<PAGE>   1
                                                                   Exhibit 13.01


               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES


SELECTED CONSOLIDATED FINANCIAL DATA
(In millions, except per share amounts)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
At and for the Year Ended December 31, (1)                             1997         1996          1995         1994         1993
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>           <C>          <C>          <C>          <C>
Total revenues                                                     $    9,911    $   8,197    $    4,569   $    4,168   $    4,715

Net income                                                         $    1,236    $     391    $      419   $      188   $      167


Total assets                                                       $   50,682    $  49,779    $   24,062   $   22,481   $   21,416
Long-term debt                                                     $    1,249    $   1,249             -            -            -
TAP-obligated mandatorily redeemable preferred
   securities of subsidiary trusts holding solely junior
   subordinated debt securities of TAP                             $      900    $     900             -            -            -
Stockholders' equity (2)                                           $    7,777    $   6,480    $    3,601   $    2,581   $    2,977


Per common share data:
Net income (3, 5)                                                  $     3.13    $    1.02    $    1.28    $     0.57   $     0.51
Net income-assuming dilution (4, 5)                                $     3.12    $    1.02    $    1.28    $     0.57   $     0.51
Cash dividends                                                     $     0.30    $    0.15          N/A           N/A          N/A
Book value                                                         $    19.78    $   16.22          N/A           N/A          N/A
Book value excluding FAS 115 adjustment                            $    17.95    $   15.50          N/A           N/A          N/A

Other data:
Year-end common shares outstanding (6)                                  393.1        399.6          N/A           N/A          N/A
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Includes amounts related to Aetna P&C from April 2, 1996, the date of the
     acquisition. GAAP financial data related to balance sheet data as of
     December 31, 1993 and subsequent, and income statement data related to
     periods ended after December 31, 1993, are presented on a purchase
     accounting basis.

(2)  Stockholders' equity at December 31, 1997, 1996, 1995 and 1994 reflects
     $722 million, $285 million, $280 million and ($443) million, respectively,
     of net unrealized gains (losses) on investment securities pursuant to the
     adoption of Statement of Financial Accounting Standards No. 115,
     "Accounting for Certain Investments in Debt and Equity Securities" in 1994.

(3)  Net income per common share is computed by dividing income available to
     common stockholders by the weighted average number of common shares
     outstanding for the period.

(4)  Net income per common share-assuming dilution (diluted EPS) reflects the
     effect of potentially dilutive securities, principally stock-based
     incentive plans.

(5)  For purposes of computing basic and diluted earnings per share for periods
     prior to the IPO, the 328 million shares of common stock issued to TIGI in
     April 1996 were assumed to be outstanding for all reported periods. See
     note 2 to the consolidated financial statements.

(6)  In April 1996, in conjunction with the acquisition of Aetna P&C, the 
     Company issued common stock through its IPO.  See note 2 to the 
     consolidated financial statements.


                                       1
<PAGE>   2
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The Results of Operations reflect the consolidated results of operations of
Travelers Property Casualty Corp. (TAP) and its subsidiaries (the Company).

CONSOLIDATED OVERVIEW

On April 2, 1996, TAP purchased from Aetna Services, Inc. (Aetna) all of the
outstanding capital stock of Travelers Casualty and Surety Company (formerly The
Aetna Casualty and Surety Company) and The Standard Fire Insurance Company
(collectively, Aetna P&C) for approximately $4.2 billion in cash. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the consolidated financial statements include the results of Aetna
P&C's operations only from the date of acquisition. For additional information
about the financing of the purchase price see Note 2 of Notes to Consolidated
Financial Statements.

The Company provides a wide range of commercial and personal property and
casualty insurance products and services to businesses, associations and
individuals throughout the United States.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
(in millions, except per share data)                                      1997                1996                1995
                                                                          ----                ----                ----
<S>                                                                     <C>                 <C>                <C>       
Revenues..............................................................  $    9,911          $   8,197          $    4,569
                                                                        ----------          ---------          ----------

Net income ...........................................................  $    1,236          $     391          $      419
Preferred dividends...................................................           -                  4                   -
                                                                        ----------          ---------          ----------

Net income available to common stockholders...........................  $    1,236          $     387          $      419
                                                                        ==========          =========          ==========

Net income per share - assuming dilution..............................  $     3.12          $    1.02          $     1.28
                                                                        ==========          =========          ==========

Weighted average number of common shares outstanding
and common stock equivalents - assuming dilution......................       395.8              379.8               328.0
                                                                        ==========          =========          ==========
</TABLE>

Net income of $1.236 billion in 1997 increased $845 million over 1996. Net
income of $391 million in 1996 decreased $28 million from 1995. The increase in
1997 from 1996 was primarily due to $423 million of net charges related to the
acquisition and integration of Aetna P&C by the Company in 1996, higher net
investment income, higher realized gains, lower catastrophe losses, favorable
reserve development in personal auto lines and expense reductions. The net
acquisition-related charges include, on an after-tax basis, $318 million in
reserve increases, net of reinsurance, primarily related to cumulative injury
claims other than asbestos, insurance products involving financial guarantees,
reserve strengthening, and assumed reinsurance, $55 million in an additional
asbestos liability pursuant to an existing settlement agreement with a
customer of Aetna P&C, $39 million in charges related to premium collection
issues on loss sensitive programs, specifically large deductible products, a $27
million provision for uncollectibility of reinsurance recoverables of Aetna P&C
determined by applying the Company's normal guidelines for estimating
collectibility of such accounts, and $23 million in lease and severance costs of
The Travelers Indemnity Company (Travelers Indemnity) related to the
restructuring plan for the acquisition, partially offset by $39 million in
decreases in Personal Lines automobile reserves. The decrease in 1996 from 1995
was primarily due to the $423 million of net charges related to the acquisition,
mostly offset by the post-acquisition results of operations.

Excluding realized investment gains and the acquisition-related charges,
operating income was $1.126 billion, $802 million and $373 million in 1997, 1996
and 1995, respectively. The increase in 1997 was due to higher net investment
income, lower catastrophe losses, favorable reserve development in personal auto
lines and expense reductions. The 1996 increase reflects higher net investment
income, favorable reserve development in personal auto lines and the benefits of
expense-reduction initiatives associated with the acquisition, marginally offset
by higher catastrophe losses. The increases in 1997 and 1996 were also due to
the inclusion of the results of operations of Aetna P&C for twelve months in
1997 and nine months in 1996.


                                       2
<PAGE>   3
Revenues of $9.911 billion in 1997 increased $1.714 billion from 1996. Revenues
of $8.197 billion in 1996 increased $3.628 billion from 1995. The 1997 increase
was primarily attributable to the inclusion of Aetna P&C for the entire year
compared to only nine months in 1996 and growth in Personal Lines earned
premiums. The increase in revenues in 1996 compared to 1995 was primarily
attributable to the post-acquisition results of operations and includes a $2.713
billion increase in earned premiums and a $946 million increase in net
investment income.

Commercial Lines earned premiums increased $613 million to $4.308 billion in
1997, primarily reflecting the post-acquisition results of operations for the
entire year compared to only nine months in 1996. The increase in Commercial
Lines earned premiums is net of continued decreases resulting from the Company's
selective underwriting and market conditions characterized by difficult pricing
and increased competition. Personal Lines earned premiums of $2.917 billion in
1997 increased $594 million from $2.323 billion in 1996, reflecting lower ceded
premiums due to a change in a reinsurance arrangement in January 1997, growth in
sales in targeted markets served by independent agents and growth in affinity
marketing, joint marketing arrangements and TRAVELERS SECURE(R). The increase
also reflects the post-acquisition results of operations for the entire year
compared to only nine months in 1996.

Net investment income was $2.051 billion in 1997, an increase of $395 million
from 1996, reflecting the higher level of invested assets in 1997. Net
investment income was $1.656 billion in 1996, an increase of $946 million from
1995, primarily due to the acquisition of Aetna P&C, increased funds available
for investment and a higher return on investments.

Fee income was $365 million in 1997, a $27 million decrease from 1996. Fee
income was $392 million in 1996, a $40 million decrease from 1995. National
Accounts within Commercial Lines is the primary source of fee income due to its
service business. Fee income in both 1997 and 1996 was negatively impacted by
the depopulation of involuntary pools as the loss experience of workers'
compensation improved and insureds moved to voluntary markets and the Company's
success in lowering workers' compensation losses of service customers, partially
offset by the Company writing more service fee-based product versus
premium-based product and the acquisition of Aetna P&C.

Claims and expenses of $8.159 billion in 1997 increased $449 million from 1996.
The increase was due to the post-acquisition results of operations for the
entire year compared to only nine months in 1996, partially offset by
acquisition-related expense reductions and lower catastrophe losses in 1997.
Claims and expenses of $7.710 billion in 1996 increased $3.692 billion from
1995. In 1996, the increase in claims and expenses was primarily attributable to
the claims and expenses related to the Aetna P&C business and financing costs
associated with the acquisition of Aetna P&C, partially offset by expense
reductions.

The Company's effective tax rate was 29%, 20% and 24% in 1997, 1996 and 1995,
respectively. These rates differed from the statutory tax rate in those years
primarily due to municipal bond interest not taxed for federal income tax
purposes. The 1997 effective tax rate was higher than 1996 due to a
proportionately smaller amount of tax-exempt income versus pre-tax income in
1997. The 1996 effective tax rate was lower than 1995 due to an increased level
of tax-exempt income and lower pre-tax income, partially offset by higher
goodwill amortization resulting from the acquisition of Aetna P&C.


                                       3
<PAGE>   4
The statutory and GAAP combined ratios were as follows:

<TABLE>
<CAPTION>
                                                                 1997        1996        1995
                                                                 ----        ----        ----
<S>                                                             <C>         <C>         <C>  
STATUTORY:                                                     
     Loss and Loss Adjustment Expense (LAE) ratio............    72.4%       85.5%       78.2%
     Underwriting expense ratio..............................    29.9        31.3        26.4
     Combined ratio before policyholder dividends............   102.3       116.8       104.6
     Combined ratio..........................................   103.5       117.2       105.4
                                                               
GAAP:                                                          
     Loss and LAE ratio......................................    72.3%       83.6%       77.7%
     Underwriting expense ratio..............................    29.6        33.2        26.6
     Combined ratio before policyholder dividends............   101.9       116.8       104.3
     Combined ratio..........................................   102.6       117.4       105.1
</TABLE>                                                                        

Beginning in 1997, for purposes of computing GAAP combined ratios, fee income is
allocated as a reduction of losses and loss adjustment expenses and other
underwriting expenses. Previously fee income was included with premiums for
purposes of computing GAAP combined ratios. The 1996 and 1995 GAAP combined
ratios have been restated to conform to the current year's presentation.

GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
In addition, certain 1996 purchase accounting adjustments recorded in connection
with the Aetna P&C acquisition resulted in a charge to statutory expenses.

The decrease in the 1997 statutory and GAAP combined ratios compared to 1996 was
primarily attributable to charges taken in 1996 related to the acquisition and
integration of Aetna P&C. Excluding these amounts, the statutory and GAAP
combined ratios before policyholder dividends for 1996 would have been 106.3%
and 107.0%, respectively. The decrease in the 1997 statutory and GAAP combined
ratios compared to the 1996 statutory and GAAP combined ratios excluding
acquisition-related charges was due to lower catastrophe losses, favorable prior
year reserve development in personal auto lines and expense reductions,
partially offset by the inclusion in 1997 of Aetna P&C's results for the entire
year compared to only nine months in 1996. Aetna P&C historically has had a
higher underwriting expense ratio, partially offset by a lower loss and LAE
ratio, which reflected the mix of business including the favorable effect of the
lower loss and LAE ratio of the Bond Specialty business. The increase in the
1996 statutory and GAAP combined ratios excluding acquisition-related charges
compared to the 1995 statutory and GAAP combined ratios was primarily due to the
inclusion in 1996 of Aetna P&C's results.

RESULTS OF OPERATIONS BY SEGMENT

<TABLE>
<CAPTION>
COMMERCIAL LINES
(in millions)                               1997           1996            1995
                                            ----           ----            ----
<S>                                    <C>            <C>             <C>      
Revenues............................   $   6,557      $   5,497       $   3,070
Net income..........................   $     946      $     197       $     329
</TABLE>


                                       4
<PAGE>   5
Net income of $946 million in 1997 increased $749 million from 1996, and 1996
net income of $197 million decreased $132 million compared to 1995. The 1997
increase compared to 1996 was primarily due to $453 million of after-tax charges
related to the acquisition of Aetna P&C included in 1996, higher net investment
income and realized investment gains, lower catastrophe losses, expense savings
associated with the acquisition and integration of Aetna P&C and the inclusion
in 1997 of Aetna P&C for the entire year compared to only nine months for 1996.
These acquisition-related charges included $318 million in reserve increases,
net of reinsurance, principally for cumulative injury other than asbestos,
insurance products involving financial guarantees, reserve strengthening and
assumed reinsurance, a $55 million provision for an additional asbestos
liability related to an existing settlement agreement with a customer of Aetna
P&C, a $39 million charge related to premium collection issues on loss sensitive
programs, specifically large deductible products, a $22 million provision for
uncollectibility of reinsurance recoverables of Aetna P&C determined by applying
the Company's normal guidelines for estimating collectibility of such accounts,
and $19 million in lease and severance costs related to the restructuring plan
for the acquisition. Operating results also reflected market conditions
characterized by difficult pricing and increased competition. The impact of this
trend in market conditions on 1997 operating results was offset by the factors
noted above as well as a continued disciplined approach to underwriting and risk
management. The 1996 decrease compared to 1995 was primarily due to $453 million
of after-tax charges related to the acquisition of Aetna P&C included in 1996,
partially offset by higher net investment income, the benefits of
expense-reduction initiatives and the inclusion of Aetna P&C's results of
operations for nine months in 1996.

Excluding realized investment gains in all years and the acquisition-related
charges, Commercial Lines earnings were $846 million, $633 million and $288
million in 1997, 1996 and 1995, respectively. The 1997 increase compared to 1996
was due to higher net investment income, lower catastrophe losses, expense
savings associated with the acquisition and integration of Aetna P&C and the
post-acquisition results of operations for the entire year compared to only nine
months in 1996. Operating results also reflected market conditions characterized
by difficult pricing and increased competition. The impact of this trend in
market conditions on 1997 operating results was offset by the factors previously
indicated as well as a continued disciplined approach to underwriting and risk
management. The 1996 increase compared to 1995 was primarily the result of
higher net investment income, the benefits of expense-reduction initiatives and
the inclusion of Aetna P&C's results of operations for nine months in 1996.

Commercial Lines net written premiums totaled $4.757 billion in 1997, up $695
million from $4.062 billion in 1996 (excluding an adjustment associated with a
reinsurance transaction), reflecting the inclusion in 1997 of Aetna P&C for the
entire year compared to only nine months in 1996 and a $142 million adjustment
due to the change to conform the Aetna P&C method of recording certain net
written premiums to the method employed by Travelers Indemnity and its
subsidiaries (Travelers P&C). This increase was offset in part by the highly
competitive conditions in the marketplace and the Company's continued
disciplined approach to underwriting and risk management. Net written premiums
in 1996 of $4.062 billion increased $1.753 billion from $2.309 billion in 1995,
reflecting the acquisition of Aetna P&C.

On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Commercial Lines net written premiums
totaled $4.757 billion in 1997, up $89 million from $4.668 billion in 1996,
which was down $476 million from $5.144 billion in 1995. The 1997 increase was
attributable to the change to conform the Aetna P&C method with the Travelers
P&C method of recording net written premiums, partially offset by the highly
competitive marketplace and the Company's disciplined approach to underwriting
and risk management. The 1996 decrease reflected the highly competitive
marketplace and the Company's selective underwriting.

Fee income was $365 million, $392 million and $432 million in 1997, 1996 and
1995, respectively. The decreases in fee income were the result of the
depopulation of involuntary pools as the loss experience of workers'
compensation improved and insureds moved to voluntary markets and the Company's
continued success in lowering workers' compensation losses of service customers,
partially offset by the Company writing more service fee-based product versus
premium-based product.


                                       5
<PAGE>   6
National Accounts works with national brokers and regional agents providing
insurance coverages and services, primarily workers' compensation, mainly to
large corporations. National Accounts also includes the alternative market
business which sells claims and policy management services to workers'
compensation and automobile assigned risk plans, self-insurance pools throughout
the United States and to niche voluntary markets. On a combined total basis
including Aetna P&C (for periods prior to April 2, 1996 for comparative purposes
only), National Accounts net written premiums of $657 million in 1997 decreased
$195 million from 1996. Net written premiums of $852 million in 1996 decreased
$340 million from 1995. The 1997 decrease was primarily due to a decrease in the
Company's level of involuntary pool participation, National Accounts writing
less premium-based product versus service fee-based product, the highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management. The 1996 decrease reflected the Company's
selective renewal activity and the highly competitive marketplace.

National Accounts new business in 1997 was significantly higher than in 1996
reflecting continued product development efforts, especially in workers'
compensation managed care programs. National Accounts business retention ratio
was also significantly higher in 1997 than in 1996, reflecting the Company's
continued focus on retaining profitable business. National Accounts new business
in 1996 was significantly lower than in 1995 despite the Aetna P&C acquisition,
and was due to the highly competitive marketplace. National Accounts business
retention ratio in 1996 was moderately lower than in 1995 and reflected the
Company's selective renewal activity and the highly competitive marketplace.

Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. On a combined total basis including Aetna P&C (for periods
prior to April 2, 1996 for comparative purposes only), Commercial Accounts net
written premiums of $1.986 billion in 1997 were $261 million above 1996 premium
levels, which were $137 million below 1995 premium levels. The increase in 1997
reflected a $127 million adjustment due to the change to conform the Aetna P&C
method with the Travelers P&C method of recording certain net written premiums
and the continued growth through programs designed to leverage underwriting
experience in specific industries, partially offset by the highly competitive
marketplace and the Company's continued disciplined approach to underwriting and
risk management. The decrease in 1996 in net written premiums was due to the
highly competitive marketplace, the Company's selective underwriting and the
continued softness in guaranteed cost pricing.

In 1997, new business in Commercial Accounts significantly improved compared to
1996, reflecting continued growth in programs designed to leverage underwriting
experience in specific industries. The Commercial Accounts business retention
ratio in 1997 significantly improved compared to 1996. Commercial Accounts
continues to focus on the retention of existing business while maintaining its
product pricing standards and its selective underwriting policy. For 1996, new
business in Commercial Accounts was significantly higher than in 1995. The 1996
increase in new business was due to the acquisition of Aetna P&C. The Commercial
Accounts business retention ratio in 1996 was virtually the same as in 1995 and
reflected Commercial Accounts selective underwriting policy.

Select Accounts serves small businesses through a network of independent agents.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Select Accounts net written premiums of
$1.432 billion for 1997 were $20 million higher than 1996. This increase
reflected a $15 million adjustment due to the change to conform the Aetna P&C
method with the Travelers P&C method of recording certain net written premiums
and the continued benefit from the broader industry and product line expertise
of the combined company, partially offset by the highly competitive marketplace
and the Company's continued disciplined approach to underwriting and risk
management. Select Accounts net written premiums of $1.412 billion for 1996 were
$54 million lower than 1995. This decrease reflected the highly competitive
marketplace and the Company's selective underwriting.


                                       6
<PAGE>   7
New premium business in Select Accounts was moderately higher in 1997 than in
1996 reflecting an increase due to the acquisition of Aetna P&C, partially
offset by a decrease due to the competitive marketplace. The Select Accounts
business retention ratio remains very strong in 1997 and was moderately higher
than in 1996, reflecting the Company's focus on retaining profitable business.
New premium business in Select Accounts was significantly higher in 1996 than in
1995 due to the acquisition of Aetna P&C. The Select Accounts business retention
ratio was moderately higher in 1996 than in 1995 reflecting the industry and
product line expertise of the combined company.

Specialty Accounts markets products to national, midsize and small customers,
including individuals, and distributes them through both wholesale brokers and
retail agents and brokers throughout the United States. On a combined total
basis including Aetna P&C (for periods prior to April 2, 1996 for comparative
purposes only), Specialty Accounts net written premiums of $682 million in 1997
were $3 million higher than 1996, which was $55 million above 1995. The 1997
increase compared to 1996 was due to increased writings of its excess and
surplus lines business, partially offset by lower directors' and officers'
liability insurance writings due to the termination of an exclusive arrangement
with a managing general agent. The 1996 increase compared to 1995 was due to
increases in directors' and officers' liability insurance and errors and
omissions coverages.

Commercial Lines claims and expenses of $5.233 billion in 1997 decreased $59
million from 1996, and increased $2.646 billion in 1996 compared to 1995. The
1997 decrease was primarily attributable to the net acquisition-related charges
of $697 million associated with the acquisition of Aetna P&C in 1996, expense
savings in 1997 and cost efficiencies in operations and in competitive workers'
compensation managed care delivery programs, mostly offset by the inclusion in
1997 of Aetna P&C for the entire year compared to only nine months in 1996. The
1996 increase was primarily attributable to the acquisition of Aetna P&C and the
net acquisition-related charges of $697 million recorded during the second and
fourth quarters of 1996, offset in part by benefits from expense reduction
initiatives associated with the integration of Aetna P&C and cost efficiencies
in operations and in competitive workers' compensation managed care delivery
programs.

Catastrophe losses, net of tax and reinsurance, were $5 million, $31 million and
$7 million in 1997, 1996 and 1995, respectively. The 1997 catastrophe losses
were primarily due to tornadoes in the Midwest in the first quarter. Catastrophe
losses in 1996 were primarily due to Hurricane Fran and December storms on the
West Coast.

Statutory and GAAP combined ratios for Commercial Lines were as follows:

<TABLE>
<CAPTION>
                                                                1997        1996      1995
                                                                ----        ----      ----
<S>                                                            <C>         <C>       <C>  
STATUTORY:
     Loss and LAE ratio.....................................    78.4%       96.2%     80.6%
     Underwriting expense ratio.............................    30.6        32.7      24.4
     Combined ratio before policyholder dividends...........   109.0       128.9     105.0
     Combined ratio.........................................   111.0       129.6     106.3

GAAP:
     Loss and LAE ratio.....................................    78.3%       92.8%     79.6%
     Underwriting expense ratio.............................    30.4        36.1      25.2
     Combined ratio before policyholder dividends...........   108.7       128.9     104.8
     Combined ratio.........................................   109.9       129.9     106.1
</TABLE>

GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only. In 1996, the net deferral for GAAP was offset by
certain 1996 purchase accounting adjustments recorded in connection with the
Aetna P&C acquisition which adjustments resulted in a charge to statutory
expenses.


                                       7
<PAGE>   8
The decreases in the 1997 statutory and GAAP combined ratios for Commercial
Lines compared to 1996 were primarily attributable to the 1996 charges related
to the acquisition and integration of Aetna P&C. Excluding these amounts, the
statutory and GAAP combined ratios before policyholder dividends for 1996 would
have been 110.0% and 111.3%, respectively. The decrease in the 1997 statutory
and GAAP combined ratios compared to the 1996 statutory and GAAP combined ratios
excluding acquisition-related charges was due to lower catastrophe losses and
reduced expenses, partially offset by the post-acquisition results of operations
for the entire year compared to only nine months in 1996. Aetna P&C has
historically had a higher underwriting expense ratio, partially offset by a
lower loss ratio, which reflected the mix of business including the favorable
effect of the lower loss ratio of the Bond Specialty business. The increase in
the 1996 statutory and GAAP combined ratios excluding acquisition-related
charges compared to the 1995 statutory and GAAP combined ratios was primarily
due to the inclusion in 1996 of Aetna P&C's results.

<TABLE>
<CAPTION>
PERSONAL LINES
(in millions)                                  1997          1996          1995
                                               ----          ----          ----
<S>                                       <C>           <C>           <C>      
Revenues................................. $   3,341     $   2,685     $   1,481
Net income............................... $     413     $     282     $     107
</TABLE>

Net income of $413 million in 1997 increased $131 million from $282 million in
1996, which increased $175 million from $107 million in 1995. The 1997 increase
primarily reflected the inclusion in 1997 of Aetna P&C for the entire year
compared to only nine months in 1996, lower catastrophe losses, an increase in
favorable prior year reserve development of $40 million primarily in the
automobile bodily injury line and production-related growth, partially offset by
investments in service centers and market expansions. The 1996 increase was
primarily attributable to the post-acquisition results of operations of Aetna
P&C (including a $30 million benefit principally resulting from a review of
Aetna P&C reserves), as well as approximately $70 million of favorable prior
year reserve development primarily in the automobile bodily injury line, the
continued benefit of expense reduction initiatives and higher net investment
income.

Revenues were $3.341 billion in 1997 compared to $2.685 billion in 1996 and
$1.481 billion in 1995. The 1997 increase compared to 1996 primarily reflected
higher net investment income, and to a lesser extent, lower ceded premiums due
to a change in a reinsurance arrangement in January 1997, growth in target
markets served by independent agents and growth in affinity marketing, joint
marketing arrangements and TRAVELERS SECURE(R). The 1996 increase compared to
1995 reflected growth in sales in targeted markets, partially offset by
reductions due to catastrophe management strategies. The 1997 and 1996 increases
also reflect the inclusion of Aetna P&C for twelve months in 1997 and nine
months in 1996.

On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Personal Lines net written premiums in 1997
totaled $3.074 billion compared to $2.675 billion in 1996 and $2.543 billion in
1995. The 1997 increase compared to 1996 primarily reflected lower ceded
premiums due to a change in a reinsurance arrangement in January 1997, growth in
sales in targeted markets served by independent agents and growth in affinity
marketing, joint marketing arrangements and TRAVELERS SECURE(R). Business
retention continued to be strong. The 1996 increase compared to 1995 was due to
the continued growth in targeted automobile and homeowners markets, partially
offset by reductions due to catastrophe management strategies.

Personal Lines claims and expenses of $2.724 billion in 1997 increased $457
million from 1996. This increase was primarily attributable to higher
production-related expenses associated with the growth in premiums, partially
offset by lower catastrophe losses and favorable prior year reserve development
in the automobile bodily injury line in 1997. The increase also reflects the
post-acquisition results of operations for the entire year compared to only nine
months in 1996. Claims and expenses of $2.267 billion in 1996 increased $932
million from 1995. This increase was primarily attributable to the acquisition
of Aetna P&C, partially offset by favorable prior year reserve development
primarily in the automobile bodily injury line in 1996 and the continued benefit
of expense reduction initiatives.


                                       8
<PAGE>   9
Included in 1997 are after-tax catastrophe losses, net of reinsurance, of $10
million compared to $58 million in 1996 and $12 million in 1995. Catastrophe
losses in 1996 were primarily due to Hurricane Fran, severe first quarter winter
storms and second quarter hail and wind storms.

Statutory and GAAP combined ratios for Personal Lines were as follows:

<TABLE>
<CAPTION>
                                                     1997             1996              1995
                                                     ----             ----              ----
<S>                                                  <C>              <C>              <C>  
STATUTORY:
     Loss and LAE ratio...........................   63.5%            68.7%             74.5%
     Underwriting expense ratio...................   28.7             28.9              29.9
     Combined ratio...............................   92.2             97.6             104.4

GAAP:
     Loss and LAE ratio...........................   63.5%            68.8%             74.5%
     Underwriting expense ratio...................   28.3             28.3              29.1
     Combined ratio...............................   91.8             97.1             103.6
</TABLE>

GAAP combined ratios for Personal Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only. In addition, certain 1996 purchase accounting
adjustments recorded in connection with the Aetna P&C acquisition resulted in a
charge to statutory expenses.

The 1996 statutory and GAAP combined ratios for Personal Lines included a
benefit resulting from the Company's review of reserves associated with the
acquisition of Aetna P&C. Excluding this item, the 1996 statutory and GAAP
combined ratios were 100.1% and 99.7%, respectively. The decrease in the 1997
statutory and GAAP combined ratios compared to the 1996 statutory and GAAP
combined ratios excluding this item was due to lower catastrophe losses and
favorable prior year reserve development, primarily in the automobile bodily
injury line. The decrease in the 1996 statutory and GAAP combined ratios
excluding this item compared to the 1995 statutory and GAAP combined ratios was
predominantly due to favorable prior year reserve development, partially offset
by higher catastrophe losses.

<TABLE>
<CAPTION>
CORPORATE AND OTHER
(in millions)                                      1997        1996         1995
                                                   ----        ----         ----
<S>                                            <C>           <C>         <C>    
Revenues.....................................  $     13      $   15      $    18
Net loss.....................................  $   (123)     $  (88)     $   (17)
</TABLE>

The primary component of net loss for 1997 and 1996 was after-tax interest
expense of $106 million and $77 million, respectively, reflecting financing
costs associated with the acquisition of Aetna P&C.

ENVIRONMENTAL CLAIMS

The Company continues to receive claims alleging liability exposures arising out
of insureds' alleged disposition of toxic substances. These claims when
submitted rarely indicate the monetary amount being sought by the claimant from
the insured and the Company does not keep track of the monetary amount being
sought in those few claims which indicated such a monetary amount.

The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At December 31, 1997, approximately 17% of
the net environmental loss reserve (i.e., approximately $192 million) consists
of case reserve for resolved claims. The balance, approximately 83% of the net
aggregate reserve (i.e., approximately $927 million), is carried in a bulk
reserve and includes incurred but not reported environmental claims for which
the Company has not received any specific claims.


                                       9
<PAGE>   10
The Company's reserving methodology is preferable to one based on "identified
claims" since the resolution of environmental exposures by the Company generally
occurs on an insured-by-insured basis as opposed to a claim-by-claim basis. The
nature of the resolution is through coverage litigation, which often pertains to
more than one claim, as well as through a settlement with an insured. Generally,
the settlement between the Company and the insured extinguishes any obligation
the Company may have under any policy issued to the insured for past, present
and future environmental liabilities. This form of settlement is commonly
referred to as a "buy-back" of policies for future environmental liability.
Additional provisions of these agreements include the appropriate indemnities
and hold harmless provisions to protect the Company. The Company's general
purpose in executing such agreements is to reduce its potential environmental
exposure and eliminate both the risks presented by coverage litigation with the
insured and the cost of such litigation.

The reserving methodology includes an analysis by the Company of the exposure
presented by each insured and the anticipated cost of resolution, if any, for
each insured. This analysis is completed by the Company on a quarterly basis. In
the course of its analysis, an assessment of the probable liability, available
coverage, judicial interpretations and historical value of similar exposures is
considered by the Company. In addition, due consideration is given to the many
variables presented, such as the nature of the alleged activities of the insured
at each site; the allegations of environmental damage at each site; the number
of sites; the total number of potentially responsible parties at each site; the
nature of environmental harm and the corresponding remedy at a site; the nature
of government enforcement activities at each site; the ownership and general use
of each site; the overall nature of the insurance relationship between the
Company and the insured; the identification of other insurers; the potential
coverage available, if any, including the number of years of coverage, if any;
and the applicable law in each jurisdiction. Analysis of these and other
factors, including the potential for future claims, results in the establishment
of the bulk reserve.

The following table displays activity for environmental losses and loss expenses
and reserves for 1997, 1996 and 1995.

<TABLE>
<CAPTION>
ENVIRONMENTAL LOSSES
(in millions)                                       1997             1996              1995
                                                    ----             ----              ----
<S>                                            <C>              <C>               <C>      
Beginning reserves:
   Direct....................................  $   1,369        $     454         $     449
   Ceded.....................................       (127)             (50)               (8)
                                               ---------        ---------         ---------
     Net.....................................      1,242              404               441

Acquisition of Aetna P&C:
   Direct....................................          -              968                 -
   Ceded.....................................          -              (39)                -

Incurred losses and loss expenses:
   Direct....................................         79              114               117
   Ceded.....................................        (14)             (52)              (61)

Losses paid:
   Direct ...................................        271              167               145
   Ceded.....................................        (67)             (14)              (22)

Other:
   Direct....................................         16                -                33
   Ceded.....................................          -                -                (3)
                                               ---------        ---------         ---------
Ending reserves:
   Direct....................................      1,193            1,369               454
   Ceded.....................................        (74)            (127)              (50)
                                               ---------        ---------         ---------
     Net.....................................  $   1,119        $   1,242         $     404
                                               =========        =========         =========
</TABLE>


                                       10
<PAGE>   11
In the above table, "Other" represents reallocation of certain general liability
reserves to environmental reserves in 1997 and the termination in 1995 of
certain agreements with The Travelers Insurance Group Inc. (TIGI) whereby TIGI
had assumed certain reserves from the Company.

The duration of the Company's investigation and review of such claims and the
extent of time necessary to determine an appropriate estimate, if any, of the
value of the claim to the Company, varies significantly and is dependent upon a
number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and the
Company to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, the Company cannot provide a meaningful average of the
duration of an environmental claim. However, based upon the Company's experience
in resolving such claims, the duration may vary from months to several years.

The property and casualty insurance industry does not have a standard method of
calculating claim activity for environmental losses. Generally for Superfund
remediation type environmental claims, the Company establishes a claim file for
each insured on a per site, per claimant basis. If there is more than one
claimant such as a federal and a state agency, this method will result in two
claims being set up for a policyholder at that one site. The Company adheres to
this method of calculating claim activity on all environmental-related claims,
whether such claims are tendered on primary, excess or umbrella policies. Since
the implementation of the claim system conversion in 1997, the Company's method
of establishing claims in the foregoing manner now applies to claims tendered
under the Travelers P&C and Aetna P&C policies.

In addition, the Company establishes claim files for bodily injury or property
damage environmental claims brought by individual claimants who allege injury or
damage as a result of the discharge of wastes or pollutants. As it pertains to
such claims tendered on policies issued by Travelers P&C, the Company
establishes a claim file on a per claim, per insured, per site basis. For
example, if one hundred claimants file a lawsuit against five policyholders
alleging bodily injury and property damage as a result of the discharge of
wastes or pollutants, one thousand claims (five hundred for the bodily injury
claims and five hundred for the property damage claims) would be established.

As it pertains to bodily injury and property damage claims tendered on Aetna P&C
policies, the Company's claim system conversion has not been completed to permit
the establishment of such claims in a manner consistent with the establishment
of Travelers P&C bodily injury and property damage claims. As it pertains to
such claims tendered on policies issued by Aetna P&C, the Company currently
establishes a claim file on a per insured, per site basis. For example, if one
hundred claimants file a lawsuit against five policyholders alleging bodily
injury and property damage as a result of the discharge of wastes or pollutants,
five claims would be established for all the bodily injury claims and five
claims would be established for all of the property damage claims.

As of December 31, 1997, calculated as described above, the Company had
approximately 40,300 pending environmental-related claims tendered by 1,400
active policyholders. Of the total pending environmental-related claims, 29,800
claims relate to Travelers P&C policies tendered by 569 policyholders and 10,500
claims relate to Aetna P&C policies tendered by 961 policyholders. Approximately
130 of these Aetna P&C policyholders are also included in the 569 Travelers P&C
policyholders' count. The pending environmental-related claims represent federal
or state EPA-type claims as well as plaintiffs' claims alleging bodily injury
and property damage due to the discharge of waste or pollutants.


                                       11
<PAGE>   12
To date, the Company generally has been successful in resolving its coverage
litigation and continues to reduce its potential exposure through favorable
settlements with certain insureds. These settlement agreements with certain
insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds. Based upon the
Company's reserving methodology and the experience of its historical resolution
of environmental exposures, it believes that the environmental reserve position
is appropriate. As of December 31, 1997, the Company, for approximately $1.16
billion, has resolved the environmental liabilities presented by 3,931 of the
5,331 policyholders who have tendered environmental claims to the Company. This
resolution comprises 74% of the policyholders who have tendered such claims. The
Company has reserves of approximately $800 million included in its bulk reserve
relating to the remaining 1,400 policyholders (26% of the total) with unresolved
environmental claims, as well as for any other policyholder that may tender an
environmental claim in the future.

ASBESTOS CLAIMS

In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. The Company continues to receive
asbestos claims alleging insureds' liability from claimants' asbestos-related
injuries. These claims, when submitted, rarely indicate the monetary amount
being sought by the claimant from the insured and the Company does not keep
track of the monetary amount being sought in those few claims that indicated
such a monetary amount. Originally the cases involved mainly plant workers and
traditional asbestos manufacturers and distributors. However, in the mid-1980s,
a new group of plaintiffs, whose exposure to asbestos was less direct and whose
injuries were often speculative, began to file lawsuits in increasing numbers
against the traditional defendants as well as peripheral defendants who had
produced products that may have contained small amounts of some form of
encapsulated asbestos. These claims continue to arise and on an individual basis
generally involve smaller companies with smaller limits of potential coverage.
Also, there has emerged a group of non-product claims by plaintiffs, mostly
independent labor union workers, mainly against companies, alleging exposure to
asbestos while working at these companies' premises. The Company continues to
receive this type of asbestos claim.

In summary, various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as premises
owners, are tendering asbestos-related claims to the industry. Because each
insured presents different liability and coverage issues, the Company evaluates
those issues on an insured-by-insured basis.

The Company's evaluations have not resulted in any meaningful data from which an
average asbestos defense or indemnity payment may be determined. The varying
defense and indemnity payments made by the Company on behalf of its insureds
have also precluded the Company from deriving any meaningful data by which it
can predict whether its defense and indemnity payments for asbestos claims (on
average or in the aggregate) will remain the same or change in the future. Based
upon the Company's experience with asbestos claims, the duration period of an
asbestos claim from the date of submission to resolution is approximately two
years.

At December 31, 1997, approximately 24% of the net aggregate reserve (i.e.,
approximately $266 million) is for pending asbestos claims. The balance,
approximately 76% (i.e., approximately $848 million) of the net asbestos
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.


                                       12
<PAGE>   13
The following table displays activity for asbestos losses and loss expenses and
reserves for 1997, 1996 and 1995. In general, the Company posts case reserves
for pending asbestos claims within approximately 30 business days of receipt of
such claims.

<TABLE>
<CAPTION>
ASBESTOS LOSSES
(in millions)                                       1997             1996              1995
                                                    ----             ----              ----
<S>                                             <C>             <C>               <C>      
Beginning reserves:
   Direct.....................................  $  1,443        $     695         $     614
   Ceded......................................      (370)            (293)             (278)
                                                --------        ---------         ---------
     Net......................................     1,073              402               336
                                                
Acquisition of Aetna P&C:                       
   Direct.....................................         -              801                 -
   Ceded......................................         -             (121)                -
                                                
Incurred losses and loss expenses:              
   Direct.....................................        87              120               109
   Ceded......................................       (18)             (35)              (66)
                                                
Losses paid:                                    
   Direct ....................................       174              173               116
   Ceded......................................      (140)             (79)              (92)
                                                
Other:                                          
   Direct.....................................         7                -                88
   Ceded......................................        (1)               -               (41)
                                                --------        ---------         ---------
Ending reserves:                                
   Direct.....................................     1,363            1,443               695
   Ceded......................................      (249)            (370)             (293)
                                                --------        ---------         ---------
     Net......................................  $  1,114        $   1,073         $     402
                                                ========        =========         =========
</TABLE>
                                               
In the above table, "Other" represents reallocation of certain reserves to
asbestos reserves in 1997 and the termination in 1995 of certain agreements with
TIGI whereby TIGI had assumed certain reserves from the Company.

In 1997, the Company reached an agreement to settle the arbitration with
underwriters at Lloyd's of London (Lloyd's) and certain London companies in New
York State to enforce reinsurance contracts with respect to recoveries for
certain asbestos claims. The dispute involved the ability of the Company to
aggregate asbestos claims under a market agreement between Lloyd's and the
Company or under the applicable reinsurance treaties. This agreement had no
impact on earnings.

UNCERTAINTY REGARDING ADEQUACY OF ENVIRONMENTAL AND ASBESTOS RESERVES

It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.

For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as previously discussed.


                                       13
<PAGE>   14
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance; and applicable coverage defenses, if any. Once the gross ultimate
exposure for indemnity and allocated claim adjustment expense is determined for
a policyholder by policy year, a ceded projection is calculated based on any
applicable facultative and treaty reinsurance, and past ceded experience. In
addition, a similar review is conducted for asbestos property damage claims.
However, due to the relatively minor claim volume, these reserves have remained
at a constant level.

As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1997 are the Company's best
estimate of ultimate claims and claim adjustment expenses based upon known facts
and current law. However, the conditions surrounding the final resolution of
these claims continue to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations and changes in Superfund
and other legislation. Because of these future unknowns, additional liabilities
may arise for amounts in excess of the current reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated, and could result in a liability exceeding reserves by an amount that
would be material to the Company's operating results in a future period.
However, the Company believes that it is not likely that these claims will have
a material adverse effect on the Company's financial condition or liquidity.

CUMULATIVE INJURY OTHER THAN ASBESTOS (CIOTA) CLAIMS

CIOTA claims are generally submitted to the Company under general liability
policies and often involve an allegation by a claimant against an insured that
the claimant has suffered injuries as a result of long-term or continuous
exposure to potentially harmful products or substances. Such potentially harmful
products or substances include, but are not limited to, lead paint, pesticides,
pharmaceutical products, silicone-based personal products, solvents and other
deleterious substances.

Due to claimants' allegations of long-term bodily injury in CIOTA claims,
numerous complex issues regarding such claims are presented. The claimants'
theories of liability must be evaluated, evidence pertaining to a causal link
between injury and exposure to a substance must be reviewed, the potential role
of other causes of injury must be analyzed, the liability of other defendants
must be explored, an assessment of a claimant's damages must be made and the law
of the jurisdiction must be applied. In addition, the Company must review the
number of policies issued by the Company to the insured and whether such
policies are triggered by the allegations, the terms and limits of liability of
such policies, the obligations of other insurers to respond to the claim, and
the applicable law in each jurisdiction.

To the extent disputes exist between the Company and a policyholder regarding
the coverage available for CIOTA claims, the Company resolves the disputes,
where feasible, through settlements with the policyholder or through coverage
litigation. Generally, the terms of a settlement agreement set forth the nature
of the Company's participation in resolving CIOTA claims, the scope of coverage
to be provided by the Company and contain the appropriate indemnities and hold
harmless provisions to protect the Company. These settlements generally
eliminate uncertainties for the Company regarding the risks extinguished,
including the risk that losses would be greater than anticipated due to evolving
theories of tort liability or unfavorable coverage determinations. The Company's
approach also has the effect of determining losses at a date earlier than would
have occurred in the absence of such settlement agreements. On the other hand,
in cases where future developments are favorable to insurers, this approach
could have the effect of resolving claims for amounts in excess of those that
would ultimately have been paid had the claims not been settled in this manner.
No inference should be drawn that because of the Company's method of dealing
with CIOTA claims, its reserves for such claims are more conservatively stated
than those of other insurers.


                                       14
<PAGE>   15
Prior to the acquisition, Aetna P&C did not distinguish CIOTA from other general
liability claims or treat CIOTA claims as a special class of claims. In
addition, there were substantial differences in claim approach and resolution
between the Company and Aetna P&C regarding CIOTA claims. During the second
quarter of 1996, the Company completed its review of Aetna P&C's exposure to
CIOTA claims in order to determine an appropriate level of reserves using the
Company's approach as described above. Based on the results of that review, the
Company's general liability insurance reserves were increased by $360 million,
net of reinsurance ($234 million after tax).

At December 31, 1997, approximately 18% of the net aggregate reserve (i.e.,
approximately $195 million) is for pending CIOTA claims. The balance,
approximately 82% (i.e., approximately $893 million) of the net CIOTA reserve,
represents incurred but not reported losses for which the Company has not
received any specific claims.

The following table displays activity for CIOTA losses and loss expenses and
reserves for 1997, 1996 and 1995. In general, the Company posts case reserves
for pending CIOTA claims within approximately 30 business days of receipt of
such claims.

<TABLE>
<CAPTION>
CIOTA LOSSES
(in millions)                                       1997             1996            1995
                                                    ----             ----            ----
<S>                                            <C>              <C>             <C>      
Beginning reserves:                           
   Direct...................................   $   1,560        $     374       $     355
   Ceded....................................        (446)               -               -
                                               ---------        ---------       ---------
     Net....................................       1,114              374             355
                                              
Acquisition of Aetna P&C:                     
   Direct...................................           -              709               -
   Ceded....................................           -             (293)              -
                                              
Incurred losses and loss expenses:            
   Direct...................................          32              565              21
   Ceded....................................          (6)            (155)              -
                                              
Losses paid:                                  
   Direct ..................................          72               88              22
   Ceded....................................         (20)              (2)              -
                                              
Other:                                        
   Direct...................................           -                -              20
   Ceded....................................           -                -               -
                                               ---------        ---------       ---------
Ending reserves:                              
   Direct...................................       1,520            1,560             374
   Ceded....................................        (432)            (446)              -
                                               ---------        ---------       ---------
     Net....................................   $   1,088        $   1,114       $     374
                                               =========        =========       =========
</TABLE>

In the above table, "Other" represents the termination in 1995 of certain
agreements with TIGI whereby TIGI had assumed certain reserves from the Company.


                                       15
<PAGE>   16
INVESTMENT PORTFOLIO

At December 31, 1997, the carrying value of the Company's investment portfolio
was $31.0 billion, representing 61% of total assets of $50.7 billion. The
average yield (excluding realized and unrealized investment gains) was 7.4%,
7.0% and 6.2% for the years ended December 31, 1997, 1996 and 1995,
respectively. Because the primary purpose of the investment portfolio is to fund
future claims payments, the Company employs a conservative investment
philosophy. The Company's fixed maturity portfolio at December 31, 1997 totaled
$27.2 billion, comprised of $25.2 billion of publicly traded fixed maturities
and $2.0 billion of private fixed maturities. The weighted average quality
ratings of the Company's publicly traded fixed maturity portfolio and private
fixed maturity portfolio at December 31, 1997 were Aa3 and A3, respectively.
Included in the fixed maturity portfolio at such date was approximately $832
million of below investment grade securities. The average duration of the fixed
maturity portfolio, including short-term investments, was 5.2 years at such
date.

The following table sets forth the Company's combined fixed maturity investment
portfolio classified by Moody's Investor's Service Inc. ratings as of December
31, 1997:

<TABLE>
<CAPTION>
                                                                          PERCENT OF
(in millions)                                CARRYING VALUE          TOTAL CARRYING VALUE
                                             --------------          --------------------
<S>                                          <C>                     <C>  
QUALITY RATING:
   Aaa....................................   $    12,054                     44.3%
   Aa.....................................         4,696                     17.3
   A......................................         6,042                     22.2
   Baa....................................         3,564                     13.1
                                             -----------                    -----
   Total investment grade.................        26,356                     96.9
   Non-investment grade...................           832                      3.1
                                             -----------                    ----- 
Total fixed maturity investments..........   $    27,188                    100.0%
                                             ===========                    ===== 
</TABLE>

The Company makes investments in collateralized mortgage obligations (CMOs).
CMOs typically have high credit quality, offer good liquidity, and provide a
significant advantage in yield and total return compared to U.S. Treasury
securities. The Company's investment strategy is to purchase CMO tranches which
are protected against prepayment risk, including planned amortization class
(PAC) tranches. Prepayment protected tranches are preferred because they provide
stable cash flows in a variety of scenarios. The Company does invest in other
types of CMO tranches if a careful assessment indicates a favorable risk/return
tradeoff. The Company does not purchase residual interests in CMOs.

At December 31, 1997, the Company held CMOs with a market value of $2.2 billion.
Approximately 77% of CMO holdings were fully collateralized by GNMA, FNMA or
FHLMC securities at such date, and the balance were fully collateralized by
portfolios of individual mortgage loans. In addition, the Company held $2.6
billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
December 31, 1997. Virtually all of these securities were rated Aaa.

DISCLOSURES ABOUT MARKET RISK

Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 1997.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.


                                       16
<PAGE>   17
The carrying value of the Company's investment portfolio as of December 31, 1997
was $31.0 billion, 88% of which is invested in fixed maturity securities. The
primary market risk to the investment portfolio is interest rate risk associated
with investments in fixed maturity securities. The Company's exposure to equity
price risk and foreign exchange risk is not significant. The Company has no
direct commodity risk.

For fixed maturity securities, short-term liquidity needs and the potential
liquidity needs of the business are key factors in managing the portfolio. The
portfolio duration relative to the liabilities' duration is primarily managed
through cash market transactions. For additional information regarding the
Company's objectives and strategies pertaining to the investment portfolio, see
the Investment Portfolio section of this management's discussion and analysis
(MD&A).

For the Company's investment portfolio, there were no significant changes in the
Company's primary market risk exposures or in how those exposures are managed
compared to the year ended December 31, 1996. The Company does not anticipate
significant changes in the Company's primary market risk exposures or in how
those exposures are managed in future reporting periods based upon what is known
or expected to be in effect in future reporting periods.

The primary market risk for all of the Company's long-term debt and mandatorily
redeemable preferred securities of subsidiary trusts (trust preferred
securities) is interest rate risk at the time of refinancing. All of the
Company's fixed rate debt is non-redeemable and the fixed rate trust securities
are not redeemable until April 30, 2001 at the earliest. The Company will
continue to monitor the interest rate environment and to evaluate refinancing
opportunities as the maturity/redemption date is approached. For additional
information regarding the Company's long-term debt and trust preferred
securities see Notes 7 and 9 of Notes to Consolidated Financial Statements and
the Liquidity and Capital Resources section of this MD&A.

Sensitivity Analysis

Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near term" means a period of time going forward up to one year from the
date of the consolidated financial statements.

In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, interest-bearing non-redeemable preferred stocks,
mortgage loans, short-term securities, cash, investment income accrued,
commercial paper, long-term debt, fixed rate trust preferred securities and
derivative financial instruments. The primary market risk to the Company's
market sensitive instruments is interest rate risk. The sensitivity analysis
model uses a 100 basis point change in interest rates to measure the
hypothetical change in fair value of financial instruments included in the
model.

For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and interest
rate reset features. Duration on tax exempt securities is adjusted for the fact
that the yield on such securities is less sensitive to changes in interest rates
compared to Treasury securities. Invested asset portfolio durations are
calculated on a market value weighted basis, including accrued investment
income, using holdings as of December 31, 1997.

For long-term debt and fixed rate trust preferred securities, the change in fair
value is determined by calculating hypothetical December 31, 1997 ending prices
based on yields adjusted to reflect a 100 basis point change, comparing such
hypothetical ending prices to actual ending prices, and multiplying the
difference by the par or shares outstanding.


                                       17
<PAGE>   18
The sensitivity analysis model used by the Company produces a loss in fair value
of market sensitive instruments of $1.250 billion based on a 100 basis point
increase in interest rates as of December 31, 1997. This loss value only
reflects the impact of an interest rate increase on the fair value of the
Company's financial instruments, which constitute approximately 59% of total
assets and approximately 5% of total liabilities. As a result, the loss value
excludes a significant portion of the Company's consolidated balance sheet which
would materially mitigate the impact of the loss in fair value associated with a
100 basis point increase in interest rates.

For example, certain non-financial instruments, primarily insurance accounts for
which the fixed maturity portfolio's primary purpose is to fund future claims
payments related thereto, are not reflected in the development of the above loss
value. These non-financial instruments include premium balances receivable,
reinsurance recoverables, claims and claim adjustment expense reserves and
unearned premium reserves. The Company's sensitivity model also calculates a
potential loss in fair value with the inclusion of these non-financial
instruments. For non-financial instruments, changes in fair value are determined
by calculating the present value of the estimated cash flows associated with
such instruments using risk-free rates as of December 31, 1997, calculating the
resulting duration, then using that duration to determine the change in value
for a 100 basis point change.

Based on the sensitivity analysis model used by the Company, the loss in fair
value of market sensitive instruments, including these non-financial
instruments, as a result of a 100 basis point increase in interest rates as of
December 31, 1997 is not material.

OUTLOOK

A variety of factors continue to affect the property and casualty insurance
market and the Company's core business outlook, including the competitive
pressures affecting pricing and profitability, inflation in the cost of medical
care and litigation.

Commercial Lines operating results for 1997 reflected the negative impact of
pricing declines in all markets. This trend in market conditions, characterized
by difficult pricing and increased competition, continued from prior years.

In National Accounts, where the majority of products are loss-sensitive
retrospectively rated or high deductible policies, pricing declines have been
the most severe. This business continues to reflect the negative impact of price
declines as evidenced by the decrease in premium and fee levels and, more
importantly, in the narrowing of profit margins earned on this business.
Additionally, there has been an increasing trend in this marketplace for
guaranteed cost products at what the Company believes are inadequate price
levels.

For Commercial Accounts and Select Accounts, the highly competitive marketplace
and soft underwriting cycle continue to pressure the pricing of guaranteed cost
products. Premiums on this business continue to reflect price declines, and have
not kept pace with loss cost inflation in recent years. The impact of this
negative trend in market conditions and resultant price declines has been
partially offset by a continued disciplined approach to underwriting and risk
management by the Company. The Company's focus is to retain existing profitable
business and obtain new accounts where it can maintain its selective
underwriting policy. The Company continues to adhere to strict guidelines to
maintain high quality underwriting and to focus on its core product lines and
markets, with particular emphasis on both product and industry specialization.

Specialty Accounts also operates within a highly competitive marketplace
characterized by pressure on both price and terms. The Company's focus in this
market is to sustain its emphasis on strict adherence to underwriting standards
and to increase its efforts to cross-sell its expanding array of specialty
products to existing customers of National Accounts, Commercial Accounts and
Select Accounts where it believes it has the greatest sales and profit
opportunities.

The combination of price declines associated with the highly competitive
marketplace and the Company's selective underwriting criteria has had an adverse
impact on premium and fee levels during the past several years. If the
competitive pressures on pricing do not improve in 1998, these factors may
continue to affect premium and fee levels unfavorably. The Company believes that
the competitive pricing environment for Commercial Lines is not likely to
improve in 1998.


                                       18
<PAGE>   19
Personal Lines strategy includes the control of operating expenses to improve
competitiveness and profitability, growth in sales through independent agents,
and continued expansion of alternative marketing channels to broaden its
distribution of personal lines products. Personal Lines is expanding its product
capabilities, including nonstandard auto coverages, in conjunction with this
growth strategy. In addition, Personal Lines continues to take action to reduce
its exposure to catastrophe losses, including limiting the writing of new
homeowners business and selectively non-renewing existing homeowners business in
certain markets, tightening underwriting standards and implementing price
increases in certain hurricane-prone areas, subject to restrictions imposed by
insurance regulatory authorities.

The property and casualty insurance industry in the United States continues to
consolidate. The Company's strategic objectives are to enhance its position as a
consistently profitable market leader and to become a low-cost provider of
property and casualty insurance in the United States, as the industry
consolidates.

In relation to the Company's objective of being a low-cost provider of property
and casualty insurance, cost reductions and enhanced productivity efforts are
expected to continue. These efforts include reducing overhead expenses,
completing the integration of Aetna P&C to make it more consistent with the
decentralized, streamlined structure of the Company, and improving claims
expense control. The Company has reached its objective of achieving $300 million
in annual cost savings in the first two years after the acquisition of Aetna
P&C.

Changes in the general interest rate environment affect the return received on
newly invested and reinvested funds. While a rising interest rate environment
enhances the returns available, it reduces the market value of existing fixed
maturity investments and the availability of gains on disposition. A decline in
interest rates reduces the return available on investment of funds but could
create the opportunity for realized investment gains on disposition of fixed
maturity investments.

Certain social, economic and political issues have led to an increased number of
legislative and regulatory proposals aimed at addressing the cost and
availability of certain types of insurance. While most of these provisions have
failed to become law, these initiatives may continue as legislators and
regulators try to respond to public availability and affordability concerns and
the resulting laws, if any, could adversely affect the Company's ability to
write business with appropriate returns.

LIQUIDITY AND CAPITAL RESOURCES

TAP was formed in January 1996 to hold the property and casualty insurance
subsidiaries of TIGI. TIGI contributed to TAP all of the outstanding shares of
common stock of Travelers Indemnity on April 1, 1996. On April 2, 1996, TAP
acquired the domestic property and casualty insurance subsidiaries of Aetna for
approximately $4.2 billion. TAP is a holding company and has no direct
operations. TAP's principal asset is the capital stock of its insurance
subsidiaries. For a description of the acquisition and the manner in which it
was funded, see Note 2 of Notes to Consolidated Financial Statements.

The liquidity requirements of the Company's business have been met primarily by
funds generated from operations, asset maturities and income received on
investments. Cash provided from these sources is used primarily for claims and
claim adjustment expense payments and operating expenses. Catastrophe claims,
the timing and amount of which are inherently unpredictable, may create
increased liquidity requirements. Additional sources of cash flow include the
sale of invested assets and financing activities. The Company believes that its
future liquidity needs will be met from all of the above sources.

Net cash flows are generally invested in marketable securities. The Company
closely monitors the duration of these investments, and investment purchases and
sales are executed with the objective of having adequate funds available to
satisfy the Company's maturing liabilities. As the Company's investment strategy
focuses on asset and liability durations, and not specific cash flows, asset
sales may be required to satisfy obligations and/or rebalance asset portfolios.
The Company's invested assets at December 31, 1997 totaled $31.0 billion and
consisted primarily of highly liquid public debt securities of $25.2 billion,
private debt securities of $2.0 billion, equity securities of $1.0 billion,
mortgage loans and real estate of $786 million, short-term investments of $1.4
billion and other investments of $574 million.


                                       19
<PAGE>   20
Cash flow needs at TAP include stockholder dividends and debt service. TAP meets
its cash flow needs primarily through dividends from operating subsidiaries. In
addition, TAP currently has available to it a $200 million line of credit for
working capital and other general corporate purposes from a subsidiary of
Travelers Group. The lender has no obligation to make any loan to TAP under this
line of credit. Also, the Company will continue to be able to make borrowings
under a $500 million Credit Facility with a syndicate of banks, which expires in
December 2001, none of which is currently utilized. Under the Credit Facility,
TAP is required to maintain a certain level of consolidated stockholders' equity
(as defined in the agreement). At December 31, 1997, this requirement was
exceeded by approximately $3.4 billion. In addition, the Credit Facility places
restrictions on the amount of consolidated debt TAP can incur. If the Company
had borrowings under the Credit Facility, the interest rate would be based upon
LIBOR plus a negotiated margin. TAP compensates the banks for the Credit
Facility through commitment fees. TAP also issues commercial paper directly to
investors and maintains unused credit availability under the Credit Facility at
least equal to the amount of commercial paper outstanding. At December 31, 1997,
TAP had $108 million outstanding under its commercial paper program.

As more fully described in Note 2 of Notes to Consolidated Financial Statements,
on April 24, 1996 TAP sold in a public offering $500 million of 6-3/4% Notes due
April 15, 2001 and $200 million of 7-3/4% Notes due April 15, 2026, in
connection with the acquisition of Aetna P&C. During the remainder of 1996, TAP
also sold $200 million of 6-3/4% Notes due September 1, 1999, $200 million of
6-1/4% Notes due October 1, 1999 and $150 million of 6-3/4% Notes due November
15, 2006. At December 31, 1997, TAP had issued a total of $1.25 billion of, and
had $750 million available for, debt offerings under its shelf registration
statement.

Because the principal operating subsidiaries of the Company are Connecticut
insurance companies, the amount of dividends that each entity may pay to the
parent company is restricted. The insurance holding company law of Connecticut
requires notice to, and approval by, the state insurance commissioner for the
declaration or payment of any dividend that together with other distributions
made within the preceding twelve months exceeds the greater of (i) 10% of the
insurer's surplus or (ii) the insurer's net income for the twelve-month period
ended the preceding December 31st, in each case determined in accordance with
statutory accounting practices. Such declaration or payment is further limited
by adjusted unassigned funds (surplus), as determined in accordance with
statutory accounting practices. The insurance holding company laws of other
states in which the Company's subsidiaries are domiciled generally contain
similar (although in certain instances somewhat more restrictive) limitations on
the payment of dividends. In 1998, dividend payments to TAP from its insurance
subsidiaries are limited to $805 million without prior approval of the
Connecticut Insurance Department.

In addition, pursuant to an intercompany agreement, TAP may not pay any
dividends on its common stock without the prior written consent of Travelers
Group, so long as Travelers Group maintains certain minimum beneficial ownership
requirements of the common stock. That agreement also limits the Company's
ability to incur indebtedness, issue equity securities and make certain capital
expenditures, among other things, without the prior written consent of Travelers
Group.

In 1996, the Company began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue. This issue involves the ability of computer systems that have
time-sensitive programs to properly recognize the year 2000. The inability to do
so could result in major failures or miscalculations. The Company has a
comprehensive plan in progress to address its internal year 2000 issue with
modifications to existing programs and conversions to new programs to bring all
its critical business systems into year 2000 compliance by year-end 1998. The
total cost associated with the required modifications and conversions, which are
expensed as incurred, is not expected to have a material effect on its financial
position, results of operations or liquidity. The Company also has third party
customers, financial institutions, vendors and others with which it conducts
business and has confirmed their plans to address year 2000 issues. While it is
likely that these efforts by third party vendors and customers will be
successfully completed in a timely manner, it is possible that a series of
failures by third parties could have a material adverse effect on the Company's
results of operations in future years.


                                       20
<PAGE>   21
The National Association of Insurance Commissioners (NAIC) adopted risk-based
capital (RBC) requirements for property-casualty companies in December 1993,
effective with reporting for 1994. The RBC requirements are to be used as early
warning tools by the NAIC and states to identify companies that merit further
regulatory action. The formulas have not been designed to differentiate among
adequately capitalized companies that operate with levels of capital higher than
RBC requirements. Therefore, it is inappropriate and ineffective to use the
formulas to rate or to rank such companies. At December 31, 1997, all of the
Company's insurance subsidiaries had adjusted capital in excess of amounts
requiring any regulatory action.

The Company has a net deferred tax asset of $1.3 billion at December 31, 1997
which relates to temporary differences that are expected to reverse as net
ordinary deductions for tax purposes. The Company will have to generate
approximately $3.8 billion of taxable income, before reversal of these temporary
differences, primarily over the next 10 to 15 years, to realize the deferred tax
asset. Management expects to realize the deferred tax asset based upon its
expectation of future positive taxable income, after reversal of these
deductible temporary differences, in the consolidated federal income tax return
of Travelers Group. The taxable income of the consolidated return of Travelers
Group, after reversal of the deductible temporary differences, is expected to be
at least $3.3 billion annually.

Certain of the Company's loss reserves are for environmental and asbestos
claims. The Company believes that it is not likely that these claims will have a
material adverse effect on the Company's financial condition or liquidity. See
the discussion of environmental and asbestos claims in this MD&A.

In connection with the 1992 sale of American Re-Insurance Company (Am Re) by
Aetna P&C, Am Re and Aetna P&C entered into a reinsurance agreement which
provides that to the extent Am Re incurred losses in 1991 and prior that were
still outstanding at January 1, 1992 in excess of $2.7 billion, Aetna P&C has an
80% participation in payments on those losses up to a maximum payment by Aetna
P&C of $500 million. This agreement has been accounted for as a deposit and a
liability has been established for the present value of the expected payout
under the agreement.

On June 23, 1997, the Company repurchased, in the aggregate, 6,600,102 shares of
its Class A Common Stock held by Aetna, J.P. Morgan Capital Corporation, Fund
American Enterprise Holdings, Inc. and The Trident Partnership, L.P.
(collectively, the "Private Investors") for a total purchase price of
approximately $240.8 million, representing a discount to the then current market
price. The repurchases represented 20% of the holdings of each of the Private
Investors. As part of the repurchase agreement, each of the Private Investors
agreed to extend its contractual sale restrictions on 50% of the remaining
shares held by the Private Investors for an additional period of approximately
six months, to March 15, 1998. On July 24, 1996, TAP's Board of Directors had
authorized the expenditure of up to $100 million for the repurchase of common
stock. This transaction satisfied the Company's previously announced program to
repurchase $100 million of its shares. During 1997 and 1996, the Company had
previously repurchased in the open market 758,700 and 406,860 shares of its
Class A Common Stock at an aggregate cost of $27 million and $13 million,
respectively, under the repurchase program, which was terminated.

On October 24, 1997, the Company filed a registration statement covering
14,200,207 shares of Class A Common Stock (which included an over-allotment
option for 1,000,000 shares) which were sold by the Private Investors. In order
to permit the grant by the Private Investors to the underwriters in the offering
of an over-allotment option to purchase up to an additional 1,000,000 shares in
the aggregate, the Company waived the restricted period on such shares, the sale
of which would otherwise be restricted until March 15, 1998. Except for
underwriting commissions, all expenses incurred in connection with the sale were
paid by the Company. The Company did not receive any proceeds from this sale of
the Class A Common Stock. The sale represented approximately 54% of the
remaining holdings of each of the Private Investors.


                                       21
<PAGE>   22
On January 28, 1998, the Company, through the Travelers Property Casualty Corp.
Capital Accumulation Plan, reissued 763,654 shares of treasury stock in the form
of restricted stock to participating officers and other key employees. In
addition, on January 22, 1997, the Company issued 413,578 shares of the
Company's Class A Common Stock and reissued 502,430 shares of treasury stock in
the form of restricted stock to participating officers and other key employees.
The fair market values per share of the 1998 and 1997 restricted stock awards
were $43.71 and $37.58, respectively. The restricted stock generally vests after
a three-year period. Except under limited circumstances, the stock cannot be
sold or transferred during the restricted period by the participant, who is
required to render service to the Company during the restricted period. Unearned
compensation expense associated with the restricted stock grant represents the
market value of the Company's common stock at the date of grant and is
recognized as a charge to income ratably over the vesting period. At December
31, 1997, 3,083,992 shares were available for future grants under TAP's
restricted stock plan.

FUTURE APPLICATION OF ACCOUNTING STANDARDS

See Note 1 of Notes to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.

FORWARD-LOOKING STATEMENTS

Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. Actual results may differ materially from those
contemplated by the forward-looking statements. In particular, the information
appearing in the section under the heading "Outlook" is forward-looking. These
forward-looking statements involve risks and uncertainties including, but not
limited to, the following: changes in general economic conditions, including the
performance of financial markets and interest rates; customer responsiveness to
both new products and distribution channels; competitive, regulatory, or tax
changes that affect the cost of or demand for the Company's products; and
adverse litigation results.

                                       22
<PAGE>   23
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENT OF INCOME
                     (In millions, except per share amounts)

<TABLE>
<CAPTION>
For the Year Ended December 31,                     1997      1996       1995
                                                    ----      ----       ----
<S>                                                <C>       <C>        <C>    
REVENUES
Premiums                                           $ 7,225   $ 6,028    $ 3,315
Net investment income                                2,051     1,656        710
Fee income                                             365       392        432
Realized investment gains                              169        18         71
Other revenues                                         101       103         41
                                                   -------   -------    -------
   Total revenues                                    9,911     8,197      4,569
                                                   -------   -------    -------

CLAIMS AND EXPENSES
Claims and claim adjustment expenses                 5,484     5,282      2,817
Amortization of deferred acquisition costs           1,127       906        512
Interest expense                                       163       118       --
General and administrative expenses                  1,385     1,404        689
                                                   -------   -------    -------
   Total claims and expenses                         8,159     7,710      4,018
                                                   -------   -------    -------
Income before federal income taxes                   1,752       487        551
                                                   -------   -------    -------
Federal income taxes:
  Current expense (benefit)                            422      (100)       160
  Deferred expense (benefit)                            94       196        (28)
                                                   -------   -------    -------
     Total federal income taxes                        516        96        132
                                                   -------   -------    -------
Net income                                         $ 1,236   $   391    $   419
                                                   =======   =======    =======
Net income per common share                        $  3.13   $  1.02    $  1.28
Net income per common share-assuming dilution      $  3.12   $  1.02    $  1.28
                                                   =======   =======    =======
</TABLE>


                 See notes to consolidated financial statements.


                                       23
<PAGE>   24
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                          (In millions, except shares)

<TABLE>
<CAPTION>
At December 31,                                                                    1997        1996
                                                                                   ----        ----
<S>                                                                              <C>         <C>     
ASSETS
Fixed maturities, available for sale at fair value (cost, $26,127 and $24,052)   $ 27,188    $ 24,446
Equity securities, at fair value (cost, $977 and $756)                              1,037         779
Mortgage loans                                                                        691       1,005
Real estate held for sale                                                              95         157
Short-term securities                                                               1,446       2,311
Other investments                                                                     574         666
                                                                                 --------    --------
         Total investments                                                         31,031      29,364
                                                                                 --------    --------
Cash                                                                                   47         106
Investment income accrued                                                             387         381
Premium balances receivable                                                         2,897       2,976
Reinsurance recoverables                                                            9,188       9,714
Deferred acquisition costs                                                            501         426
Deferred federal income taxes                                                       1,316       1,583
Contractholder receivables                                                          1,923       1,828
Goodwill                                                                            1,497       1,549
Other assets                                                                        1,895       1,852
                                                                                 --------    --------
         Total assets                                                            $ 50,682    $ 49,779
                                                                                 ========    ========

LIABILITIES
Claims and claim adjustment expense reserves                                     $ 30,324    $ 31,177
Unearned premium reserves                                                           3,867       3,554
Contractholder payables                                                             1,923       1,828
Commercial paper                                                                      108          25
Long-term debt                                                                      1,249       1,249
Other liabilities                                                                   4,534       4,566
                                                                                 --------    --------
         Total liabilities                                                         42,005      42,399
                                                                                 --------    --------
TAP-obligated mandatorily redeemable preferred securities of subsidiary
    trusts holding solely junior subordinated debt securities of TAP                  900         900
                                                                                 --------    --------
STOCKHOLDERS' EQUITY
Common stock:
  Class A, $.01 par value, 700 million shares authorized;
    (issued shares, 72,393,407 and 71,979,829)                                          1           1
  Class B, $.01 par value, 700 million shares authorized;
    328,020,170 shares issued and outstanding                                           3           3
Additional paid-in capital                                                          5,473       5,455
Retained earnings                                                                   1,866         749
Treasury stock, at cost (shares, 7,314,688 and 406,860)                              (266)        (13)
Unrealized gain on investment securities, net of tax                                  722         285
Unearned compensation                                                                 (22)         --
                                                                                 --------    --------
         Total stockholders' equity                                                 7,777       6,480
                                                                                 --------    --------
         Total liabilities and stockholders' equity                              $ 50,682    $ 49,779
                                                                                 ========    ========
</TABLE>


                 See notes to consolidated financial statements.


                                       24
<PAGE>   25
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                          (In millions, except shares)

<TABLE>
<CAPTION>
                                                                                        SHARES (IN THOUSANDS)
For the Year Ended December 31,                1997        1996        1995        1997        1996          1995
                                               ----        ----        ----        ----        ----          ----
<S>                                          <C>         <C>         <C>          <C>         <C>            <C>
COMMON STOCK AND ADDITIONAL
   PAID-IN CAPITAL
Balance, beginning of year                   $  5,459    $  2,899    $  2,921     400,000         100         100
Capital Accumulation Plan grant                    18          --          --         414          --          --
Capitalization of Travelers
   Property Casualty Corp.                         --       2,560          --          --     399,900          --
Other                                              --          --         (22)         --          --          --
                                             --------    --------    --------     -------     -------         ---
Balance, end of year                            5,477       5,459       2,899     400,414     400,000         100
                                             --------    --------    --------     -------     -------         ---
RETAINED EARNINGS
Balance, beginning of year                        749         422         103
Net income                                      1,236         391         419
Dividends                                        (119)        (64)       (100)
                                             --------    --------    --------    
Balance, end of year                            1,866         749         422
                                             --------    --------    --------    
TREASURY STOCK (at cost)
Balance, beginning of year                        (13)         --          --        (407)         --          --
Capital Accumulation Plan grant,
   net of forfeitures                              15          --          --         449          --          --
Treasury stock acquired                          (268)        (13)         --      (7,359)       (407)         --
Other                                              --          --          --           2          --          --
                                             --------    --------    --------     -------     -------         ---
Balance, end of year                             (266)        (13)         --      (7,315)       (407)         --
                                             --------    --------    --------     -------     -------         ---
UNREALIZED GAIN (LOSS) ON
   INVESTMENT SECURITIES,
   NET OF TAX
Balance, beginning of year                        285         280        (443)
Net change in unrealized gains and losses
   on investment securities, net of tax           437           5         723
                                             --------    --------    --------    
Balance, end of year                              722         285         280
                                             --------    --------    --------    
UNEARNED COMPENSATION
Balance, beginning of year                         --          --          --
Issuance of restricted stock under Capital
   Accumulation Plan, net of forfeitures          (33)         --          --
Restricted stock amortization                      11          --          --
                                             --------    --------    --------    
Balance, end of year                              (22)         --          --
                                             --------    --------    --------     -------     -------         ---
Total stockholders' equity
   and shares outstanding                    $  7,777    $  6,480    $  3,601     393,099     399,593         100
                                             ========    ========    ========     =======     =======         ===
                                                                                             
</TABLE>


                 See notes to consolidated financial statements.


                                       25
<PAGE>   26
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (In millions)

<TABLE>
<CAPTION>
For the Year Ended December 31,                                                          1997        1996        1995
                                                                                         ----        ----        ----
<S>                                                                                   <C>         <C>         <C>     
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                          $  1,236    $    391    $    419
   Adjustments to reconcile net income to net cash provided by operating activities
     Realized investment gains                                                            (169)        (18)        (71)
     Depreciation and amortization                                                          47          40          15
     Deferred federal income taxes                                                          94         196         (28)
     Amortization of deferred policy acquisition costs                                   1,127         906         512
     Premium balances receivable                                                            79         212         387
     Reinsurance recoverables                                                               97        (159)        364
     Deferred policy acquisition costs                                                  (1,210)       (935)       (493)
     Insurance reserves                                                                   (121)        691         (18)
     Other                                                                                (557)       (143)        407
                                                                                      --------    --------    --------
     Net cash provided by operating activities                                             623       1,181       1,494
                                                                                      --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from maturities of investments
     Fixed maturities                                                                    1,422       1,567         684
     Mortgage loans                                                                        154         133          15
  Proceeds from sales of investments
     Fixed maturities                                                                   10,045      12,606       4,871
     Equity securities                                                                     504         558         157
     Mortgage loans                                                                        231          23          36
     Real estate held for sale                                                             129          16          22
  Purchases of investments
     Fixed maturities                                                                  (13,421)    (15,049)     (6,497)
     Equity securities                                                                    (554)       (785)       (472)
     Mortgage loans                                                                        (38)       (161)        (40)
  Short-term securities, (purchases) sales, net                                            872      (1,044)       (211)
  Other investments, net                                                                   (57)        (90)         16
  Business acquisitions                                                                     --      (4,160)         --
  Business divestments                                                                      --           1          --
  Securities transactions in course of settlement                                          335         571          44
                                                                                      --------    --------    --------
     Net cash used in investing activities                                                (378)     (5,814)     (1,375)
                                                                                      --------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES
  Issuance of commercial paper, net                                                         83          25          --
  Issuance of long-term debt                                                                --       1,249          --
  Borrowings on revolving line of credit                                                    --       2,650          --
  Payments on revolving line of credit                                                      --      (2,650)         --
  Contribution from TIGI                                                                    --       1,138          --
  Purchase of treasury stock                                                              (268)        (13)         --
  Private offering of common stock                                                          --         525          --
  Initial public offering of common stock                                                   --         928          --
  Issuance of mandatorily redeemable preferred securities                                   --         900          --
  Issuance of Series Z preferred stock                                                      --         540          --
  Redemptions of Series Z preferred stock                                                   --        (540)         --
  Dividends on Series Z preferred stock                                                     --          (4)         --
  Dividends to TIGI                                                                        (98)        (49)       (100)
  Dividends to minority shareholders                                                       (21)        (11)         --
                                                                                      --------    --------    --------
     Net cash provided by (used in) financing activities                                  (304)      4,688        (100)
                                                                                      --------    --------    --------
  Net increase (decrease) in cash                                                          (59)         55          19
  Cash at beginning of period                                                              106          51          32
                                                                                      --------    --------    --------
  Cash at end of period                                                               $     47    $    106    $     51
                                                                                      ========    ========    ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Income taxes paid (refunded)                                                        $    677    $   (208)   $    (28)
  Interest paid                                                                       $    163    $     99    $     --
                                                                                      ========    ========    ========  
</TABLE>

                 See notes to consolidated financial statements.


                                       26
<PAGE>   27
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       BASIS OF PRESENTATION

       The consolidated financial statements include the accounts of Travelers
       Property Casualty Corp. (TAP) (a direct majority-owned subsidiary of The
       Travelers Insurance Group Inc. (TIGI) and an indirect majority-owned
       subsidiary of Travelers Group Inc.) and its subsidiaries (collectively,
       the Company). On April 2, 1996, TAP purchased from Aetna Services, Inc.
       (Aetna) all of the outstanding capital stock of Travelers Casualty and
       Surety Company (formerly The Aetna Casualty and Surety Company) and The
       Standard Fire Insurance Company (collectively, Aetna P&C) for
       approximately $4.2 billion in cash. The acquisition was accounted for
       under the purchase method of accounting and, accordingly, the
       consolidated financial statements include the results of Aetna P&C's
       operations only from the date of acquisition. Significant intercompany
       transactions and balances have been eliminated.

        The preparation of financial statements in conformity with generally
        accepted accounting principles requires management to make estimates and
        assumptions that affect the reported amounts of assets and liabilities
        and disclosure of contingent assets and liabilities at the date of the
        financial statements and the reported amounts of revenues and claims and
        expenses during the reporting period. Actual results could differ from
        those estimates.

       Certain reclassifications have been made to prior years' financial
       statements to conform to the current year's presentation.

       ACCOUNTING CHANGES

       EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
       In February 1998, the Financial Accounting Standards Board (FASB) issued
       Statement of Financial Accounting Standards No. 132, "Employers'
       Disclosures about Pensions and Other Postretirement Benefits" (FAS 132).
       FAS 132 supersedes the disclosure requirements in FASB Statements No. 87,
       "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for
       Settlements and Curtailments of Defined Benefit Pension Plans and
       Termination of Benefits," and No. 106, "Employers' Accounting for
       Postretirement Benefits Other Than Pensions." FAS 132 addresses
       disclosure only and does not address measurement or recognition. In
       addition to other disclosure changes, FAS 132 allows employers to
       disclose total contributions to multiemployer plans without
       disaggregating the amounts attributable to pensions and other
       postretirement benefits. This statement is effective for fiscal years
       beginning after December 15, 1997. Earlier application is encouraged.
       Effective December 31, 1997, the Company adopted FAS 132. The adoption of
       this standard did not have any impact on results of operations, financial
       condition or liquidity.

       EARNINGS PER SHARE
       Effective December 31, 1997, the Company adopted Statement of Financial
       Accounting Standards No. 128, "Earnings per Share" (FAS 128). This
       statement establishes standards for computing and presenting earnings per
       share (EPS) and applies to entities with publicly held common stock. FAS
       128 requires restatement of all prior period EPS data presented. It
       simplifies the standards for computing earnings per share previously
       found in Accounting Principles Board Opinion No. 15, "Earnings per Share"
       (APB 15), and makes them comparable to international EPS standards. It
       replaces the presentation of primary EPS with a presentation of basic
       EPS. It also requires dual presentation of basic and diluted EPS on the
       face of the income statement for all entities with complex capital
       structures and requires a reconciliation of the numerator and denominator
       of the basic EPS computation to the numerator and denominator of the
       diluted EPS computation. See note 1, Accounting Policies, Earnings per
       Share. FAS 128 supersedes APB 15 and related accounting interpretations
       and is effective for financial statements issued for periods ending after
       December 15, 1997, including interim periods.


                                       27
<PAGE>   28
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       Basic EPS is computed by dividing income available to common stockholders
       by the weighted average number of common shares outstanding for the
       period. Diluted EPS reflects the effect of potentially dilutive
       securities, principally stock-based incentive plans.

       ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
       EXTINGUISHMENTS OF LIABILITIES Effective January 1, 1997, the Company
       adopted Statement of Financial Accounting Standards No. 125, "Accounting
       for Transfers and Servicing of Financial Assets and Extinguishments of
       Liabilities" (FAS 125). This statement establishes accounting and
       reporting standards for transfers and servicing of financial assets and
       extinguishments of liabilities. These standards are based on an approach
       that focuses on control. Under this approach, after a transfer of
       financial assets, an entity recognizes the financial and servicing assets
       it controls and the liabilities it has incurred, derecognizes financial
       assets when control has been surrendered and derecognizes liabilities
       when extinguished. FAS 125 provides standards for distinguishing
       transfers of financial assets that are sales from transfers that are
       secured borrowings. In December 1996, the FASB issued Statement of
       Financial Accounting Standards No. 127, "Deferral of the Effective Date
       of Certain Provisions of FASB Statement No. 125," which delays until
       January 1, 1998 the effective date for certain provisions. Earlier or
       retroactive application is not permitted. The adoption of the provisions
       of FAS 125 effective January 1, 1997 did not have a material impact on
       results of operations, financial condition or liquidity. The adoption of
       the provisions of FAS 127 effective January 1, 1998 will not have a
       material impact on results of operations, financial condition or
       liquidity.

       ACCOUNTING POLICIES

       INVESTMENTS
       Fixed maturities include bonds, notes and redeemable preferred stocks.
       Fixed maturities are valued based upon quoted market prices or dealer
       quotes, or if quoted market prices or dealer quotes are not available,
       discounted expected cash flows using market rates commensurate with the
       credit quality and maturity of the investment. Also included in fixed
       maturities are loan-backed and structured securities, which are amortized
       using the retrospective method. The effective yield used to determine
       amortization is calculated based on actual historical and projected
       future cash flows, which are obtained from a widely-accepted securities
       data provider. Fixed maturities are classified as "available for sale"
       and are reported at fair value, with unrealized investment gains and
       losses, net of income taxes, charged or credited directly to
       stockholders' equity.

       Equity securities, which include common and nonredeemable preferred
       stocks, are classified as available for sale and carried at fair value
       based primarily on quoted market prices. Changes in fair values of equity
       securities are charged or credited directly to stockholders' equity, net
       of income taxes.

       Mortgage loans are carried at amortized cost. A mortgage loan is
       considered impaired when it is probable that the Company will be unable
       to collect principal and interest amounts due. For mortgage loans that
       are determined to be impaired, a reserve is established for the
       difference between the amortized cost and fair market value of the
       underlying collateral. In estimating fair value, the Company uses
       interest rates reflecting the returns required in the current real estate
       financing market. There were no impaired loans at December 31, 1997 and
       1996.

       Real estate held for sale is carried at the lower of cost or fair value
       less estimated costs to sell. Fair value is established at the time of
       foreclosure by internal analysis or external appraisers, using discounted
       cash flow analyses and other acceptable techniques. Thereafter, an
       allowance for losses on real estate held for sale is established if the
       carrying value of the property exceeds its current fair value less
       estimated costs to sell. There was no such allowance at December 31, 1997
       and 1996.


                                       28
<PAGE>   29
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

   1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       Accrual of income is suspended on fixed maturities or mortgage loans that
       are in default, or on which it is likely that future payments will not be
       made as scheduled. Interest income on investments in default is
       recognized only as payment is received. Investments included in the
       consolidated balance sheet that were non-income producing for the
       preceding 12 months were not significant.

       Short-term securities, consisting primarily of money market instruments
       and other debt issues purchased with a maturity of less than one year,
       are carried at amortized cost which approximates market.

       INVESTMENT GAINS AND LOSSES
       Realized investment gains and losses are included as a component of
       pretax revenues based upon specific identification of the investments
       sold on the trade date. Other-than-temporary declines in market value of
       investments are included in realized investment gains and losses.

       REINSURANCE RECOVERABLES
       Amounts recoverable from reinsurers are estimated in a manner consistent
       with the claim liability associated with the reinsured business. The
       Company evaluates and monitors the financial condition of its reinsurers
       under voluntary reinsurance arrangements to minimize its exposure to
       significant losses from reinsurer insolvencies.

       DEFERRED ACQUISITION COSTS
       Commissions and premium taxes, which vary with and are primarily related
       to the production of new business, are deferred and amortized pro rata
       over the contract periods in which the related premiums are earned.
       Future investment income attributable to related premiums is taken into
       account in measuring the recoverability of the carrying value of this
       asset. Deferred acquisition costs are reviewed to determine if they are
       recoverable from future income, and if not, are charged to expense. All
       other acquisition expenses are charged to operations as incurred.

       CONTRACTHOLDER RECEIVABLES AND PAYABLES
       Under certain workers' compensation insurance contracts with deductible
       features, the Company is obligated to pay the claimant for the full
       amount of the claim. The Company is subsequently reimbursed by the
       policyholder for the deductible amount. These amounts are included on a
       gross basis in the consolidated balance sheet in contractholder payables
       and contractholder receivables, respectively.

       GOODWILL
       Goodwill is amortized on a straight-line basis over a 40-year period. The
       carrying amount is regularly reviewed for indicators of
       other-than-temporary impairments in value. Impairments would be
       recognized in operating results if a permanent diminution in value is
       deemed to have occurred.

       CLAIMS AND CLAIM ADJUSTMENT EXPENSE RESERVES
       Claims and claim adjustment expense reserves represent estimated
       provisions for both reported and unreported claims incurred and related
       expenses. The reserves are adjusted regularly based on experience.
       Included in the claims and claim adjustment expense reserves in the
       consolidated balance sheet at December 31, 1997 and 1996 are $1.5 billion
       and $1.6 billion, respectively, of reserves related to workers'
       compensation that have been discounted using an interest rate of 5%.


                                       29
<PAGE>   30

               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       In determining claims and claim adjustment expense reserves, the Company
       carries on a continuing review of its overall position, its reserving
       techniques and its reinsurance. These reserves represent the estimated
       ultimate cost of all incurred claims and claim adjustment expenses. Since
       the reserves are based on estimates, the ultimate liability may be more
       or less than such reserves. The effects of changes in such estimated
       reserves are included in the results of operations in the period in which
       the estimates are changed. Such changes may be material to the results of
       operations and could occur in a future period.

       PERMITTED STATUTORY ACCOUNTING PRACTICES
       The Company's insurance subsidiaries, domiciled principally in
       Connecticut, prepare statutory financial statements in accordance with
       the accounting practices prescribed or permitted by the insurance
       departments of the states of domicile. Prescribed statutory accounting
       practices include certain publications of the National Association of
       Insurance Commissioners as well as state laws, regulations, and general
       administrative rules. Permitted statutory accounting practices encompass
       all accounting practices not so prescribed. The impact of any permitted
       accounting practices on statutory surplus of the Company is not material.

       PREMIUMS AND UNEARNED PREMIUM RESERVES
       Premiums are recognized as revenues pro rata over the policy period.
       Unearned premium reserves represent the unexpired portion of policy
       premiums. Accrued retrospective premiums are included in premium balances
       receivable.

       FEE INCOME
       Fee income includes servicing fees from carriers and revenues from large
       deductible policies and service contracts and are recognized pro rata
       over the contract or policy periods.

       OTHER REVENUES
       Other revenues include revenues from premium installment charges, which
       are recognized as collected, revenues of noninsurance subsidiaries other
       than fee income, gains and losses on dispositions of assets and
       operations other than realized investment gains and losses and the pretax
       operating results of real estate joint ventures.

       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.

       STOCK-BASED COMPENSATION
       The Company accounts for its stock-based compensation plans using the
       accounting method prescribed by Accounting Principles Board Opinion No.
       25, "Accounting for Stock Issued to Employees," and has included in the
       notes to consolidated financial statements the pro forma disclosures
       required by FAS No. 123 "Accounting for Stock-Based Compensation." See
       note 14. The Company accounts for its stock-based non-employee
       compensation plans at fair value.


                                       30
<PAGE>   31
              TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       EARNINGS PER SHARE
       Basic EPS is computed by dividing income available to common stockholders
       by the weighted average number of common shares outstanding for the
       period. Diluted EPS reflects the effect of potentially dilutive
       securities, principally stock-based incentive plans. The following table
       is a reconciliation of the numerators and denominators of the basic and
       diluted earnings per share computation for net income:

<TABLE>
<CAPTION>
       (for the year ended December 31, 1997,                            PER SHARE
        in millions, except per share amounts)    INCOME(1)   SHARES(2)    AMOUNT
                                                  ---------   ---------  ---------
<S>                                               <C>         <C>        <C>  
       Basic EPS                                                        
        Income available to common stockholders    $1,236       395.5      $ 3.13
       Effects of Dilutive Securities                                   
        Restricted Stock                               --          .3       (0.01)
                                                   ------       -----      ------
       Diluted EPS                                                      
        Income available to common stockholders                         
         and assumed conversions                   $1,236       395.8      $ 3.12
                                                   ======       =====      ======

</TABLE>

       (1) Numerator                                                    
       (2) Denominator                                               

       For the years ended December 31, 1996 and 1995, there were no dilutive
       securities issued.

       On February 3, 1998, the Staff of the Securities and Exchange Commission
       issued Staff Accounting Bulletin No. 98 (SAB 98). SAB 98 requires that
       FAS 128 should be used to compute earnings per share for periods prior to
       an initial public offering (IPO). For purposes of computing basic and
       diluted EPS for periods prior to the IPO, the 328 million shares of
       common stock issued to TIGI in April 1996 were assumed to be outstanding
       for all reported periods. See note 2. Previously, all common stock issued
       within a one-year period prior to an IPO was treated as outstanding for
       all reported periods. This amount was then reduced by the dilutive effect
       of such issuances of stock prior to the IPO determined by using the
       actual proceeds and the number of shares that could have been repurchased
       using the IPO price as the repurchase price for all periods presented.
       Accordingly, the Company has restated its earnings per share for 1996 and
       1995 in accordance with the guidelines of SAB 98.

       DERIVATIVE FINANCIAL INSTRUMENTS
       The Company uses derivative financial instruments, including financial
       futures contracts, forward contracts and interest rate swaps, as a means
       of hedging exposure to interest rate and foreign currency risk. Hedge
       accounting is used to account for derivatives. To qualify for hedge
       accounting the changes in value of the derivative must be expected to
       substantially offset the changes in value of the hedged item. Hedges are
       monitored to ensure that there is a high correlation between the
       derivative instruments and the hedged investment.

       Gains and losses arising from financial futures contracts are used to
       adjust the basis of hedged investments and are recognized in net
       investment income over the life of the investment.

       Interest rate swaps are carried at market value and included in other
       investments in the consolidated balance sheet. Unrealized gains and
       losses are reflected in stockholders' equity. Swap payments are accrued
       and recognized in net investment income.


                                       31
<PAGE>   32
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       Forward contracts were not significant at December 31, 1997 and 1996.
       Information concerning derivative financial instruments is included in
       note 12.

       ACCOUNTING STANDARDS NOT YET ADOPTED

       In December 1997, the Accounting Standards Executive Committee of the
       American Institute of Certified Public Accountants issued Statement of
       Position 97-3, "Accounting by Insurance and Other Enterprises for
       Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
       determining when an entity should recognize a liability for guaranty-fund
       and other insurance-related assessments, how to measure that liability,
       and when an asset may be recognized for the recovery of such assessments
       through premium tax offsets or policy surcharges. This SOP is effective
       for financial statements for fiscal years beginning after December 15,
       1998, and the effect of initial adoption is to be reported as a
       cumulative catch-up adjustment. Restatement of previously issued
       financial statements is not allowed. The Company has not yet determined
       the impact that SOP 97-3 will have on its consolidated financial
       statements or when it will be implemented.

       In June 1997, the FASB issued Statement of Financial Accounting Standards
       No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
       standards for the reporting and display of comprehensive income and its
       components in a full set of general-purpose financial statements. All
       items that are required to be recognized under accounting standards as
       components of comprehensive income are to be reported in a financial
       statement that is displayed with the same prominence as other financial
       statements. This statement stipulates that comprehensive income reflect
       the change in equity of an enterprise during a period from transactions
       and other events and circumstances from nonowner sources. Comprehensive
       income will thus represent the sum of net income and other comprehensive
       income, although FAS 130 does not require the use of the terms
       comprehensive income or other comprehensive income. The accumulated
       balance of other comprehensive income is required to be displayed
       separately from retained earnings and additional paid-in capital in the
       consolidated balance sheet. This statement is effective for fiscal years
       beginning after December 15, 1997. The Company anticipates that the
       adoption of FAS 130 will result primarily in reporting unrealized gains
       and losses on investments in debt and equity securities in comprehensive
       income.

       In June 1997, the FASB also issued Statement of Financial Accounting
       Standards No. 131, "Disclosures about Segments of an Enterprise and
       Related Information" (FAS 131). FAS 131 establishes standards for the way
       that public enterprises report information about operating segments in
       annual financial statements and requires that selected information about
       those operating segments be reported in interim financial statements.
       This statement supersedes Statement of Financial Accounting Standards No.
       14, "Financial Reporting for Segments of a Business Enterprise". FAS 131
       requires that all public enterprises report financial and descriptive
       information about its reportable operating segments. Operating segments
       are defined as components of an enterprise about which separate financial
       information is available that is evaluated regularly by the chief
       operating decision maker in deciding how to allocate resources and in
       assessing performance. This statement is effective for fiscal years
       beginning after December 15, 1997. The Company's reportable operating
       segments are not expected to change as a result of the adoption of FAS
       131.


                                       32
<PAGE>   33
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       NATURE OF OPERATIONS

       The Company is comprised of two major business segments: Commercial Lines
       and Personal Lines.

       COMMERCIAL LINES
       Commercial Lines offers a broad array of property and casualty insurance
       and insurance-related services. Protection is afforded to customers of
       Commercial Lines for the risks of property loss such as fire and
       windstorm, financial loss such as business interruption from property
       damage, liability claims arising from operations and workers'
       compensation benefits through insurance products where risk is
       transferred from the customer to Commercial Lines. Such coverages include
       workers' compensation, general liability, commercial multi-peril,
       commercial automobile, property, fidelity and surety, professional
       liability, and several miscellaneous coverages. Commercial Lines is
       divided into four marketing groups that are designed to focus on a
       particular client base or industry segment to provide products and
       services that specifically address customers' needs: National Accounts,
       Commercial Accounts, Select Accounts, and Specialty Accounts.

       National Accounts provides a variety of casualty products to large
       companies, as well as employee groups, associations and franchises.
       Products are marketed through national brokers and regional agents.
       Programs offered by National Accounts include risk transfer and risk
       service, such as claims settlement, loss control and risk management
       services, and are generally offered in connection with a retrospectively
       rated insurance policy, a large deductible plan or a self-insured
       program. National Accounts also includes the Company's alternative market
       business, which sells claims and policy management services to workers'
       compensation and automobile assigned risk plans, self-insurance pools
       throughout the United States and to niche voluntary markets.

       Commercial Accounts serves medium-sized businesses for casualty products
       and both large and medium-sized businesses for property products.
       Commercial Accounts sells a broad range of property and casualty
       insurance products, with an emphasis on guaranteed cost products, through
       a large network of independent agents and brokers. Within Commercial
       Accounts the Company has established dedicated operations that
       exclusively target the construction industry, providing insurance and
       risk management services for virtually all areas of construction. The
       dedicated construction operations are reflective of the Company's focus
       on industry specialization.

       Select Accounts serves small businesses and individuals with commercial
       exposures. Select Accounts' products are generally guaranteed cost
       policies, often a packaged product covering property and liability
       exposures. The products are sold through independent agents.

       Specialty Accounts markets products to national, mid-size and small
       customers, including individuals. The principal products of Specialty
       Accounts include professional liability insurance, directors' and
       officers' liability insurance, fiduciary liability insurance, employment
       practices liability insurance, product liability, fidelity and surety
       bonds, commercial umbrella and excess liability, excess property
       insurance and coverages relating to the entertainment industry, excess
       and surplus lines coverages and other industry specific programs. Its
       products are distributed through both wholesale brokers and retail agents
       and brokers.


                                       33
<PAGE>   34
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       PERSONAL LINES
       Personal Lines writes virtually all types of property and casualty
       insurance covering personal risks. The primary coverages in Personal
       Lines are personal automobile and homeowners insurance sold to
       individuals. These products are distributed through independent agents,
       sponsoring organizations such as employee and affinity groups, joint
       marketing arrangements with other insurers and through the independent
       agents of Primerica Financial Services, a unit of Travelers Group Inc.

       Personal automobile policies provide coverage for liability to others for
       both bodily injury and property damage, and for physical damage to an
       insured's own vehicle from collision and various other perils. In
       addition, many states require policies to provide first-party personal
       injury protection, frequently referred to as no-fault coverage.

       Homeowners policies are available for dwellings, condominiums, mobile
       homes and rental property contents. Protection against losses to
       dwellings and contents from a wide variety of perils is included in these
       policies, as well as coverage for liability arising from ownership or
       occupancy.

       CATASTROPHE EXPOSURE
       The Company has a geographic exposure to catastrophe losses in certain
       North Atlantic states, California and South Florida. Catastrophes can be
       caused by various events including hurricanes, windstorms, earthquakes,
       hail, severe winter weather, explosions and fires. The incidence and
       severity of catastrophes are inherently unpredictable. The extent of
       losses from a catastrophe is a function of both the total amount of
       insured exposure in the area affected by the event and the severity of
       the event. Most catastrophes are restricted to small geographic areas;
       however, hurricanes and earthquakes may produce significant damage in
       large, heavily populated areas. The Company generally seeks to reduce its
       exposure to catastrophes through individual risk selection and the
       purchase of catastrophe reinsurance.

2.     ACQUISITION OF SUBSIDIARIES

       TRAVELERS CASUALTY AND SURETY COMPANY AND THE STANDARD FIRE INSURANCE
       COMPANY

       As discussed in note 1, on April 2, 1996, TAP purchased from Aetna all of
       the outstanding capital stock of Aetna P&C. To finance the $4.2 billion
       purchase price including transaction costs, plus capital contributions
       totaling $710 million to Aetna P&C, TAP borrowed $2.7 billion from a
       syndicate of banks under a five-year revolving credit facility (the
       Credit Facility) and sold approximately 33 million shares of its Class A
       Common Stock representing approximately 9% of its outstanding common
       stock (at that time) to four private investors, including Aetna, for an
       aggregate of $525 million. TIGI acquired approximately 328 million shares
       of Class B Common Stock of TAP in exchange for contributing the
       outstanding capital stock of The Travelers Indemnity Company and a
       capital contribution of approximately $1.1 billion. In addition,
       Travelers Group Inc. purchased from TAP $540 million of Series Z
       Preferred Stock of TAP. Approximately $18 million of the purchase price
       was funded through the settlement of receivables from Aetna.


                                       34
<PAGE>   35
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2.     ACQUISITION OF SUBSIDIARIES, CONTINUED

       On April 23, 1996, TAP sold in a public offering approximately 39 million
       shares of its Class A Common Stock, representing approximately 9.75% of
       its outstanding common stock, for total proceeds of $928 million. On
       April 24, 1996, TAP sold in a public offering $500 million of 6-3/4%
       Notes due April 15, 2001 and $200 million of 7-3/4% Notes due April 15,
       2026. On April 26, 1996, Travelers P&C Capital I, a wholly owned
       subsidiary trust of TAP, issued $800 million of 8.08% Trust Preferred
       Securities in a public offering. On May 10, 1996, Travelers P&C Capital
       II, a wholly owned subsidiary trust of TAP, issued $100 million of 8.00%
       Trust Preferred Securities in a public offering. These Trust Preferred
       Securities, which are fully and unconditionally guaranteed by TAP, have a
       liquidation value of $25 per Trust Preferred Security and are mandatorily
       redeemable under certain circumstances. Dividends on the Trust Preferred
       Securities have been classified as interest expense in the consolidated
       statement of income. The aggregate proceeds from the above offerings of
       $2.5 billion, together with the proceeds from the issuance by TAP of
       approximately $700 million of commercial paper, were used to repay in
       full the borrowings under the Credit Facility and to redeem in full TAP's
       Series Z Preferred Stock.

       The assets and liabilities of Aetna P&C are reflected in the consolidated
       balance sheet on a fully consolidated basis at management's best estimate
       of their fair values at the acquisition date. Evaluation and appraisal of
       assets and liabilities included: adjustments to investments; deferred
       acquisition costs; financial guarantee obligations which the Company
       assumed, designated as held for sale and actively marketed; claims
       reserves to conform the accounting policy regarding discounting to that
       historically used by the Company; liabilities for lease and severance
       costs relating to the restructuring plan for the business acquired; and
       other assets and liabilities and related deferred income tax amounts. The
       excess of the purchase price over the estimated fair value of net assets
       was approximately $1.2 billion and is being amortized over 40 years.

       During 1996, the Company recorded charges related to the acquisition and
       integration of Aetna P&C. These charges resulted primarily from
       anticipated costs of the acquisition and the application of the Company's
       strategies, policies and practices to Aetna P&C reserves and include:
       $279 million after tax ($430 million before tax) in reserve increases,
       net of reinsurance, primarily related to cumulative injury claims other
       than asbestos (CIOTA), insurance products involving financial guarantees,
       and assumed reinsurance; a $55 million after-tax ($84 million before tax)
       provision for an additional asbestos liability related to an existing
       settlement agreement with a customer of Aetna P&C; a $39 million
       after-tax ($60 million before tax) charge related to premium collection
       issues on loss sensitive programs, specifically large deductible
       products; a $27 million after-tax ($41 million before tax) provision for
       uncollectibility of reinsurance recoverables of Aetna P&C determined by
       applying the Company's normal guidelines for estimating collectibility of
       such accounts; and $23 million after tax ($35 million before tax) in
       lease and severance costs of The Travelers Indemnity Company related to
       the restructuring plan for the acquisition.


                                       35
<PAGE>   36
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2.     ACQUISITION OF SUBSIDIARIES, CONTINUED

       The following unaudited pro forma information presents the results of
       operations of the Company and Aetna P&C for the years ended December 31,
       1996 and 1995, with pro forma adjustments as if the acquisition and
       transactions related to the funding of the acquisition had been
       consummated as of the beginning of the periods presented. This pro forma
       information is not necessarily indicative of what would have occurred had
       the acquisition and related transactions been made on the dates
       indicated, or of future results of the Company.

<TABLE>
<CAPTION>
       (for the year ended December 31, in millions, except per share amounts)      1996 *           1995*
                                                                                    ------           -----
<S>                                                                                 <C>              <C>     
       Revenues                                                                     $ 9,805          $ 9,876
       Net income                                                                       584               73
       Net income per common share                                                     1.46             0.18
                                                                                    -------          -------
</TABLE>

     * Historical results of Aetna P&C include $307 million ($200 million after
       tax) and $199 million ($129 million after tax) of realized investment
       gains in 1996 and 1995, respectively.


       SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
       RELATING TO THE ACQUISITION OF AETNA P&C

       Noncash investing and financing transactions relating to the acquisition
       of Aetna P&C that are not reflected in the consolidated statement of cash
       flows follows:

<TABLE>
<CAPTION>
       (for the year ended December 31, in millions)                    1996
                                                                        ----

<S>                                                                  <C>      
       Fair value of investments acquired                            $  13,969
       Fair value of other assets acquired                              10,386
       Claims and claim adjustment expense reserves assumed            (16,907)
       Other liabilities assumed                                        (3,288)
                                                                     ---------
       Cash payment related to business acquisition                  $   4,160
                                                                     =========
</TABLE>


                                       36
<PAGE>   37
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

3.   SEGMENT INFORMATION

<TABLE>
<CAPTION>
                                                                                                  CORPORATE
                                                                   COMMERCIAL        PERSONAL     AND OTHER
     (at and for the year ended December 31, in millions)             LINES           LINES       OPERATIONS    CONSOLIDATED
                                                                   ----------       ---------     ----------    ------------
     <S>                                                             <C>            <C>           <C>           <C>     
     1997
     Revenues
       Premiums                                                      $  4,308       $   2,917      $      --       $  7,225
       Net investment income                                            1,695             353              3          2,051
       Fee income                                                         365              --             --            365
       Realized investment gains                                          154              15             --            169
       Other                                                               35              56             10            101
                                                                     --------       ---------      ---------       --------
         Total revenues                                              $  6,557       $   3,341      $      13       $  9,911
                                                                     ========       =========      =========       ========
     Income (loss) before federal income taxes                       $  1,324       $     617      $    (189)      $  1,752
     Net income (loss)                                                    946             413           (123)         1,236
     Assets                                                            43,208           7,113            361         50,682
                                                                     --------       ---------      ---------       --------
     1996
     Revenues
       Premiums                                                      $  3,695       $   2,323      $      10       $  6,028
       Net investment income                                            1,343             311              2          1,656
       Fee income                                                         392              --             --            392
       Realized investment gains (losses)                                  26              (8)            --             18
       Other                                                               41              59              3            103
                                                                     --------       ---------      ---------       --------
         Total revenues                                              $  5,497       $   2,685      $      15       $  8,197
                                                                     ========       =========      =========       ========
     Income (loss) before federal income taxes                       $    205       $     417      $    (135)      $    487
     Net income (loss)                                                    197 (1)         282 (2)        (88)           391
     Assets                                                            42,345           7,030            404         49,779
                                                                     --------       ---------      ---------       --------
     1995
     Revenues
       Premiums                                                      $  2,017       $   1,284      $      14       $  3,315
       Net investment income                                              548             161              1            710
       Fee income                                                         432              --             --            432
       Realized investment gains                                           62               9             --             71
       Other                                                               11              27              3             41
                                                                     --------       ---------      ---------       --------
         Total revenues                                              $  3,070       $   1,481      $      18       $  4,569
                                                                     ========       =========      =========       ========
     Income (loss) before federal income taxes                       $    424       $     146      $     (19)      $    551
     Net income (loss)                                                    329             107            (17)           419
     Assets                                                            20,168           3,617            277         24,062
                                                                     ========       =========      =========       ========
</TABLE>


     Results of operations and assets include amounts related to Aetna P&C from
     April 2, 1996, the date of the acquisition.

     (1) Includes $453 million of acquisition-related charges.

     (2) Includes a benefit of $39 million related to the review of Aetna P&C's
         insurance reserves, partially offset by $9 million of other
         acquisition-related charges.


                                       37
<PAGE>   38
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4.     INVESTMENTS

       FIXED MATURITIES

       The amortized cost and fair value of investments in fixed maturities
       classified as available for sale were as follows:


<TABLE>
<CAPTION>
                                                                           GROSS UNREALIZED
                                                          AMORTIZED       --------------------        FAIR
       (at December 31, 1997, in millions)                  COST          GAINS         LOSSES        VALUE
                                                            ----          -----         ------        -----
       <S>                                                 <C>           <C>           <C>           <C>    
       Mortgage-backed securities -
         CMOs and pass-through securities                  $ 4,625       $   171       $    --       $ 4,796
       U.S. Treasury securities and obligations
         of U.S. Government and government
         agencies and authorities                            1,965           108             1         2,072
       Obligations of states, municipalities and
         political subdivisions                              7,599           366             2         7,963
       Debt securities issued by foreign governments           638            26             1           663
       All other corporate bonds                            11,249           407            14        11,642
       Redeemable preferred stock                               51             1            --            52
                                                           -------       -------       -------       -------
                 Total                                     $26,127       $ 1,079       $    18       $27,188
                                                           =======       =======       =======       =======
</TABLE>

<TABLE>
<CAPTION>
                                                                           GROSS UNREALIZED         
                                                         AMORTIZED       ---------------------       FAIR
       (at December 31, 1996, in millions)                 COST          GAINS          LOSSES       VALUE
                                                         ---------       -----          ------       -----
       <S>                                                <C>           <C>           <C>           <C>    
       Mortgage-backed securities -
         CMOs and pass-through securities                  $ 4,462       $    75       $    10       $ 4,527
       U.S. Treasury securities and obligations
         of U.S. Government and government
         agencies and authorities                            2,403            51             3         2,451
       Obligations of states, municipalities and
         political subdivisions                              5,127           123            31         5,219
       Debt securities issued by foreign governments           581            16             1           596
       All other corporate bonds                            11,404           201            27        11,578
       Redeemable preferred stock                               75            --            --            75
                                                           -------       -------       -------       -------
                 Total                                     $24,052       $   466       $    72       $24,446
                                                           =======       =======       =======       =======
</TABLE>

       The amortized cost and fair value of fixed maturities by contractual
       maturity follow. 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.


                                       38
<PAGE>   39
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4.     INVESTMENTS, CONTINUED

<TABLE>
<CAPTION>
                                                             AMORTIZED        FAIR
       (at December 31, 1997, in millions)                      COST          VALUE
                                                             ---------       -------
       <S>                                                    <C>            <C>    
       Due in one year or less                                $   898        $   903
       Due after 1 year through 5 years                         6,146          6,290
       Due after 5 years through 10 years                       5,895          6,153
       Due after 10 years                                       8,563          9,046
                                                              -------        -------
                                                               21,502         22,392
       Mortgage-backed securities                               4,625          4,796
                                                              -------        -------
          Total                                               $26,127        $27,188
                                                              =======        =======
</TABLE>

       The Company makes investments in collateralized mortgage obligations
       (CMOs). CMOs typically have high credit quality, offer good liquidity,
       and provide a significant advantage in yield and total return compared to
       U.S. Treasury securities. The Company's investment strategy is to
       purchase CMO tranches which are protected against prepayment risk,
       including planned amortization class (PAC) tranches. Prepayment protected
       tranches are preferred because they provide stable cash flows in a
       variety of scenarios. The Company does invest in other types of CMO
       tranches if a careful assessment indicates a favorable risk/return
       tradeoff. The Company does not purchase residual interests in CMOs.

       At December 31, 1997 and 1996, the Company held CMOs classified as
       available for sale with a fair value of $2.2 billion and $2.1 billion,
       respectively. Approximately 77% and 81% of the Company's CMO holdings are
       fully collateralized by GNMA, FNMA or FHLMC securities at December 31,
       1997 and 1996, respectively. In addition, the Company held $2.6 billion
       and $2.4 billion of GNMA, FNMA or FHLMC mortgage-backed pass-through
       securities at December 31, 1997 and 1996, respectively. Virtually all of
       these securities are rated Aaa.

       Proceeds from sales of fixed maturities classified as available for sale
       were $10.0 billion, $12.6 billion and $4.9 billion in 1997, 1996 and
       1995, respectively. Gross gains of $172 million, $82 million and $65
       million and gross losses of $94 million, $177 million and $90 million,
       respectively, were realized on those sales.

       EQUITY SECURITIES

       The cost and fair value of investments in equity securities were as
       follows:


       <TABLE>
       <CAPTION>
                                                               GROSS UNREALIZED         
                                                              -------------------       FAIR
       (at December 31, 1997, in millions)       COST        GAINS        LOSSES       VALUE
                                                 ----        -----        ------       -----
       <S>                                       <C>          <C>          <C>          <C>   
       Common stocks                             $  202       $   31       $   14       $  219
       Nonredeemable preferred stocks               775           46            3          818
                                                 ------       ------       ------       ------
         Total                                   $  977       $   77       $   17       $1,037
                                                 ======       ======       ======       ======
       (at December 31, 1996, in millions)

       Common stocks                             $  164       $   29       $   17       $  176
       Nonredeemable preferred stocks               592           16            5          603
                                                 ------       ------       ------       ------
         Total                                   $  756       $   45       $   22       $  779
                                                 ======       ======       ======       ======
</TABLE>


                                       39
<PAGE>   40
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4.     INVESTMENTS, CONTINUED

       Proceeds from sales of equity securities were $504 million, $558 million
       and $157 million in 1997, 1996 and 1995, respectively, resulting in gross
       realized gains of $78 million, $147 million and $28 million and gross
       realized losses of $55 million, $28 million and $6 million, respectively.

        REAL ESTATE HELD FOR SALE AND MORTGAGE LOANS

        Underperforming mortgage loans include delinquent loans, loans in the
        process of foreclosure and loans modified at interest rates below
        market.

       The Company's real estate held for sale and mortgage loan portfolios
       consisted of the following:

<TABLE>
<CAPTION>
       (at December 31, in millions)                            1997           1996
                                                                ----           ----
       <S>                                                     <C>            <C>   
       Current mortgage loans                                  $  675         $  965
       Underperforming mortgage loans                              16             40
                                                               ------         ------
         Total mortgage loans                                     691          1,005
       Real estate held for sale                                   95            157
                                                               ------         ------
         Total                                                 $  786         $1,162
                                                               ======         ======
</TABLE>

        Aggregate annual maturities on mortgage loans include $16 million which
        are past maturity and $56 million, $205 million, $173 million, $52
        million, $5 million and $184 million for 1998, 1999, 2000, 2001, 2002
        and 2003 and thereafter, respectively.

       CONCENTRATIONS

       At December 31, 1997 and 1996, the Company had concentrations of credit
       risk in tax-exempt investments of the State of Texas of $1.2 billion and
       $1.1 billion, respectively, and in the State of New York of $1.2 billion
       and $400 million, respectively.

       The Company participates in a short-term investment pool maintained by an
       affiliate. See note 14.

       Included in fixed maturities are below investment grade assets totaling
       $832 million and $599 million at December 31, 1997 and 1996,
       respectively. The Company defines its below investment grade assets as
       those securities rated "Ba1" or lower by external rating agencies, or the
       equivalent by internal analysts when a public rating does not exist. Such
       assets include publicly traded below investment grade bonds and certain
       other privately issued bonds that are classified as below investment
       grade loans.

       The Company also has significant concentrations of investments in the
       following industries:

<TABLE>
<CAPTION>
       (at December 31, in millions)         1997           1996
                                             ----           ----
       <S>                                  <C>            <C>   
       Banking                              $2,444         $2,001
       Financing                             1,645          2,027
                                             =====          =====
</TABLE>

       Below investment grade assets included in the preceding table are not
       significant.


                                       40
<PAGE>   41
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4.     INVESTMENTS, CONTINUED

       The Company monitors creditworthiness of counterparties to all financial
       instruments by using controls that include credit approvals, limits and
       other monitoring procedures. Collateral for fixed maturities often
       includes pledges of assets, including stock and other assets, guarantees
       and letters of credit.

       NET INVESTMENT INCOME

<TABLE>
<CAPTION>
       (for the year ended December 31, in millions)                               1997          1996          1995
                                                                                   ----          ----          ---- 
       <S>                                                                       <C>           <C>            <C> 
       Gross investment income:
         Fixed maturities                                                        $ 1,695       $ 1,344        $586
         Mortgage loans                                                              103            90          21
         Short-term securities                                                        57            77          73
         Other                                                                       267           197          49
                                                                                 -------       -------        ----
                                                                                   2,122         1,708         729
       Investment expenses                                                            71            52          19
                                                                                 -------       -------        ----
       Net investment income                                                     $ 2,051       $ 1,656        $710
                                                                                 =======       =======        ====
</TABLE>

       REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)

       Realized investment gains (losses) for the periods were as follows:

<TABLE>
<CAPTION>
       (for the year ended December 31, in millions)        1997          1996           1995
                                                            ----          ----           ----
       <S>                                                <C>           <C>            <C>     
       REALIZED
       Fixed maturities                                   $    78       $   (95)       $   (40)
       Equity securities                                       23           119             25
       Mortgage loans                                          20            (1)             2
       Real estate held for sale                               18             3              1
       Other                                                   30            (8)            83
                                                          -------       -------        -------
       Realized investment gains                          $   169       $    18        $    71
                                                          =======       =======        =======
</TABLE>

       Changes in net unrealized gains (losses) on investment securities that
       are included as a separate component of stockholders' equity were as
       follows:

<TABLE>
<CAPTION>
       (for the year ended December 31, in millions) .     1997       1996       1995
                                                         -------    -------    -------
       <S>                                               <C>        <C>        <C>
       UNREALIZED
       Fixed maturities                                  $   667    $    20    $ 1,039
       Equity securities                                      37        (15)        55
       Other                                                 (30)         1         20
                                                         -------    -------    -------
                                                             674          6      1,114
       Related taxes                                         237          1        391
                                                         -------    -------    -------
       Change in unrealized gains (losses) on
         investment securities                               437          5        723
       Balance, beginning of year                            285        280       (443)
                                                         -------    -------    -------
       Balance, end of year                              $   722    $   285    $   280
                                                         =======    =======    =======
</TABLE>


                                       41
<PAGE>   42
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

5.     REINSURANCE

       The Company participates in reinsurance in order to limit losses,
       minimize exposure to large risks, provide additional capacity for future
       growth and to effect business-sharing arrangements. In addition, the
       Company assumes 100% of the workers' compensation premiums written by the
       Accident Department of its affiliate, The Travelers Insurance Company
       (TIC). The Company is also a member of and participates as a servicing
       carrier for several pools and associations.

       Reinsurance is placed on both a quota-share and excess of loss basis.
       Reinsurance ceded arrangements do not discharge the Company as the
       primary insurer, except for cases involving a novation.

       Effective January 1, 1995, the Company terminated a reinsurance agreement
       with TIGI whereby TIGI assumed 8% of the Company's business written prior
       to 1991. Also, effective January 1, 1995, the Company terminated certain
       agreements with TIGI whereby TIGI had assumed certain casualty reserves
       subject to a stop loss arrangement. As a result of the termination of
       these agreements, TIGI transferred $520 million of invested assets and of
       insurance liabilities to the Company.

       In connection with the 1992 sale of American Re-Insurance Company (Am Re)
       by Aetna P&C, Am Re and Aetna P&C entered into a reinsurance agreement
       which provides that to the extent Am Re incurred losses in 1991 and prior
       that were still outstanding at January 1, 1992 in excess of $2.7 billion,
       Aetna P&C has an 80% participation in payments on those losses up to a
       maximum payment by Aetna P&C of $500 million. This agreement has been
       accounted for as a deposit and a liability has been established for the
       present value of the expected payout under the agreement.


                                       42
<PAGE>   43
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

5.     REINSURANCE, CONTINUED

        A summary of reinsurance financial data reflected within the
        consolidated statement of income is presented below:

<TABLE>
<CAPTION>
       (for the year ended December 31, in millions)    1997        1996        1995
                                                       -------     -------     -------
       <S>                                             <C>         <C>         <C>
       WRITTEN PREMIUMS
        Direct                                         $ 8,862     $ 7,585     $ 4,261
       Assumed from:
          Affiliated companies                             264         264         374
          Non-affiliated companies                         421         320         301
        Ceded to:
          Affiliated companies                             (54)        (58)        (48)
          Non-affiliated companies                      (1,661)     (1,769)     (1,267)
                                                       -------     -------     -------
        Total net written premiums                     $ 7,832     $ 6,342     $ 3,621
                                                       =======     =======     =======

       EARNED PREMIUMS
        Direct                                         $ 8,250     $ 7,263     $ 4,007
        Assumed from:
          Affiliated companies                             305         201         284
          Non-affiliated companies                         429         395         346
        Ceded to:
          Affiliated companies                             (50)        (58)        (48)
          Non-affiliated companies                      (1,709)     (1,773)     (1,274)
                                                       -------     -------     -------
        Total net earned premiums                      $ 7,225     $ 6,028     $ 3,315
                                                       =======     =======     =======

       Percentage of amount assumed to net earned         10.2%        9.9%       19.0%
                                                       -------     -------     -------
       Ceded claims incurred                           $ 1,082     $ 1,558     $ 1,245
                                                       =======     =======     =======
</TABLE>

       Reinsurance recoverables, net of valuation allowance, include amounts
       recoverable on unpaid and paid claims and were as follows:

<TABLE>
<CAPTION>
       (at December 31, in millions)                           1997     1996
                                                               ----     ----
       <S>                                                    <C>      <C>   
       REINSURANCE RECOVERABLES 
        Property-casualty business:
          Pools and associations                              $3,378   $4,160
          Non-affiliated companies                             4,829    4,553
          Affiliated companies                                   795      793

        Accident and health business:
          Affiliated companies                                   186      208
                                                              ------   ------
        Total reinsurance recoverables                        $9,188   $9,714
                                                              ======   ======
</TABLE>


                                       43
<PAGE>   44
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

5.     REINSURANCE, CONTINUED

       Amounts of ceded claims and claim adjustment expenses recoverable from
       unaffiliated insurers at December 31, 1997 and 1996 include $352 million
       and $488 million, respectively, recoverable from Lloyd's of London
       (Lloyd's). In 1997, the Company reached an agreement to settle the
       arbitration with underwriters at Lloyd's and certain London companies in
       New York State to enforce reinsurance contracts with respect to
       recoveries for certain asbestos claims. The dispute involved the ability
       of the Company to aggregate asbestos claims under a market agreement
       between Lloyd's and the Company or under the applicable reinsurance
       treaties. The outcome of this agreement had no impact on earnings.

       In 1996, Lloyd's restructured its operations with respect to claims for
       years prior to 1993. The outcome of the restructuring of Lloyd's is
       uncertain and the impact, if any, on collectibility of amounts
       recoverable by the Company from Lloyd's cannot be quantified at this
       time. The Company believes that it is possible that an unfavorable impact
       on collectibility could have a material adverse effect on the Company's
       results of operations in a future period. However, the Company believes
       that it is not likely that the outcome could have a material adverse
       effect on the Company's financial condition or liquidity. The Company
       carries an allowance for uncollectible reinsurance which is not allocated
       to any specific proceedings or disputes, whether for financial
       impairments or coverage defenses. Including this allowance, the Company
       believes that the net receivable from reinsurance contracts is properly
       stated.

6.     INSURANCE CLAIMS RESERVES

       Claims and claim adjustment expense reserves were as follows:

<TABLE>
<CAPTION>
       (at December 31, in millions)                               1997           1996
                                                                   ----           ----
       <S>                                                        <C>            <C>    
       Claims and claim adjustment expense reserves:
         Property-casualty                                        $30,138        $30,969
         Accident and health                                          186            208
                                                                  -------        -------
         Total                                                    $30,324        $31,177
                                                                  =======        =======
</TABLE>


                                       44
<PAGE>   45
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

6.     INSURANCE CLAIMS RESERVES, CONTINUED

       The table below is a reconciliation of beginning and ending
       property-casualty reserve balances for claims and claim adjustment
       expenses.

<TABLE>
<CAPTION>
       (for the year ended December 31, in millions)                           1997        1996       1995
                                                                               ----        ----       ----
       <S>                                                                   <C>         <C>        <C>     
       Claims and claim adjustment expense
         reserves at beginning of year                                       $ 30,969    $ 15,213   $ 15,013
       Less reinsurance recoverables on unpaid losses                           9,153       5,123      5,301
                                                                             --------    --------   --------
       Net balance at beginning of year                                        21,816      10,090      9,712
                                                                             --------    --------   --------
       Provision for claims and claim adjustment expenses
         for claims arising in the current year                                 5,730       4,839      2,903
       Estimated claims and claim adjustment
         expenses for claims arising in prior years                              (492)        192       (226)
       Acquisitions                                                                --      11,752         --
       Termination of reinsurance agreements with TIGI (see note 5)                --          --        520
                                                                             --------    --------   --------
           Total increases                                                      5,238      16,783      3,197
                                                                             --------    --------   --------
       Claims and claim adjustment expense payments for claims arising in:
         Current year                                                           1,944       1,858        886
         Prior years                                                            3,704       3,199      1,933
                                                                             --------    --------   --------
           Total payments                                                       5,648       5,057      2,819
                                                                             --------    --------   --------
       Net balance at end of year                                              21,406      21,816     10,090
       Plus reinsurance recoverables on unpaid losses                           8,732       9,153      5,123
                                                                             --------    --------   --------
       Claims and claim adjustment expense
         reserves at end of year                                             $ 30,138    $ 30,969   $ 15,213
                                                                             ========    ========   ========
</TABLE>

        In 1997, estimated claims and claim adjustment expenses for claims
        arising in prior years included $154 million of net favorable
        development in certain Personal Lines coverages and Commercial Lines
        coverages, predominantly automobile coverages. In addition, in 1997
        Commercial Lines experienced $122 million of favorable prior year loss
        development on retrospectively rated policies in the workers'
        compensation line; however, since the business to which it relates is
        subject to premium adjustments, there was no impact on results of
        operations. Also in 1997, the Company adopted newly prescribed statutory
        allocations of certain claim adjustment expenses. The new allocations
        resulted in favorable prior year loss development of $216 million offset
        by an increase in the current accident year provision of the same
        amount.

        In 1996, estimated claims and claim adjustment expenses for claims
        arising in prior years included $238 million of net favorable
        development in certain Personal Lines coverages and Commercial Lines
        coverages. Also included in 1996 is $430 million within Commercial Lines
        of acquisition-related charges primarily for CIOTA, insurance products
        involving financial guarantees, and assumed reinsurance. In addition, as
        a result of the Company's review of Aetna P&C's insurance reserves,
        Commercial Lines reserves were increased by $60 million and Personal
        Lines reserves were decreased by $60 million.


                                       45
<PAGE>   46
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

6.     INSURANCE CLAIMS RESERVES, CONTINUED

       In 1995, estimated claims and claim adjustment expenses for claims
       arising in prior years included favorable loss development on
       retrospectively rated policies in certain workers' compensation, general
       liability and commercial auto lines of approximately $150 million;
       however, since the business to which it relates is subject to premium
       adjustments, the net impact on results of operations is not significant.
       In addition, in 1995 estimated claims and claim adjustment expenses for
       claims arising in prior years included favorable loss development in
       Personal Lines of approximately $60 million.

       The claims and claim adjustment expense reserves included $2.2 billion
       and $2.3 billion for asbestos and environmental-related claims net of
       reinsurance at December 31, 1997 and 1996, respectively.

       It is difficult to estimate the reserves for environmental and
       asbestos-related claims due to the vagaries of court coverage decisions,
       plaintiffs' expanded theories of liability, the risks inherent in major
       litigation and other uncertainties. Conventional actuarial techniques are
       not used to estimate such reserves.

       For environmental claims, the Company estimates its financial exposure
       and establishes reserves based upon an analysis of its historical claim
       experience and the facts of the individual underlying claims. The unique
       facts presented in each claim are evaluated individually and
       collectively. Due consideration is given to the many variables presented
       in each claim.

       The following factors are evaluated in projecting the ultimate reserve
       for asbestos-related claims: available insurance coverage; limits and
       deductibles; an analysis of each policyholder's potential liability;
       jurisdictional involvement; past and projected future claim activity;
       past settlement values of similar claims; allocated claim adjustment
       expense; potential role of other insurance, and applicable coverage
       defenses, if any. Once the gross ultimate exposure for indemnity and
       allocated claim adjustment expense is determined for a policyholder by
       policy year, a ceded projection is calculated based on any applicable
       facultative and treaty reinsurance, and past ceded experience. In
       addition, a similar review is conducted for asbestos property damage
       claims. However, due to the relatively minor claim volume, these reserves
       have remained at a constant level.

       As a result of these processes and procedures, the reserves carried for
       environmental and asbestos claims at December 31, 1997 are the Company's
       best estimate of ultimate claims and claim adjustment expenses based upon
       known facts and current law. However, the conditions surrounding the
       final resolution of these claims continue to change. Currently, it is not
       possible to predict changes in the legal and legislative environment and
       their impact on the future development of asbestos and environmental
       claims. Such development will be affected by future court decisions and
       interpretations and changes in Superfund and other legislation. Because
       of these future unknowns, additional liabilities may arise for amounts in
       excess of the current reserves. These additional amounts, or a range of
       these additional amounts, cannot now be reasonably estimated, and could
       result in a liability exceeding reserves by an amount that would be
       material to the Company's operating results in a future period. However,
       the Company believes that it is not likely that these claims will have a
       material adverse effect on the Company's financial condition or
       liquidity.


                                       46
<PAGE>   47
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7.     DEBT

       As discussed in note 2, during the first quarter of 1996, TAP entered
       into a five-year revolving credit facility, as amended, in the amount of
       $2.7 billion with a syndicate of banks. The Credit Facility, which
       expires in December 2001, was used to finance in part the purchase of
       Aetna P&C. As of April 30, 1996, all borrowings under the Credit Facility
       had been repaid in full and the amount of the Credit Facility was
       subsequently reduced to $500 million. Under this facility TAP is required
       to maintain a certain level of consolidated stockholders' equity (as
       defined in the agreement). At December 31, 1997, this requirement was
       exceeded by approximately $3.4 billion. In addition, the Credit Facility
       places restrictions on the amount of consolidated debt TAP can incur. At
       December 31, 1997, there were no borrowings outstanding under this
       facility. If TAP had borrowings under this facility, the interest rate
       would be based upon LIBOR plus a negotiated margin. TAP compensates the
       banks for the Credit Facility through commitment fees. TAP also issues
       commercial paper directly to investors and maintains unused credit
       availability under the Credit Facility at least equal to the amount of
       commercial paper outstanding. At December 31, 1997, TAP had $108 million
       outstanding under its commercial paper program. The weighted average
       interest rate on commercial paper as of December 31, 1997 was 6.11%. TAP
       also currently has available to it a $200 million line of credit for
       working capital and other general corporate purposes from a subsidiary of
       Travelers Group Inc. The lender has no obligation to make any loan to TAP
       under this line of credit.

       The Company completed the following long-term debt offerings during 1996.
       At December 31, 1997, $750 million is available for debt offerings under
       its shelf registration statement. Long-term debt outstanding at December
       31, 1997 and 1996 was as follows:

<TABLE>
<CAPTION>
       (in millions)

       <S>                                        <C>   
       6-3/4% Notes due 1999                      $  200
       6-1/4% Notes due 1999                         200
       6-3/4% Notes due 2001                         500
       6-3/4% Notes due 2006                         150
       7-3/4% Notes due 2026                         200
                                                  ------
                                                   1,250
       Debt discount                                  (1)
                                                  ------
         Total                                    $1,249
                                                  ======
</TABLE>


                                       47
<PAGE>   48
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8.     FEDERAL INCOME TAXES

<TABLE>
<CAPTION>
       (for the year ended December 31, in millions)                     1997        1996        1995
                                                                         ----        ----        ----
       <S>                                                              <C>         <C>         <C>    
       EFFECTIVE TAX RATE
       Income before federal income taxes                               $ 1,752     $   487     $   551
       Statutory tax rate                                                    35%         35%         35%
                                                                        -------     -------     -------
       Expected federal income taxes                                        613         170         193
       Tax effect of:
         Nontaxable investment income                                      (108)        (86)        (68)
         Goodwill                                                            14          12           4
         Other, net                                                          (3)         --           3
                                                                        -------     -------     -------
       Federal income taxes                                             $   516     $    96     $   132
                                                                        =======     =======     =======
       Effective tax rate                                                    29%         20%         24%
                                                                        -------     -------     -------
       COMPOSITION OF FEDERAL INCOME TAXES 
         Current expense (benefit):
         United States                                                  $   413     $  (102)    $   155
         Foreign                                                              9           2           5
                                                                        -------     -------     -------
           Total                                                            422        (100)        160
                                                                        -------     -------     -------
       Deferred expense (benefit):
         United States                                                       94         196         (28)
                                                                        -------     -------     -------
       Federal income tax expense                                       $   516     $    96     $   132
                                                                        =======     =======     =======
</TABLE>

       The net deferred tax assets were comprised of the tax effects of
       temporary differences related to the following assets and liabilities:

<TABLE>
<CAPTION>
       (at December 31, in millions)                     1997     1996
                                                         ----     ----
       <S>                                              <C>      <C>   
       Deferred tax assets:
         Claims and claim adjustment expense reserves   $1,206   $1,241
         Acquisition-related reserves                      146      221
         Unearned premium reserves                         183      141
         Employee benefits                                  98       87
         Other                                             211      186
                                                         -----    -----
          Total                                          1,844    1,876
                                                         -----    -----

       Deferred tax liabilities:
         Deferred acquisition costs                        175      149
         Investments                                       314      103
         Other                                              39       41
                                                         -----    -----
          Total                                            528      293
                                                         -----    -----
       Net deferred tax asset                           $1,316   $1,583
                                                        ======   ======
</TABLE>


                                       48
<PAGE>   49
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8.     FEDERAL INCOME TAXES, CONTINUED

       The Company is a member of a subgroup of companies comprised of TIGI and
       its non-life insurance subsidiaries. This subgroup is included in the
       consolidated federal income tax return filed by Travelers Group Inc. TIGI
       allocates federal income taxes to its subsidiaries on a separate return
       basis adjusted for credits and other amounts required by the
       consolidation process. Any resulting liability is paid currently to TIGI.
       Any credits for losses will be paid by TIGI currently to the extent that
       such credits are for tax benefits that have been utilized in the
       consolidated federal income tax return. TIGI will reimburse the Company
       for any remaining receivable at the end of the federal statutory
       carryforward period.

       In the event that the consolidated return develops an alternative minimum
       tax (AMT), each company with an AMT on a separate company basis will be
       allocated a portion of the consolidated AMT. Settlement of the AMT will
       be made in the same manner and timing as the regular tax. If the AMT is
       available as a credit against the regular tax, each subsidiary remitting
       the AMT may establish a receivable from TIGI. The receivable will be paid
       as the credit is utilized on the consolidated return or at the end of the
       federal statutory carryforward period for operating losses.

       The Company has a net deferred tax asset which relates to temporary
       differences that are expected to reverse as net ordinary deductions. The
       Company will have to generate approximately $3.8 billion of taxable
       income, before reversal of these temporary differences, primarily over
       the next 10 to 15 years, to realize the deferred tax asset. Management
       expects to realize the deferred tax asset based upon its expectation of
       future positive taxable income, after the reversal of these deductible
       temporary differences, in the consolidated federal income tax return of
       Travelers Group Inc. The taxable income of the consolidated return of
       Travelers Group Inc., after reversal of the deductible temporary
       differences, is expected to be at least $3.3 billion annually. At
       December 31, 1997, the Company has no ordinary or capital loss
       carryforwards.

9.     STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY

       MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS

       During 1996, the Company formed the following statutory business trusts
       under the laws of the state of Delaware. Each trust exists for the
       exclusive purposes of (i) issuing Trust Securities (both common and
       preferred) representing undivided beneficial interests in the assets of
       the Trust; (ii) investing the gross proceeds of the Trust Securities in
       Junior Subordinated Deferrable Interest Debentures (Subordinated
       Debentures) of its parent; and (iii) engaging in only those activities
       necessary or incidental thereto. These Subordinated Debentures and the
       related income effects are eliminated in the consolidated financial
       statements. The outstanding Preferred Securities of subsidiary trusts
       were as follows at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                   LIQUIDATION         INTEREST
       (in millions)                                   VALUE             RATE
                                                   -----------         --------
<S>                                                <C>                 <C>
       Travelers P&C Capital I                         $800             8.08%
       Travelers P&C Capital II                         100             8.00%
                                                       ----            
         Total                                         $900
                                                       ====            
</TABLE>


                                       49
<PAGE>   50
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

9.     STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED

       In April 1996, Travelers P&C Capital I, a wholly owned subsidiary trust
       of TAP, issued 32 million 8.08% Trust Preferred Securities (TAP I 8.08%
       Preferred Securities) with a liquidation preference of $25 per TAP I
       8.08% Preferred Security to the public and 989,720 common securities to
       TAP, the proceeds of which were invested by Travelers P&C Capital I in
       $825 million of 8.08% Junior Subordinated Deferrable Interest Debentures
       due 2036 issued by TAP (TAP 8.08% Debentures). The TAP 8.08% Debentures
       mature on April 30, 2036 and are redeemable by TAP in whole or in part at
       any time after April 30, 2001. Travelers P&C Capital I will use the
       proceeds from any such redemption to redeem a like amount of TAP I 8.08%
       Preferred Securities and common securities. Distributions on the TAP I
       8.08% Preferred Securities and common securities are cumulative and
       payable quarterly in arrears.

       In May 1996, Travelers P&C Capital II, a wholly owned subsidiary trust of
       TAP, issued 4 million 8.00% Trust Preferred Securities (TAP II 8.00%
       Preferred Securities; and together with the TAP I 8.08% Preferred
       Securities, the TAP Preferred Securities) with a liquidation value of $25
       per TAP II 8.00% Preferred Security to the public and 123,720 common
       securities to TAP, the proceeds of which were invested by Travelers P&C
       Capital II in $103 million of 8.00% Junior Subordinated Deferrable
       Interest Debentures issued by TAP (TAP 8.00% Debentures; and together
       with the TAP 8.08% Debentures, TAP Debentures). The TAP 8.00% Debentures
       mature on May 15, 2036 and are redeemable by TAP in whole or in part at
       any time after May 15, 2001. Travelers P&C Capital II will use the
       proceeds from any such redemption to redeem a like amount of TAP II 8.00%
       Preferred Securities and common securities. Distributions on the TAP II
       8.00% Preferred Securities and common securities are cumulative and
       payable quarterly in arrears.

       TAP has guaranteed, on a subordinated basis, distributions and other
       payments due on each series of TAP Preferred Securities. The obligations
       of TAP with respect to the TAP Debentures, when considered together with
       certain undertakings of TAP with respect to Travelers P&C Capital I and
       Travelers P&C Capital II, constitute full and unconditional guarantees by
       TAP of Travelers P&C Capital I's and Travelers P&C Capital II's
       obligations under the respective TAP Preferred Securities. The TAP
       Preferred Securities are classified in the consolidated balance sheet as
       "TAP-obligated mandatorily redeemable preferred securities of subsidiary
       trusts holding solely junior subordinated debt securities of TAP" at
       their liquidation value of $900 million. TAP has the right, at any time,
       to defer payments of interest on the TAP Debentures and consequently the
       distributions on the TAP Preferred Securities and common securities would
       be deferred (though such distributions would continue to accrue with
       interest thereon since interest would accrue on the TAP Debentures during
       any such extended interest payment period). TAP cannot pay dividends on
       its common stock during such deferments. Distributions on the TAP
       Preferred Securities have been classified as interest expense in the
       consolidated statement of income.

       COMMON STOCK

       CLASS A
       On April 2, 1996, TAP sold approximately 33 million shares of its Class A
       Common Stock to four private investors, Aetna, J.P. Morgan Capital
       Corporation, Fund American Enterprise Holdings, Inc. and The Trident
       Partnership, L.P. (collectively, the Private Investors), for an aggregate
       of $525 million. On April 23, 1996, TAP sold in a public offering
       approximately 39 million shares of its Class A Common Stock, for net
       proceeds of $928 million. On all matters submitted to vote of the TAP
       stockholders, holders of Class A Common Stock are entitled to one vote
       per share.


                                       50

<PAGE>   51
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

9.     STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED

       On June 23, 1997, the Company repurchased, in the aggregate, 6,600,102
       shares of Class A Common Stock held by the Private Investors for a total
       purchase price of approximately $241 million, representing a discount to
       the then current market price. Following this transaction, Travelers
       Group Inc.'s beneficial ownership of the Company increased to
       approximately 83.4%. The repurchases represented 20% of the holdings of
       each of the Private Investors. As part of the repurchase agreement, each
       of the Private Investors agreed to extend its contractual sale
       restrictions on 50% of the remaining shares held by the Private Investors
       for an additional period of approximately six months, to March 15, 1998.
       On July 24, 1996, TAP's Board of Directors had authorized the expenditure
       of up to $100 million for the repurchase of common stock. This
       transaction satisfied the Company's previously announced program to
       repurchase $100 million of its shares. During 1997 and 1996, the Company
       had previously repurchased in the open market 758,700 and 406,860 shares
       of its Class A Common Stock at an aggregate cost of $27 million and $13
       million, respectively, under the repurchase program, which was
       terminated.

       On January 28, 1998, the Company, through the Travelers Property Casualty
       Corp. Capital Accumulation Plan, reissued 763,654 shares of treasury
       stock in the form of restricted stock to participating officers and other
       key employees. Previously, on January 22, 1997, the Company issued
       413,578 shares of the Company's Class A Common Stock and reissued 502,430
       shares of treasury stock in the form of restricted stock to participating
       officers and other key employees. The fair market values per share of the
       1998 and 1997 restricted stock awards were $43.71 and $37.58,
       respectively. The restricted stock generally vests after a three-year
       period. Except under limited circumstances, the stock cannot be sold or
       transferred during the restricted period by the participant, who is
       required to render service to the Company during the restricted period.
       Unearned compensation expense associated with the restricted stock grants
       represents the market value of the Company's common stock at the date of
       grant and is recognized as a charge to income ratably over the vesting
       period. At December 31, 1997, 3,083,992 shares were available for future
       grants under the Company's restricted stock plans.

       CLASS B
       In exchange for contributing the outstanding capital stock of The
       Travelers Indemnity Company and a capital contribution of approximately
       $1.1 billion, TIGI acquired approximately 328 million shares of Class B
       Common Stock of TAP. TIGI owns all of the outstanding shares of Class B
       Common Stock representing approximately 83.4% of the economic interest in
       TAP at December 31, 1997. Class B holders are entitled to 10 votes per
       share on any matter submitted to vote of the TAP stockholders.

       PREFERRED STOCK

       In connection with the financing of the acquisition of Aetna P&C,
       Travelers Group Inc. purchased from TAP $540 million of Series Z
       Preferred Stock of TAP. On April 26, 1996 and May 10, 1996, TAP redeemed
       the Series Z Preferred Stock with the proceeds of the public offering of
       Class A Common Stock and various Note and Trust Preferred Securities
       offerings. Prior to their redemption, TAP paid $4 million of dividends on
       the Series Z Preferred Stock.

       DIVIDENDS

       The Company's insurance subsidiaries are currently subject to various
       regulatory restrictions that limit the maximum amount of dividends
       available to be paid to their parent without prior approval of insurance
       regulatory authorities. Dividend payments to TAP from its insurance
       subsidiaries are limited to $805 million in 1998 without prior approval
       of the Connecticut Insurance Department.


                                       51
<PAGE>   52
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

9.     STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED

       STATUTORY NET INCOME AND SURPLUS

       Statutory net income of the Company's insurance subsidiaries was $1.1
       billion for the year ended December 31, 1997, and was $120 million, which
       includes $285 million related to the first quarter of Aetna P&C, for the
       year ended December 31, 1996. Statutory net income was $313 million for
       the year ended December 31, 1995, excluding Aetna P&C.

       Statutory capital and surplus of the Company's insurance subsidiaries was
       $6.2 billion and $5.4 billion at December 31, 1997 and 1996,
       respectively.

10.    BENEFIT PLANS

       PENSION AND OTHER POSTRETIREMENT BENEFITS

       The Company participates in a qualified, noncontributory defined benefit
       pension plan sponsored by an affiliate. In addition, the Company provides
       certain other postretirement benefits to retired employees through a plan
       sponsored by an affiliate. The Company's share of net expense for the
       qualified pension and other postretirement benefit plans was $26 million,
       $19 million and $15 million for 1997, 1996 and 1995, respectively.
       Beginning January 1, 1996, the Company's other postretirement benefit
       plans were amended to restrict benefit eligibility to retirees and
       certain retiree-eligible employees. Previously, covered employees could
       become eligible for postretirement benefits if they reached retirement
       age while working for the Company.

       401(k) SAVINGS PLAN

       Substantially all employees of the Company are eligible to participate in
       a 401(k) savings plan sponsored by Travelers Group Inc. Effective January
       1, 1997, there are no Company matching contributions for substantially
       all employees. For 1996, the Company's matching contribution, for almost
       all employees except former Aetna P&C employees, was 100% of pre-tax
       contributions up to an annual maximum of $1,000. Former Aetna P&C
       employees received a match equal to 100% of their pre-tax contributions
       up to 5% of salary. Prior to January 1, 1996, the Company matched 50% of
       the first 5% of pre-tax contributions, and provided for a variable match
       based on the profitability of TIGI and its subsidiaries. These matching
       contributions were invested in Series C Preferred Stock issued by
       Travelers Group Inc. On January 2, 1998, the Series C Preferred Stock was
       converted into Travelers Group Inc.'s common stock at an exchange rate of
       approximately 2.42 shares of Travelers Group Inc.'s common stock for each
       share of Series C Preferred Stock. The Company's expense was ($11)
       million, $2 million and $7 million in 1997, 1996 and 1995, respectively.
       The 1997 amount reflects the effect of forfeitures.

11.    LEASES

       Most leasing functions for TIGI and its subsidiaries are administered by
       the Company. Rent expense related to these leases is shared by the
       companies on a cost allocation method based generally on estimated usage
       by department. Rent expense was $118 million, $90 million and $61 million
       in 1997, 1996 and 1995, respectively.

       Future minimum annual rentals under noncancellable operating leases are
       $81 million, $70 million, $57 million, $40 million, $25 million and $96
       million for 1998, 1999, 2000, 2001, 2002 and 2003 and thereafter,
       respectively. Future sublease rental income of approximately $67 million
       will partially offset these commitments.


                                       52
<PAGE>   53
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


12.    DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

       DERIVATIVE FINANCIAL INSTRUMENTS

       The Company uses derivative financial instruments, including financial
       futures contracts, forward contracts and interest rate swaps, as a means
       of hedging exposure to interest rate and foreign currency risk. The
       Company does not hold or issue derivative instruments for trading
       purposes. These derivative financial instruments have off-balance-sheet
       risk. Financial instruments with off-balance-sheet risk involve, to
       varying degrees, elements of credit and market risk in excess of the
       amount recognized on the consolidated balance sheet. The contract or
       notional amounts of these instruments reflect the extent of involvement
       the Company has in a particular class of financial instrument. However,
       the maximum loss of cash flow associated with these instruments can be
       less than these amounts. For forward contracts and interest rate swaps,
       credit risk is limited to the amount that it would cost the Company to
       replace the contract. Financial futures contracts have very little credit
       risk since organized exchanges are the counterparties.

       The Company monitors creditworthiness of counterparties to these
       financial instruments by using criteria of acceptable risk that are
       consistent with on-balance-sheet financial instruments. The controls
       include credit approvals, limits and other monitoring procedures.

       The Company may occasionally enter into interest rate swaps in connection
       with other financial instruments to provide greater risk diversification
       and to better match an asset with a corresponding liability. 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 upon
       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.
       Swaps are not exchange traded so they are subject to the risk of default
       by the counterparty.

       The Company uses exchange traded financial futures to manage its exposure
       to changes in interest rates which arise from the need to reinvest
       proceeds from the sale or maturity of investments. To hedge against
       adverse changes in interest rates, the Company enters long positions in
       financial futures contracts which offset asset price changes resulting
       from changes in market interest rates until an investment is purchased.

       Margin payments are required to enter a futures contract and contract
       gains or losses are settled daily in cash. The contract amount of futures
       contracts represents the extent of the Company's involvement, but not
       future cash requirements, as open positions are typically closed out
       prior to the delivery date of the contract.

       The Company held no financial futures contracts at December 31, 1997. At
       December 31, 1996, the Company held financial futures contracts with
       notional amounts of approximately $522 million and a deferred loss of $2
       million. Total gains from financial futures of $15 million were deferred
       at December 31, 1996 and reported in other liabilities. At December 31,
       1996, the Company's futures contracts had no fair value because these
       contracts are marked to market and settled daily in cash.

       At December 31, 1997 and 1996, the Company held interest rate swaps with
       notional amounts of $311 million and $763 million, respectively. The fair
       value of these financial instruments was $11 million (gain position) and
       $10 million (loss position) at December 31, 1997 and was $12 million
       (gain position) and $13 million (loss position) at December 31, 1996. The
       fair values were determined using a discounted cash flow method.

       The off-balance-sheet risk of forward contracts was not significant at
       December 31, 1997 and 1996. Financial guarantees are described in note
       13.


                                       53
<PAGE>   54
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

12.    DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
       CONTINUED

       FAIR VALUE OF FINANCIAL INSTRUMENTS

       The Company uses various financial instruments in the normal course of
       its business. Certain insurance contracts are excluded by Statement of
       Financial Accounting Standards No. 107, "Disclosures about Fair Value of
       Financial Instruments," and, therefore, are not included in the amounts
       discussed.

       At December 31, 1997 and 1996, investments in fixed maturities had a fair
       value, which equaled carrying value, of $27.2 billion and $24.4 billion,
       respectively. The fair value of investments in fixed maturities for which
       a quoted market price or dealer quote are not available was $1.5 billion
       and $1.7 billion at December 31, 1997 and 1996, respectively. The
       carrying values of cash, short-term securities, mortgage loans,
       investment income accrued and commercial paper approximated their fair
       values. See notes 1 and 4.

       At December 31, 1997 and 1996, the carrying value of $1.2 billion of
       long-term debt approximated its fair value. Fair value is based upon bid
       price at December 31, 1997 and 1996. At December 31, 1997 and 1996, the
       carrying value of $900 million of TAP Preferred Securities approximated
       their fair value. Fair value is based upon the closing price at December
       31, 1997 and 1996.

       The carrying values of $1.5 billion and $1.4 billion of financial
       instruments classified as other assets approximated their fair values at
       December 31, 1997 and 1996, respectively. The carrying values of $3.8
       billion and $3.5 billion of financial instruments classified as other
       liabilities at December 31, 1997 and 1996, respectively, also
       approximated their fair values. Fair value is determined using various
       methods including discounted cash flows, as appropriate for the various
       financial instruments.

13.    COMMITMENTS AND CONTINGENCIES

       FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

       See note 12 and the following, "Guarantees of the Securities of Other
       Issuers," for a discussion of financial instruments with
       off-balance-sheet risk.

       In the normal course of business, the Company issues fixed and variable
       rate loan commitments and has unfunded commitments to partnerships. The
       off-balance-sheet risks of these financial instruments were not
       significant at December 31, 1997 and 1996.

       GUARANTEES OF THE SECURITIES OF OTHER ISSUERS

       The Company underwrote insurance guaranteeing the securities of other
       issuers, primarily corporate and industrial revenue bond issuers. The
       aggregate net amount of guarantees of principal and interest for such
       securities was approximately $334 million ($5.6 billion before
       reinsurance) and $729 million ($8.3 billion before reinsurance) at
       December 31, 1997 and 1996, respectively. The scheduled maturities for
       these guarantees are $6 million, $6 million, $8 million, $4 million and
       $310 million for 1998, 1999, 2000, 2001 and 2002 and thereafter,
       respectively.

       Reserves for the financial guarantee business, which include reserves for
       defaults, incurred but not reported losses and unearned premiums, totaled
       $71 million at December 31, 1997 and 1996.


                                       54
<PAGE>   55
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

13.    COMMITMENTS AND CONTINGENCIES, CONTINUED

       Included in the gross amounts are financial guarantees representing the
       Company's participation in the Municipal Bond Insurance Association's
       guarantee of municipal bond obligations of $5.3 billion and $7.6 billion
       at December 31, 1997 and 1996, respectively. The bonds are generally
       rated A or above, and the Company's participation has been reinsured.

       It is not practicable to estimate a fair value for the Company's
       financial guarantees because there is no quoted market price for such
       contracts, it is not practicable to reliably estimate the timing and
       amount of all future cash flows due to the unique nature of each of these
       contracts, and the Company no longer writes such guarantees.

       LITIGATION

       In the ordinary course of business, the Company is a defendant or
       codefendant in various litigation matters other than environmental and
       asbestos claims. Although there can be no assurances, as of December 31,
       1997, the Company believes, based on information currently available,
       that the ultimate resolution of these legal proceedings would not be
       likely to have a material adverse effect on its results of operations,
       financial condition or liquidity.

14.    RELATED PARTY TRANSACTIONS

       The Company provides certain administrative services to TIC. Settlements
       for these functions between the Company and its affiliates are made
       regularly. Investment advisory and management services and data
       processing services are provided by affiliated companies. Charges for
       these services are shared by the companies on cost allocation methods
       based generally on estimated usage by department.

       An affiliate maintains a short-term investment pool in which the Company
       participates. The positions of each company participating in the pool are
       calculated and adjusted daily. At December 31, 1997 and 1996, the pool
       totaled approximately $2.6 billion and $2.9 billion, respectively. The
       Company's share of the pool amounted to $1.2 billion and $1.9 billion at
       December 31, 1997 and 1996, respectively, and is included in short-term
       securities in the consolidated balance sheet.

       The Company participates in a stock option plan sponsored by Travelers
       Group Inc. that provides for the granting of stock options in Travelers
       Group Inc. common stock to officers and key employees. To further
       encourage employee stock ownership, during 1997 Travelers Group Inc.
       introduced the WealthBuilder stock option program. Under this program all
       employees meeting certain requirements have been granted Travelers Group
       Inc. stock options.

       The Company applies APB 25 and related interpretations in accounting for
       stock options. Since stock options under the Travelers Group Inc. plans
       are issued at fair market value on the date of award, no compensation
       cost has been recognized for these awards. FAS 123 provides an
       alternative to APB 25 whereby fair values may be ascribed to options
       using a valuation model and amortized to compensation cost over the
       vesting period of the options.


                                       55
<PAGE>   56
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

14.    RELATED PARTY TRANSACTIONS, CONTINUED

       Had the Company applied FAS 123 in accounting for Travelers Group Inc.
       stock options, net income and net income per share-assuming dilution
       would have been the pro forma amounts indicated below:

<TABLE>
<CAPTION>
       (for the year ended December 31,                                    NET INCOME
       in millions, except per share amounts)                NET INCOME    PER SHARE
                                                             ----------    ---------
<S>                                                           <C>           <C>   
       1997
       Net income, as reported                                $ 1,236       $ 3.12
       FAS 123 pro forma adjustments, after tax                   (16)       (0.04)
                                                              -------       ------
         Net income, pro forma                                $ 1,220       $ 3.08
                                                              =======       ======


       1996
       Net income, as reported                                $   391       $ 1.02
       FAS 123 pro forma adjustments, after tax                    (6)       (0.01)
                                                              -------       ------
         Net income, pro forma                                $   385       $ 1.01
                                                              =======       ======

       1995
       Net income, as reported                                $   419       $ 1.28
       FAS 123 pro forma adjustments, after tax                    (2)           -
                                                              -------       ------
         Net income, pro forma                                $   417       $ 1.28
                                                              =======       ======
</TABLE>

       Most leasing functions for TIGI and its subsidiaries are administered by
       the Company. See note 11.

       The Company leases furniture and equipment from subsidiaries of TIGI. The
       rental expense charged to the Company for this furniture and equipment
       was $48 million, $44 million and $39 million in 1997, 1996 and 1995,
       respectively.

       At December 31, 1996, the Company had an investment of $55 million in
       bonds of its affiliate, Commercial Credit Company. This is included in
       fixed maturities in the consolidated balance sheet.

       In the ordinary course of business, the Company purchases and sells
       securities through affiliated broker-dealers. These transactions are
       conducted on an arm's length basis.

       The Company participates in reinsurance agreements with TIC and has
       participated in reinsurance agreements with TIGI. See note 5.

       The Company purchases annuities from affiliates to settle certain claims.
       Reinsurance recoverables at December 31, 1997 and 1996 included $795
       million and $793 million, respectively, related to these annuities.


                                       56
<PAGE>   57
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

15.    NONCASH FINANCING AND INVESTING ACTIVITIES

       Significant noncash financing activities include the transfer of
       approximately 328 million shares of Class B Common Stock to TIGI in
       exchange for the outstanding capital stock of The Travelers Indemnity
       Company in 1996. See note 2.

       Significant noncash investing activities include: a) the conversion of $8
       million and $24 million of convertible preferred stock for $8 million and
       $24 million of common stock in 1997 and 1996, respectively; b) the
       conversion of $26 million, $38 million and $23 million of convertible
       bonds for $26 million, $38 million and $23 million of common stock in
       1997, 1996 and 1995, respectively; c) the conversion of $81 million of
       real estate held for sale for $81 million of joint venture participation
       in 1997; d) the conversion of $31 million of convertible preferred stock
       for $31 million of convertible bonds in 1995; and e) the acquisition of
       real estate through foreclosures of mortgage loans amounting to $14
       million and $13 million in 1996 and 1995, respectively.


                                       57
<PAGE>   58
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

16.    SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                               FIRST         SECOND            THIRD       FOURTH
       1997 (in millions, except per share amounts)           QUARTER        QUARTER          QUARTER      QUARTER        TOTAL
                                                              -------        -------          -------      -------        -----
<S>                                                         <C>            <C>              <C>          <C>          <C>      
       Total revenues                                       $   2,431      $   2,431        $   2,507    $   2,542    $   9,911
       Total expenses                                           2,041          2,038            2,040        2,040        8,159
                                                            --------       --------         ---------    ---------    ---------
       Income before federal income taxes                         390            393              467          502        1,752
       Federal income tax expense                                 117            117              140          142          516
                                                            --------       --------         ---------    ---------    ---------
       Net income                                           $     273      $     276        $     327    $     360    $   1,236
                                                            =========      =========        =========    =========    =========
       Net income per common share                          $   0.68       $   0.69         $    0.83    $    0.92    $    3.13
       Net income per common share-                                                         
         assuming dilution                                  $   0.68       $   0.69         $    0.83    $    0.92    $    3.12
                                                            =========      =========        =========    =========    =========
       Common stock price                                                                   
         High                                               $  39 5/8      $  40 3/8        $   43 9/16  $   45       $   45
         Low                                                $  31 3/4      $  31 3/8        $   37 7/8   $   34 7/8   $   31 3/8
         Close                                              $  31 3/4      $  39 7/8        $   40 1/2   $   44       $   44
       Dividends per share of common stock                  $  0.075       $  0.075         $  0.075     $   0.075    $   0.300
                                                            =========      =========        =========    =========    =========
                                                                                            
                                                                FIRST         SECOND            THIRD       FOURTH
       1996 (in millions, except per share amounts)           QUARTER        QUARTER          QUARTER      QUARTER        TOTAL
                                                              -------        -------          -------      -------        -----
       Total revenues                                       $   1,152      $   2,202        $   2,452    $   2,391    $   8,197
       Total expenses                                           1,027          2,563            2,099        2,021        7,710
                                                            --------       --------         ---------    ---------    ---------
       Income (loss) before federal income taxes                  125           (361)             353          370          487
       Federal income tax expense (benefit)                        27           (145)             106          108           96
                                                            --------       --------         ---------    ---------    ---------
       Net income (loss)                                    $      98      $    (216)       $     247    $     262    $     391
                                                            =========      =========        =========    =========    =========
       Net income (loss) per common share                   $   0.30       $  (0.56)        $    0.62    $    0.65    $    1.02
       Net income (loss) per common share-                                                  
         assuming dilution                                  $   0.30       $  (0.56)        $    0.62    $    0.65    $    1.02
                                                            =========      =========        =========    =========    =========
       Common stock price                                                                   
         High                                                     N/A      $     28 1/2     $    29 3/8  $    36      $   36
         Low                                                      N/A      $     26         $    23 1/8  $    28      $   23 1/8
         Close                                                    N/A      $     28 3/8     $    27 1/2  $    35 3/8  $   35 3/8
       Dividends per share of common stock                        N/A              -        $    0.075   $    0.075   $   0.150
                                                            =========      =========        =========    =========    =========
</TABLE>

       Includes amounts related to Aetna P&C from April 2, 1996, the date of
       acquisition.

       1996 results include charges of $391 million and $32 million in the
       second and fourth quarter, respectively, related to the acquisition of
       Aetna P&C. See note 2.

       Due to changes in the number of average shares outstanding, quarterly
       earnings per share of common stock do not add to the total for the years.

       Common stock prices for the first quarter of 1996 are not applicable as
       shares began trading in April 1996.


                                       58
<PAGE>   59
                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Stockholders
Travelers Property Casualty Corp.:

We have audited the accompanying consolidated balance sheets of Travelers
Property Casualty Corp. and Subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Travelers Property
Casualty Corp. and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations, changes in stockholders' equity and their cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.




/s/ KPMG Peat Marwick LLP

Hartford, Connecticut 
January 26, 1998, except for note 1, 
Accounting Policies - Earnings per Share, 
as to which the date is February 3, 1998


                                       59