the Agreement. At December 31, 2004 and 2003, the Company had no ordinary or capital loss carryforwards. The policyholders' surplus account, which arose under prior tax law, is generally that portion of the gain from operations that has not been subjected to tax, plus certain deductions. The balance of this account is approximately $2.1 million. At current rates the maximum amount of such tax would be approximately $700 thousand. 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 or exceed limits prescribed by federal law. The 2004 Tax Act provides that this account can be reduced directly by distributions made by the life insurance subsidiaries in 2005 and 2006. The Company intends to make sufficient distributions to eliminate this account within the timeframe permitted under the Act. 7. SHAREHOLDER'S EQUITY SHAREHOLDER'S EQUITY AND DIVIDEND AVAILABILITY The Company's statutory net income (loss) was $(211) million, $37 million and $(134) million for the years ended December 31, 2004, 2003 and 2002, respectively. Statutory capital and surplus was $942 million and $494 million at December 31, 2004 and 2003, respectively. The Company is currently subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to its parent without prior approval of insurance regulatory authorities. In accordance with Connecticut statutes, the Company may not pay dividends during 2005 without prior approval of the State of Connecticut Insurance Department. 28 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX Changes in each component of Accumulated Other Changes in Equity from Nonowner Sources were as follows:
NET ACCUMULATED UNREALIZED DERIVATIVE OTHER CHANGES GAIN/LOSS ON INSTRUMENTS & IN EQUITY FROM INVESTMENT HEDGING NONOWNER ($ IN MILLIONS) SECURITIES ACTIVITIES SOURCES -------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 2002 $ 13 $ 3 $ 16 -------------------------------------------------------------------------------------------------------------------------- Unrealized gains on investment securities, net of tax of $35 64 -- 64 Add: Reclassification adjustment for losses included in net income, net of tax of $4 8 -- 8 Add: Derivative instrument hedging activity gains, net of tax of $3 -- 7 7 -------------------------------------------------------------------------------------------------------------------------- PERIOD CHANGE 72 7 79 -------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 3 1, 2002 85 10 95 -------------------------------------------------------------------------------------------------------------------------- Unrealized gains on investment securities, net of tax of $61 114 -- 114 Add: Reclassification adjustment for losses included in net income, net of tax of $5 9 -- 9 Less: Derivative instrument hedging activity loss, net of tax benefits of $(1) -- (3) (3) -------------------------------------------------------------------------------------------------------------------------- PERIOD CHANGE 123 (3) 120 -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2003 208 7 215 Unrealized gains on investment securities, net of tax of $3 5 -- 5 Add: Reclassification adjustment for losses included in net income, net of tax of $2 4 -- 4 Less: Derivative instrument hedging activity loss, net of tax benefits of $(3) -- (5) (5) -------------------------------------------------------------------------------------------------------------------------- PERIOD CHANGE 9 (5) 4 -------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2004 $ 217 $ 2 $ 219 --------------------------------------------------------------------------------------------------------------------------
29 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. BENEFIT PLANS PENSION AND OTHER POSTRETIREMENT BENEFITS The Company participates in a qualified, noncontributory defined benefit pension plan, a non-qualified pension plan and other postretirement benefits to retired employees through plans sponsored by Citigroup. The Company's share of net expense for these plans was not significant for 2004, 2003 and 2002. 401(K) SAVINGS PLAN Substantially all of the Company's employees are eligible to participate in a 401(k) savings plan sponsored by Citigroup. The Company's expenses in connection with the 401(k) savings plan were not significant in 2004, 2003 and 2002. See Note 11. 9. 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 foreign currency, equity price changes and/or interest rate risk on anticipated transactions or existing assets and liabilities. The Company does not hold or issue derivative instruments for trading purposes. The Company uses exchange traded financial futures contracts to manage its exposure to changes in interest rates that 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. Futures contracts are commitments to buy or sell at a future date a financial instrument, at a contracted price, and may be settled in cash or through delivery. The Company uses equity option contracts to manage its exposure to changes in equity market prices that arise from the sale of certain insurance products. To hedge against adverse changes in the equity market prices, the Company enters long positions in equity option contracts with major financial institutions. These contracts allow the Company, for a fee, the right to receive a payment if the Standard and Poor's 500 Index falls below agreed upon strike prices. The Company enters into interest rate swaps in connection with other financial instruments to provide greater risk diversification and better match the cash flows from assets and related liabilities. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. A single net payment is usually made by one counterparty at each due date. Forward contracts are used on an ongoing basis to hedge the Company's exposure to foreign currency exchange rates that result from the net investment in the Company's direct foreign currency investments. To hedge against adverse changes in exchange rates, the Company enters into contracts to exchange 30 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) foreign currency for U.S. Dollars with major financial institutions. These contracts cannot be settled prior to maturity. At the maturity date the Company must purchase the foreign currency necessary to settle the contracts. Several of the Company's hedging strategies do not qualify or are not designated as hedges for accounting purposes. This can occur when the hedged item is carried at fair value with changes in fair value recorded in earnings, the derivative contracts are used in a macro hedging strategy, the hedge is not expected to be highly effective, or structuring the hedge to qualify for hedge accounting is too costly or time consuming. 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. Additionally, the Company enters into collateral agreements with its derivative counterparties. As of December 31, 2004 and 2003 the Company held collateral under these contracts amounting to approximately $101.5 million and $69.7 million, respectively. The table below provides a summary of the notional and fair value of derivatives by type:
($ IN MILLIONS) DECEMBER 31, 2004 DECEMBER 31, 2003 Fair Value Fair Value ---------- ---------- Notional Notional Derivative Type Amount Assets Liabilities Amount Assets Liabilities --------------- ----------------------------------------------------------------------- Interest rate, equity and currency swaps $ 228.5 $ 4.1 $ 12.5 $ 331.8 $ 12.2 $ 8.5 Financial futures 216.9 -- -- 92.2 -- -- Interest rate and equity options 1,031.6 135.4 -- 491.0 115.1 -- Currency forwards 3.1 -- -- 1.4 -- -- Credit derivatives 8.6 0.2 0.1 8.6 0.2 0.1 ----------------------------------------------------------------------- TOTAL $1,488.7 $ 139.7 $ 12.6 $ 925.0 $ 127.5 $ 8.6 =======================================================================
The following table summarizes certain information related to the Company's hedging activities for the years ended December 31, 2004 and 2003:
Year Ended Year Ended ($ IN MILLIONS) December 31, 2004 December 31, 2003 ------------------------------------------------------------------------------ Hedge ineffectiveness recognized related to fair value hedges $ (3.8) $ (3.3) Hedge ineffectiveness recognized related to cash flow hedges (.1) (.3) Net gain or loss from economic hedges in earnings (.6) 8.1
Cash flow transaction amounts expected to be reclassified from accumulated other changes in equity from nonowner sources into pre-tax earnings within twelve months from December 31, 2004 is not significant. 31 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 and joint ventures. All of these commitments are to unaffiliated entities. The notional values of loan commitments at December 31, 2004 and 2003 were $34.4 million and $7.6 million, respectively. The notional values of other unfunded commitments were $19.9 million and $31.0 million at December 31, 2004 and 2003, respectively. FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS The Company uses various financial instruments in the normal course of its business. Certain insurance contracts are excluded by SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," and therefore are not included in the amounts discussed. At December 31, 2004, investments in fixed maturities had a carrying value and a fair value of $6.3 billion compared with a carrying value and a fair value of $5.4 billion at December 31, 2003. See Notes 1 and 2. At December 31, 2004, mortgage loans had a carrying value of $212.1 million and a fair value of $220.8 million and at December 31, 2003 had a carrying value of $135.4 million and a fair value of $147.6 million. In estimating fair value, the Company used interest rates reflecting the current real estate financing market. The carrying values of short-term securities were $420.0 million and $195.3 million in 2004 and 2003, respectively, which approximated their fair values. Policy loans, which are included in other invested assets, had carrying values of $31.9 million and $26.8 million in 2004 and 2003, respectively, which also approximated their fair values. The Company had interest rate and equity options with fair values of $135.4 million and $115.1 million, at December 31, 2004 and 2003, respectively, also included in other invested assets. The carrying values of $208.7 million and $260.6 million of financial instruments classified as other assets approximated their fair values at December 31, 2004 and 2003, respectively. The carrying values of $425.9 million and $439.2 million of financial instruments classified as other liabilities also approximated their fair values at December 31, 2004 and 2003, respectively. Fair value is determined using various methods, including discounted cash flows, as appropriate for the various financial instruments. At December 31, 2004 and 2003, contractholder funds with defined maturities had a carrying value of $2.8 billion and a fair value of $3.0 billion. 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 $610.6 million and a fair value of $543.2 million at December 31, 2004, compared with a carrying value of $677.7 million and a fair value of $527.3 million at December 31, 2003. These contracts generally are valued at surrender value. 32 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES LITIGATION In August 1999, an amended putative class action complaint captioned LISA MACOMBER, ET AL. VS. TRAVELERS PROPERTY CASUALTY CORPORATION, ET AL. was filed in New Britain, Connecticut Superior Court against the Company, its parent corporation, certain of the Company's affiliates (collectively TLA), and the Company's former affiliate, Travelers Property Casualty Corporation. The amended complaint alleges Travelers Property Casualty Corporation purchased structured settlement annuities from the Company and spent less on the purchase of those structured settlement annuities than agreed with claimants; and that commissions paid to brokers of structured settlement annuities, including an affiliate of the Company, were paid, in part, to Travelers Property Casualty Corporation. The amended complaint was dismissed and following an appeal by plaintiff in September 2002 the Connecticut Supreme Court reversed the dismissal of several of the plaintiff's claims. On May 26, 2004, the Connecticut Superior Court certified a nation wide class action. The class action claims against TLA are violation of the Connecticut Unfair Trade Practice Statute, unjust enrichment and civil conspiracy. On June 15, 2004, the Defendants, including TLA, appealed the Connecticut Superior Court's May 26, 2004 class certification order. In 2003 and 2004, several issues in the mutual fund and variable insurance product industries have come under the scrutiny of federal and state regulators. Like many other companies in our industry, the Company has received a request for information from the Securities and Exchange Commission (SEC) and a subpoena from the New York Attorney General regarding market timing and late trading. During 2004 the SEC requested additional information about the Company's variable product operations on market timing, late trading and revenue sharing, and the SEC, the National Association of Securities Dealers and the New York Insurance Department have made inquiries into these issues and other matters associated with the sale and distribution of insurance products. In addition, like many insurance companies and agencies, in 2004 and 2005 the Company received inquiries from certain state Departments of Insurance regarding producer compensation and bidding practices. The Company is cooperating fully with all of these requests and is not able to predict their outcomes. In addition, the Company is a defendant or co-defendant in various other litigation matters in the normal course of business. These include civil actions, arbitration proceedings and other matters arising in the normal course of business out of activities as an insurance company, a broker and dealer in securities or otherwise. In the opinion of the Company's management, the ultimate resolution of these legal and regulatory proceedings would not be likely to have a material adverse effect on the Company's financial condition or liquidity, but, if involving monetary liability, may be material to the Company's operating results for any particular period. 33 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. RELATED PARTY TRANSACTIONS TIC handles banking functions, including payment of expenses for the Company and some of its non-insurance affiliates. In addition, Citigroup and certain of its subsidiaries provide investment management and accounting services, payroll, internal auditing, benefit management and administration, property management and investment technology services to the Company as of December 31, 2004 and 2003. Charges for these services are shared by the Company and TIC on cost allocation methods, based generally on estimated usage by department and were insignificant for the Company in 2004, 2003 and 2002. TIC maintains a short-term investment pool in which the Company participates. The position of each company participating in the pool is calculated and adjusted daily. At December 31, 2004 and 2003, the pool totaled approximately $4.1 billion and $3.8 billion, respectively. The Company's share of the pool amounted to $384.2 million and $124.6 million at December 31, 2004 and 2003, respectively, and is included in short-term securities in the balance sheet. At December 31, 2004 and 2003, the Company had investments in Tribeca Citigroup Investments Ltd., an affiliate of the Company, in the amounts of $13.8 million and $25.5 million, respectively. Income of $1.3 million, $6.6 million and $1.9 million was earned on these investments in 2004, 2003 and 2002, respectively. At December 31, 2004 and 2003 the Company had outstanding loaned securities to an affiliate, Citigroup Global Markets Inc., (CGMI) in the amount of $38.1 million and $7.1 million, respectively. The Company has other affiliated investments. The individual investment with any one affiliate was insignificant at December 31, 2004 and 2003. The Company's Travelers Target Maturity (TTM) Modified Guaranteed Annuity Contracts are subject to a limited guarantee agreement by TIC in a principal amount of up to $450 million. TIC's obligation is to pay in full to any owner or beneficiary of the TTM Modified Guaranteed Annuity Contracts principal and interest as and when due under the annuity contract to the extent that the Company fails to make such payment. In addition, TIC guarantees that the Company will maintain a minimum statutory capital and surplus level. The Company distributes fixed and variable annuity products through its affiliate Smith Barney (SB), a division of CGMI. Premiums and deposits related to these products were $506 million, $707 million and $821 million in 2004, 2003 and 2002, respectively. The Company also markets term and universal life products through SB. Premiums related to such products were $107.7 million, $87.5 million and $87.2 million in 2004, 2003 and 2002, respectively. Commissions and fees paid to SB were $50.2 million, $56.7 million and $57.5 million in 2004, 2003 and 2002, respectively. The Company also distributes deferred annuity products through its affiliates Primerica Financial Services, Inc. (PFS), CitiStreet Retirement Services, a division of CitiStreet LLC, (together with its subsidiaries, CitiStreet) and Citibank, N.A. (Citibank). Deposits received from PFS were $636 million, $628 million and $662 million in 2004, 2003 and 2002, respectively. Commissions and fees paid to PFS were $47.9 million, $52.4 million and $47.1 million in 2004, 2003 and 2002, respectively. 34 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Deposits received from CitiStreet were $116 million, $82 million and $184 million in 2004, 2003 and 2002, respectively. Related commissions and fees paid to CitiStreet were $3.1 million, $2.3 million and $2.6 million in 2004, 2003 and 2002, respectively. Deposits received from Citibank were $112 million, $162 million and $117 million in 2004, 2003 and 2002, respectively. Commissions and fees paid to Citibank were $13.0 million, $12.4 million and $7.2 million in 2004, 2003 and 2002, respectively. 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 other employees. To further encourage employee stock ownership, Citigroup introduced the WealthBuilder stock option program during 1997 and the Citigroup Ownership Program in 2001. Under these programs, all employees meeting established requirements have been granted Citigroup stock options. During 2001, Citigroup introduced the Citigroup 2001 Stock Purchase Program for new employees, which allowed eligible employees of Citigroup, including the Company's employees, to enter into fixed subscription agreements to purchase shares at the market value on the date of the agreements. During 2003 Citigroup introduced the Citigroup 2003 Stock Purchase Program, which allowed eligible employees of Citigroup, including the Company's employees, to enter into fixed subscription agreements to purchase shares at the lesser of the market value on the first date of the offering period or the market value at the close of the offering period. Enrolled employees are permitted to make one purchase prior to the expiration date. The Company's charge to income for these plans was insignificant in 2004, 2003 and 2002. Most leasing functions for TIC and the Company are administered by a Citigroup subsidiary. Rent expense related to leases is shared by the companies on a cost allocation method based generally on estimated usage by department. The Company's rent expense was insignificant in 2004, 2003 and 2002. During 2004 TLARC was established as a pure captive to reinsure 100% of the statutory-based risk associated with universal life contracts. Statutory premiums paid by the Company to TLARC totaled $927 million in 2004. Ceding commissions and experience refunds paid by TLARC to the Company totaled $913 million in 2004. The net amount paid was $14 million and was reported as a reduction of other income. See Note 3. 35 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES The following table reconciles net income to net cash used in operating activities:
-------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002 ($ IN MILLIONS) -------------------------------------------------------------------------------- Net Income $ 158 $ 119 $ 103 Adjustments to reconcile net income to cash used in operating activities: Realized (gains) losses (17) 7 31 Deferred federal income taxes (47) (39) 87 Amortization of deferred policy acquisition costs 226 136 67 Additions to deferred policy acquisition costs (469) (351) (317) Investment income accrued (7) (37) (35) Insurance reserves (49) (16) (9) Other 314 (44) 72 -------------------------------------------------------------------------------- Net cash used in operations $ 109 $(225) $ (1) --------------------------------------------------------------------------------
13. NON-CASH INVESTING AND FINANCING ACTIVITIES There were no significant non-cash activities for the years end December 31, 2004, 2003 and 2002. 14. SUBSEQUENT EVENT On January 31, 2005, Citigroup announced that it had agreed to sell TIC, the Company and certain other domestic and international insurance businesses (the Life Insurance and Annuity Businesses) to MetLife, Inc. (MetLife) pursuant to an Acquisition Agreement (the Agreement). The transaction is subject to certain regulatory approvals, as well as other customary conditions to closing. Citigroup currently anticipates that the intended sale would be completed this summer. TIC's Primerica segment and certain other assets will remain with Citigroup. Accordingly, prior to the closing, TIC will distribute to its parent company, by way of dividend, Primerica Life Insurance Company and certain other assets. Subject to closing adjustments described in the Agreement, the contemplated sale price would be $11.5 billion. 36 THE TRAVELERS LIFE AND ANNUITY COMPANY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholder The Travelers Life and Annuity Company: Under date of March 28, 2005, we reported on the balance sheets of The Travelers Life and Annuity Company as of December 31, 2004 and 2003, and the related statements of income, changes in shareholder's equity and cash flows for each of the years in the three-year period ended December 31, 2004, which are included in the Form 10-K. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the financial statements, the Company changed its methods of accounting and reporting for certain nontraditional long-duration contracts and for separate accounts in 2004 and for goodwill and intangible assets in 2002. /s/ KPMG LLP Hartford, Connecticut March 28, 2005 37 THE TRAVELERS LIFE AND ANNUITY COMPANY SCHEDULE I SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2004 ($ IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------ AMOUNT SHOWN IN TYPE OF INVESTMENT COST VALUE BALANCE SHEET (1) - ------------------------------------------------------------------------------------------------------------------ Fixed Maturities: Bonds: U.S. Government and government agencies and authorities $ 719 $ 741 $ 741 States, municipalities and political subdivisions 57 65 65 Foreign governments 63 69 69 Public utilities 354 382 382 Convertible bonds and bonds with warrants attached 25 28 28 All other corporate bonds 4,707 4,970 4,970 - ------------------------------------------------------------------------------------------------------------------ Total Bonds 5,925 6,255 6,255 Redeemable Preferred Stocks 4 6 6 - ------------------------------------------------------------------------------------------------------------------ Total Fixed Maturities 5,929 6,261 6,261 - ------------------------------------------------------------------------------------------------------------------ Equity Securities: Common Stocks: Industrial, miscellaneous and all other 12 15 15 - ------------------------------------------------------------------------------------------------------------------ Total Common Stocks 12 15 15 Non-Redeemable Preferred Stocks 4 4 4 - ------------------------------------------------------------------------------------------------------------------ Total Equity Securities 16 19 19 - ------------------------------------------------------------------------------------------------------------------ Mortgage Loans 212 212 Policy Loans (4) 32 32 Short-Term Securities 420 420 Other Investments (2) (3) 312 312 - ------------------------------------------------------------------------------------------------------------------ Total Investments $6,921 $7,256 ==================================================================================================================
(1) Determined in accordance with methods described in Notes 1 and 2 of Notes to Financial Statements. (2) Excludes cost and carrying value of investments in related parties of $72 million and $73 million, respectively. (3) Includes derivatives marked to market and recorded at fair value in the balance sheet. (4) Included in other invested assets on balance sheet. 38 THE TRAVELERS LIFE AND ANNUITY COMPANY SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION 2002-2004 ($ IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------ FUTURE POLICY BENEFITS, BENEFITS, LOSSES, NET CLAIMS, LOSSES OTHER DEFERRED POLICY CLAIMS AND LOSS PREMIUM INVESTMENT AND SETTLEMENT AMORTIZATION OF DEFERRED OPERATING PREMIUMS ACQUISITION COSTS EXPENSES (1) REVENUE INCOME EXPENSES (2) POLICY ACQUISITION COSTS EXPENSES WRITTEN - ------------------------------------------------------------------------------------------------------------------------------------ 2004 $1,522 $6,306 $40 $389 $326 $226 $63 $40 2003 $1,279 $5,610 $41 $356 $307 $136 $49 $41 2002 $1,064 $5,032 $43 $312 $275 $ 67 $32 $43
(1) Includes contractholder funds. (2) Includes interest credited on contractholder funds. 39 THE TRAVELERS LIFE AND ANNUITY COMPANY SCHEDULE IV REINSURANCE ($ IN MILLIONS)
- ----------------------------------------------------------------------------------------- PERCENTAGE ASSUMED OF AMOUNT CEDED TO OTHER FROM OTHER ASSUMED TO GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT NET - ----------------------------------------------------------------------------------------- 2004 - ---- Life Insurance In Force $54,886 $44,286 $ -- $10,600 -- % Premiums: Annuity $ 6 $ -- $ -- $ 6 Individual life 68 34 -- 34 ------- ------- ------- ------- Total Premiums $ 74 $ 34 $ -- $ 40 -- % ======= ======= ======= ======= 2003 - ---- Life Insurance In Force $43,671 $34,973 $ -- $ 8,698 -- % Premiums: Annuity $ 4 $ -- $ -- $ 4 Individual Life 62 25 -- 37 ------- ------- ------- ------- Total Premiums $ 66 $ 25 $ -- $ 41 -- % ======= ======= ======= ======= 2002 - ---- Life Insurance In Force $35,807 $29,261 $ -- $ 6,546 -- % Premiums: Annuity $ 5 $ -- $ -- $ 5 Individual life 53 15 -- 38 ------- ------- ------- ------- Total Premiums $ 58 $ 15 $ -- $ 43 -- % ======= ======= ======= =======
40 8 VINTAGE STATEMENT OF ADDITIONAL INFORMATION THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES INDIVIDUAL VARIABLE ANNUITY CONTRACT ISSUED BY THE TRAVELERS LIFE AND ANNUITY COMPANY ONE CITYPLACE HARTFORD, CONNECTICUT 06103-3415 L-12540S May 2005 PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (a) The financial statements of the Registrant and the Report of Independent Registered Public Accounting Firm thereto are contained in the Registrant's Annual Report and are included in the Statement of Additional Information. The financial statements of the Registrant include: Statement of Assets and Liabilities as of December 31, 2004 Statement of Operations for the year ended December 31, 2004 Statement of Changes in Net Assets for the years ended December 31, 2004 and 2003 Statement of Investments as of December 31, 2004 Notes to Financial Statements The financial statements and schedules of The Travelers Life and Annuity Company and the report of Independent Registered Public Accounting Firm, are contained in the Statement of Additional Information. The financial statements of The Travelers Life and Annuity Company include: Statements of Income for the years ended December 31, 2004, 2003 and 2002 Balance Sheets as of December 31, 2004 and 2003 Statements of Changes in Retained Earnings and Accumulated Other Changes in Equity from Non-Owner Sources for the years ended December 31, 2004, 2003 and 2002 Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 Notes to Financial Statements (b) Exhibits EXHIBIT NUMBER DESCRIPTION ------ ----------- 1. Resolution of The Travelers Life and Annuity Company Board of Directors authorizing the establishment of the Registrant. (Incorporated herein by reference to Registration Statement on Form N-4, File No. 3-58131, filed via Edgar on March 17, 1995.) 2. Not Applicable. 3(a) Distribution and Principal Underwriting Agreement among the Registrant, The Travelers Life and Annuity Company and Travelers Distribution LLC (Incorporated herein by reference to Exhibit 3(a) to the Registration Statement on Form N-4, File No. 333-58809 filed February 26, 2001.) 3(b) Selling Agreement. (Incorporated herein by reference to Exhibit 3(b) to Post-Effective Amendment No. 2 the Registration Statement on Form N-4, File No. 333-65942 filed April 15, 2003.) 4 Variable Annuity Contracts. (Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-58131, filed via Edgar on March 17, 1995.) 5. Form of Applications. (Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-4, filed September 8, 1995.) 6(a) Charter of The Travelers Life and Annuity Company, as amended on April 10, 1990. (Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-58131, filed via Edgar on March 17, 1995.) 6(b) By-Laws of The Travelers Life and Annuity Company, as amended on October 20, 1994. (Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-58131, filed via Edgar on March 17, 1995.) 7. Specimen Reinsurance Contract. (Incorporated herein by reference to Exhibit 7 to Post-Effective Amendment No. 2 the Registration Statement on Form N-4, File No. 333-65942 filed April 15, 2003.) 8 Form of Participation Agreement. (Incorporated herein by reference to Exhibit 8 to Post-Effective Amendment No. 8 to the Registration Statement on Form N-4, File No. 333-101778. 9. Opinion of Counsel as to the legality of securities being registered. (Incorporated herein by reference to Exhibit 9 to Post-Effective Amendment No. 3 to the Registration Statement on Form N-4 filed April 29, 1997.) 10. Consent of KPMG LLP, Independent Registered Public Accounting Firm. Filed herewith. 11. Not applicable. 12. Not applicable. 15. Powers of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as signatory for George C. Kokulis, Katherine M. Sullivan and Glenn D. Lammey. (Incorporated herein by reference to Exhibit 15(b) to Post-Effective Amendment No. 5 to the Registration Statement on Form N-4, filed April 18, 2000. Power of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as signatory for Glenn D. Lammey, Marla Berman Lewitus and William R. Hogan. (Incorporated herein by reference to Exhibit 15 to Post-Effective Amendment No. 6 to the Registration Statement on Form N-4 filed April 19, 2001.) Power of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as signatory for Kathleen A. Preston. (Incorporated herein by reference to Exhibit 15 to Post-Effective Amendment No. 7 to the Registration Statement on Form N-4, File No. 33-58131 filed April 24, 2002.) Power of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as signatory for Edward Cassidy. Filed herewith. Power of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as signatory for William P. Krivoshik. Filed herewith. ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
NAME AND PRINCIPAL POSITIONS AND OFFICES BUSINESS ADDRESS WITH INSURANCE COMPANY - ---------------- ---------------------- George C. Kokulis Director, Chairman, President and Chief Executive Officer Glenn D. Lammey Director, Senior Executive Vice President, Chief Financial Officer, Chief Accounting Officer Kathleen L. Preston Director and Executive Vice President Edward W. Cassidy Director and Executive Vice President Brendan M. Lynch Executive Vice President David P. Marks Executive Vice President and Chief Investment Officer Winnifred Grimaldi Senior Vice President Marla Berman Lewitus Director, Senior Vice President and General Counsel William P. Krivoshik Director, Senior Vice President and Chief Information Officer David A. Golino Vice President and Controller Donald R. Munson, Jr. Vice President Mark Remington Vice President Tim W. Still Vice President Bennett Kleinberg Vice President Dawn Fredette Vice President George E. Eknaian Vice President and Chief Actuary Linn K. Richardson Second Vice President and Actuary Paul Weissman Second Vice President and Actuary Ernest J.Wright Vice President and Secretary Kathleen A. McGah Assistant Secretary and Deputy General Counsel
Principal Business Address: * The Travelers Insurance Company One Cityplace Hartford, CT 06103-3415 ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR REGISTRANT Incorporated herein by reference to Exhibit 16 to Post-Effective Amendment No. 8 to the Registration Statement on Form N-4, File No. 333-101778. ITEM 27. NUMBER OF CONTRACT OWNERS As of February 28, 2005, 10,101 Contract Owners held qualified and non-qualified contracts offered by the Registrant. ITEM 28. INDEMNIFICATION Sections 33-770 to 33-778, inclusive of the Connecticut General Statutes ("C.G.S.") regarding indemnification of directors and officers of Connecticut corporations provides in general that Connecticut corporations shall indemnify their officers, directors and certain other defined individuals against judgments, fines, penalties, amounts paid in settlement and reasonable expenses actually incurred in connection with proceedings against the corporation. The corporation's obligation to provide such indemnification generally does not apply unless (1) the individual is wholly successful on the merits in the defense of any such proceeding; or (2) a determination is made (by persons specified in the statute) that the individual acted in good faith and in the best interests of the corporation and in all other cases, his conduct was at least not opposed to the best interests of the corporation, and in a criminal case he had no reasonable cause to believe his conduct was unlawful; or (3) the court, upon application by the individual, determines in view of all of the circumstances that such person is fairly and reasonably entitled to be indemnified, and then for such amount as the court shall determine. With respect to proceedings brought by or in the right of the corporation, the statute provides that the corporation shall indemnify its officers, directors and certain other defined individuals, against reasonable expenses actually incurred by them in connection with such proceedings, subject to certain limitations. Citigroup Inc. also provides liability insurance for its directors and officers and the directors and officers of its subsidiaries, including the Registrant. This insurance provides for coverage against loss from claims made against directors and officers in their capacity as such, including, subject to certain exceptions, liabilities under the federal securities laws. RULE 484 UNDERTAKING Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 29. PRINCIPAL UNDERWRITER (a) Travelers Distribution LLC One Cityplace Hartford, CT 06103-3415 Travelers Distribution LLC also serves as principal underwriter and distributor for the following funds: The Travelers Fund U for Variable Annuities, The Travelers Fund VA for Variable Annuities, The Travelers Fund BD for Variable Annuities, The Travelers Fund BD III for Variable Annuities, Travelers Fund BD IV for Variable Annuities, The Travelers Fund ABD for Variable Annuities, The Travelers Fund ABD II for Variable Annuities,The Travelers Separate Account PF for Variable Annuities, The Travelers Separate Account PF II for Variable Annuities, The Travelers Separate Account QP for Variable Annuities, The Travelers Separate Account TM for Variable Annuities, The Travelers Separate Account TM II for Variable Annuities, The Travelers Separate Account Five for Variable Annuities, The Travelers Separate Account Six for Variable Annuities, The Travelers Separate Account Seven for Variable Annuities, The Travelers Separate Account Eight for Variable Annuities, The Travelers Separate Account Nine for Variable Annuities, The Travelers Separate Account Ten for Variable Annuities, The Travelers Fund UL for Variable Life Insurance, The Travelers Fund UL II for Variable Life Insurance, The Travelers Fund UL III for Variable Life Insurance, The Travelers Variable Life Insurance Separate Account One, The Travelers Variable Life Insurance Separate Account Two, The Travelers Variable Life Insurance Separate Account Three, The Travelers Variable Life Insurance Separate Account Four, The Travelers Separate Account MGA, The Travelers Separate Account MGA II, The Travelers Growth and Income Stock Account for Variable Annuities, The Travelers Quality Bond Account for Variable Annuities, The Travelers Money Market Account for Variable Annuities, The Travelers Timed Growth and Income Stock Account for Variable Annuities, The Travelers Timed Short-Term Bond Account for Variable Annuities and The Travelers Timed Aggressive Stock Account for Variable Annuities, Citicorp Life Variable Annuity Separate Account and First Citicorp Life Variable Annuity Separate Account,TIC Separate Account Eleven for Variable Annuities, TLAC Separate Account Twelve for Variable Annuities, TIC Separate Account Thirteen for Variable Annuities, TLAC Separate Account Fourteen for Variable Annuities, TIC Variable Annuity Separate Account 2002, and TLAC Variable Annuity Separate Account 2002.
(b) NAME AND PRINCIPAL POSITIONS AND OFFICES BUSINESS ADDRESS WITH UNDERWRITER ---------------- ---------------- Kathleen L. Preston Board of Manager Glenn D. Lammey Board of Manager William F. Scully III Board of Manager Donald R. Munson, Jr. Board of Manager, President, Chief Executive Officer and Chief Operating Officer Tim W. Still Vice President Anthony Cocolla Vice President John M. Laverty Treasurer and Chief Financial Officer Stephen E. Abbey Chief Compliance Officer Alison K. George Director and Chief Advertising Compliance Officer Stephen T. Mullin Chief Compliance Officer Ernest J. Wright Secretary Kathleen A. McGah Assistant Secretary William D. Wilcox Assistant Secretary
* The business address for all the above is: One Cityplace, Hartford, CT 06103-3415. (c) Not Applicable ITEM 30. LOCATION OF ACCOUNTS AND RECORDS (1) The Travelers Life and Annuity Company One Cityplace Hartford, Connecticut 06103-3415 ITEM 31. MANAGEMENT SERVICES Not applicable. ITEM 32. UNDERTAKINGS The undersigned Registrant hereby undertakes: (a) To file a post-effective amendment to this registration statement as frequently as is necessary to ensure that the audited financial statements in the registration statement are never more than sixteen months old for so long as payments under the variable annuity contracts may be accepted; (b) To include either (1) as part of any application to purchase a contract offered by the prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a post card or similar written communication affixed to or included in the prospectus that the applicant can remove to send for a Statement of Additional Information; and (c) To deliver any Statement of Additional Information and any financial statements required to be made available under this Form N-4 promptly upon written or oral request. The Company hereby represents: (a) That the aggregate charges under the Contracts of the Registrant described herein are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Company. SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets the requirements of Securities Act Rule 485(b) for effectiveness of this post-effective amendment to this registration statement and has duly caused this post-effective amendment to this registration statement to be signed on its behalf, in the City of Hartford, State of Connecticut, on this 20th day of April, 2005. THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES (Registrant) THE TRAVELERS LIFE AND ANNUITY COMPANY (Depositor) By: *GLENN D. LAMMEY ----------------------------------------- Glenn D. Lammey, Chief Financial Officer, Chief Accounting Officer As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on the 20th day of April, 2005.
*GEORGE C. KOKULIS Director, President and Chief Executive - --------------------------------------------------------- Officer (Principal Executive Officer) (George C. Kokulis) *GLENN D. LAMMEY Director, Chief Financial Officer, Chief - --------------------------------------------------------- Accounting Officer (Principal Financial (Glenn D. Lammey) Officer) *MARLA BERMAN LEWITUS Director, Senior Vice President and General - --------------------------------------------------------- Counsel (Marla Berman Lewitus) *KATHLEEN L. PRESTON Director and Executive Vice President - --------------------------------------------------------- (Kathleen L. Preston) *EDWARD W. CASSIDY Director and Executive Vice President - --------------------------------------------------------- (Edward W. Cassidy) *WILLIAM P. KRIVOSHIK Director, Senior Vice President and Chief - --------------------------------------------------------- Information Officer (William P. Krivoshik)
*By: /s/ Ernest J. Wright, Attorney-in-Fact EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 10. Consent of KPMG LLP, Independent Registered Public Accounting Firm. 15. Power of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as signatory for Edward W. Cassidy. Power of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as signatory for William Krivoshik. EX-10 2 c36276_ex-10.txt EXHIBIT 10 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors The Travelers Life and Annuity Company: We consent to the use of our reports included herein or incorporated by reference and to the reference to our firm under the heading "Independent Registered Public Accounting Firm". Our reports on The Travelers Life and Annuity Company refer to changes in the Company's methods of accounting and reporting for certain nontraditional long-duration contracts and for separate accounts in 2004 and for goodwill and intangible assets in 2002. /s/ KPMG LLP Hartford, Connecticut April 20, 2005 EX-15 3 c36276_ex-15.txt EXHIBIT 15 THE TRAVELERS LIFE AND ANNUITY COMPANY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That I, EDWARD W. CASSIDY of South Windsor, Connecticut, Director, and Executive Vice President of The Travelers Life and Annuity Company (hereafter the "Company"), do hereby make, constitute and appoint ERNEST J. WRIGHT, Secretary of said Company, and KATHLEEN A. McGAH, Assistant Secretary of said Company, or either one of them acting alone, my true and lawful attorney-in-fact, for me, and in my name, place and stead, to sign registration statements on behalf of said Company on Form N-4 or other appropriate form under the Securities Act of 1933 for variable life insurance contracts and modified annuity contracts to be offered by said Company, and further, to sign any and all amendments thereto, including pre-effective and 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 8th day of February, 2005. /s/ Edward W. Cassidy -------------------------------------- Director, and Executive Vice President The Travelers Life and Annuity Company THE TRAVELERS INSURANCE COMPANY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That I, WILLIAM P. KRIVOSHIK of Wilton, Connecticut, Director, Senior Vice President and Chief Information Officer of The Travelers Life and Annuity Company (hereafter the "Company"), do hereby make, constitute and appoint ERNEST J. WRIGHT, Secretary of said Company, and KATHLEEN A. McGAH, Assistant Secretary of said Company, or either one of them acting alone, my true and lawful attorney-in-fact, for me, and in my name, place and stead, to sign registration statements on behalf of said Company on Form N-4 or other appropriate form under the Securities Act of 1933 for variable life insurance contracts and modified annuity contracts to be offered by said Company, and further, to sign any and all amendments thereto, including pre-effective and 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 8th day of February, 2005. /s/ William P. Krivoshik --------------------------------------------------- Director, Senior Vice President and Chief Information Officer The Travelers Life and Annuity Company -----END PRIVACY-ENHANCED MESSAGE-----