<PAGE>   1


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                 FOR THE TRANSITION PERIOD FROM        TO       

                         COMMISSION FILE NUMBER 1-14328

                        TRAVELERS PROPERTY CASUALTY CORP.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                              06-1445591
(STATE OR OTHER JURISDICTION                                 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION)                          IDENTIFICATION NO.)

                  ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
                                 (860) 277-0111
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
<S>                                                                              <C>
                                TITLE OF EACH CLASS                              NAME OF EACH EXCHANGE ON WHICH REGISTERED
                                -------------------                              -----------------------------------------
                  CLASS A COMMON STOCK, PAR VALUE $ .01 PER SHARE                         NEW YORK STOCK EXCHANGE
                          6-3/4% NOTES DUE APRIL 15, 2001                                 NEW YORK STOCK EXCHANGE
             8.08% TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST (AND                    NEW YORK STOCK EXCHANGE
                    REGISTRANT'S GUARANTY WITH RESPECT THERETO)
               8% TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST (AND                     NEW YORK STOCK EXCHANGE
                    REGISTRANT'S GUARANTY WITH RESPECT THERETO)
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  NONE

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X   NO

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT AS OF MARCH 4, 1998 WAS APPROXIMATELY $2.76 BILLION.

AS OF MARCH 4, 1998, 65,828,627 SHARES OF THE REGISTRANT'S CLASS A COMMON STOCK,
PAR VALUE $ .01 PER SHARE, AND 328,020,170 SHARES OF THE REGISTRANT'S CLASS B
COMMON STOCK, PAR VALUE $.01 PER SHARE, WERE OUTSTANDING.

                       DOCUMENTS INCORPORATED BY REFERENCE

CERTAIN PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1997 ARE INCORPORATED BY REFERENCE INTO PART II
OF THIS FORM 10-K.

CERTAIN PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1998 ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD ON APRIL 22, 1998 ARE INCORPORATED BY REFERENCE INTO
PART III OF THIS FORM 10-K.
<PAGE>   2
                        TRAVELERS PROPERTY CASUALTY CORP.

                           ANNUAL REPORT ON FORM 10-K

                     FOR FISCAL YEAR ENDED DECEMBER 31, 1997

                                TABLE OF CONTENTS

FORM 10-K
ITEM NUMBER                                                                 PAGE
                                                                             
         PART I

1.       Business..............................................................1
2.       Properties...........................................................52
3.       Legal Proceedings....................................................53
4.       Submission of Matters to a Vote of Security Holders..................55

         PART II

5.       Market for Registrant's Common Equity and
           Related Stockholder Matters........................................55
6.       Selected Financial Data..............................................56
7.       Management's Discussion and Analysis of Financial
           Condition and Results of Operations................................56
7A.      Quantitative and Qualitative Disclosures About Market Risk...........56
8.       Financial Statements and Supplementary Data..........................56
9.       Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure................................56

         PART III

10.      Directors and Executive Officers of the Registrant...................57
11.      Executive Compensation...............................................57
12.      Security Ownership of Certain Beneficial Owners
           and Management.....................................................57
13.      Certain Relationships and Related Transactions.......................57

         PART IV

14.      Exhibits, Financial Statement Schedules, and Reports
           on Form 8-K........................................................58
         Exhibit Index........................................................59
         Signatures...........................................................63
         Index to Consolidated Financial Statements and Schedules............F-1
<PAGE>   3
                                     PART I



ITEM 1.       BUSINESS.


         Travelers Property Casualty Corp. is a property-casualty insurance
holding company engaged, through its subsidiaries, principally in two business
segments: Commercial Lines, which includes Specialty Accounts, and Personal
Lines. The Company provides a wide range of commercial and personal property and
casualty insurance products and services to businesses, government units,
associations and individuals. Except as the context otherwise requires, as used
herein the "Company" refers to Travelers Property Casualty Corp. and its
consolidated subsidiaries.

         Travelers Property Casualty Corp. was formed in January 1996 to hold
the property and casualty insurance subsidiaries (collectively, "Travelers P&C")
of The Travelers Insurance Group Inc. ("TIGI"), an indirect wholly-owned
subsidiary of Travelers Group Inc. ("Travelers Group"). On April 2, 1996, the
Company purchased from Aetna Services, Inc. (formerly Aetna Life and Casualty
Company) ("Aetna") all of the outstanding capital stock of Travelers Casualty
and Surety Company (formerly The Aetna Casualty and Surety Company) ("Travelers
Casualty") and The Standard Fire Insurance Company ("Standard Fire"), Aetna's
property and casualty insurance subsidiaries (collectively, "Aetna P&C"), for
approximately $4.2 billion in cash. The acquisition of Aetna P&C (the
"Acquisition") was treated as a purchase and, accordingly, the Company's
consolidated financial statements include the results of Aetna P&C's operations
only from the date of the Acquisition. For additional information about the
Acquisition, the public offering and other related transactions, see Note 2 of
Notes to Consolidated Financial Statements.

         Travelers Group owns approximately 83% of the Company's outstanding
common stock. Travelers Group is a diversified financial services holding
company engaged, through its subsidiaries, principally in four business
segments: (i) Investment Services, including Asset Management; (ii) Consumer
Finance Services; (iii) Life Insurance Services; and (iv) Property & Casualty
Insurance Services (primarily through the Company). The periodic reports of
Travelers Group provide additional business and financial information concerning
that company and its consolidated subsidiaries.

         The principal executive offices of the Company are located at One Tower
Square, Hartford, Connecticut 06183; telephone number (860) 277-0111.




<PAGE>   4
         This discussion of the Company's business is organized as follows: (i)
a description of each of the Company's two business segments and related
services; (ii) a description of the Corporate and Other segment; and (iii)
certain other information.(1) A glossary of insurance terms is included
beginning on page 43.

COMMERCIAL LINES

         The Company is the third largest writer of commercial lines insurance
in the United States based on 1996 direct written premiums published by A.M.
Best Company ("A.M. Best"). The Company's Commercial Lines offers a broad array
of property and casualty insurance and insurance-related services. Commercial
Lines is organized into four marketing and underwriting 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,
primarily serving large national corporations; Commercial Accounts, serving
mid-size businesses; Select Accounts, serving small businesses and individuals
with commercial exposures; and Specialty Accounts, providing a variety of
specialty coverages. The Company also has a dedicated group within Commercial
Accounts that serves the construction industry. The Company distributes its
commercial products through approximately 5,200 brokers and independent agencies
located throughout the United States. In 1997, Commercial Lines generated net
written premiums of $4.8 billion.

         SELECTED PRODUCT AND MARKET INFORMATION

         The table on the next page sets forth by product line and market net
written premiums for Commercial Lines for the periods indicated. For a
description of the product lines and markets referred to in the table, see "--
Product Lines" and "-- Principal Markets and Methods of Distribution,"
respectively.

         Many National Accounts customers often demand service-type products,
primarily for workers' compensation coverage and to a lesser extent in general
liability and commercial automobile coverages. These types of products include
risk management services such as claims settlement, loss control and
engineering. Many of these products generate fee income rather than net written
premiums, and are not reflected in the table below.

         Because the Acquisition occurred on April 2, 1996, the Company's
results of operations for periods prior to April 2, 1996 do not include the
results of Aetna P&C. Accordingly, premium and other operational information
provided for the Company's combined businesses prior to such time has been
included below for informational purposes only. As used herein,


-------- 
(1) Certain items in this Form 10-K, including certain matters
discussed under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (the "MD&A"), are forward-looking
statements. The matters referred to in such statements could be affected by the
risks and uncertainties involved in the Company's business, including the effect
of economic and market conditions, the level and volatility of interest rates
and currency values, the impact of current or pending legislation and regulation
and the other risks and uncertainties detailed in the section under the heading
"Outlook" and in the Forward Looking Statements section of the MD&A.

                                       2
<PAGE>   5
unless the context otherwise requires, "combined" refers to the operations of
both Travelers P&C and Aetna P&C, without regard to the date of the Acquisition.

                          COMBINED NET WRITTEN PREMIUMS


<TABLE>
<CAPTION>

                                                                                                           
                                                                                                      
                                                                                                     
                                                                                  PERCENTAGE OF TOTAL
                                                                                 NET WRITTEN PREMIUMS
                                                YEAR ENDED DECEMBER 31,         YEAR ENDED DECEMBER 31,
                                                -----------------------        
                                          1997          1996          1995                  1997
                                          ----          ----          ----                  ----
                                                 (Dollars in millions)
NET WRITTEN PREMIUMS BY PRODUCT
LINE:
<S>                                        <C>          <C>           <C>                   <C>
   Workers' compensation                   $1,176       $ 1,223       $ 1,312               24.7%
   Commercial multi-peril                   1,037         1,223         1,188               21.8
   General liability                          931           836           815               19.6
   Commercial automobile                      866           806           888               18.2
   Property                                   383           342           457                8.1
   Fidelity and surety                        201           215           233                4.2
   Other                                      163            23           251                3.4
                                           ------        ------        ------              ------
      Total Commercial Lines (1)           $4,757        $4,668        $5,144              100.0%
                                           ======        ======        ======              ======
NET WRITTEN PREMIUMS BY MARKET:
   National Accounts (2)                     $657          $852        $1,192               13.8%
   Commercial Accounts                      1,986         1,725         1,862               41.8
   Select Accounts                          1,432         1,412         1,466               30.1
   Specialty Accounts                         682           679           624               14.3
                                           ------       -------       -------              ------
      Total Commercial Lines (1)           $4,757       $ 4,668       $ 5,144              100.0%
                                           ======       =======       =======              ======
</TABLE>
---------------------
         (1)  1997 includes a $142 million increase due to a change to conform
              the Aetna P&C method of recording certain net written premiums to
              the method employed by Travelers P&C. 

         (2)  The decreases in National Accounts net written premiums during the
              periods shown primarily reflect the highly competitive marketplace
              and the Company's selective underwriting practices.

         The following table sets forth service fee income by market for
Commercial Lines for the periods indicated and includes information with respect
to Aetna P&C only from the date of the Acquisition.

                       COMMERCIAL LINES SERVICE FEE INCOME

<TABLE>
<CAPTION>

                                               YEAR ENDED DECEMBER 31,
                                               -----------------------
                                          1997          1996           1995
                                          ----          ----           ----
                                                 (Dollars in millions)
<S>                                         <C>           <C>            <C>
SERVICE FEE INCOME BY MARKET:
   National Accounts                        $346          $382           $424
   Commercial Accounts                        19            10              8
                                            ----          ----           ----
      Total Commercial Lines                $365          $392           $432
                                            ====          ====           ====
</TABLE>


                                       3
<PAGE>   6
         PRODUCT LINES

         The Company writes a broad range of commercial property and casualty
insurance for risks of all sizes. The core products in the Company's Commercial
Lines are as follows:

         WORKERS' COMPENSATION provides coverage for employers' liability for
injuries to employees under common law as well as the obligation of an employer
under state or federal law to provide its employees with specified benefits for
work-related injuries, deaths and diseases, regardless of fault. In addition to
the liability exposure that may arise under common law, there are typically four
types of benefits payable under workers' compensation policies: medical
benefits, disability benefits, death benefits and vocational rehabilitation
benefits. Workers' compensation policies are often written in conjunction with
other commercial policies. The Company offers three types of workers'
compensation products: (i) guaranteed cost insurance products, in which policy
premiums charged are fixed and do not vary as a result of the insured's loss
experience, (ii) loss sensitive insurance products, including retrospectively
rated policies, in which premiums are adjusted based on actual loss experience
of the insured during the policy period, and large deductible plans, in which
the customer bears the insurance risk up to its deductible amount, and (iii)
service programs, which are generally sold to the Company's larger national
accounts, where the Company receives fees for providing loss prevention, risk
management, claim administration and benefit administration services to
organizations pursuant to service agreements. The Company also participates in
state assigned risk pools servicing workers' compensation policies as a
servicing carrier and pool participant. The Company emphasizes managed care cost
containment strategies (which involve employers, employees and care providers in
a cooperative effort that focuses on the injured employee's early return to
work), cost-effective quality care, and customer service in this market.
Workers' compensation comprehensive claim and managed care cost containment
services are integrated through the Company's claims management system to
maximize cost savings on both service delivery and loss payout.

         COMMERCIAL MULTI-PERIL provides a combination of property and liability
coverage for businesses and business property for damages such as that caused by
fire, wind, hail, water, theft and vandalism, and protects businesses from
financial loss due to business interruption. It also insures businesses against
third-party liability from accidents occurring on their premises or arising out
of their operations, such as injuries sustained from products sold.

         GENERAL LIABILITY provides coverage for liability exposures including
bodily injury and property damage arising from products sold and general
business operations. General liability also includes coverage for directors' and
officers' liability arising in their official capacities, employment practices
liability insurance, fiduciary liability for trustees and sponsors of pension,
health and welfare, and other employee benefit plans, errors and omissions
insurance for employees, agents, professionals and others arising from acts or
failures to act under specified circumstances, as well as medical malpractice,
umbrella and excess insurance.

         COMMERCIAL AUTOMOBILE provides coverage for businesses against losses
incurred from personal bodily injury, bodily injury to third parties, property
damage to an insured's vehicle,

                                       4
<PAGE>   7
and property damage to other vehicles and other property resulting from the
ownership, maintenance or use of automobiles and trucks in a business.

         PROPERTY provides coverage for loss or damage to buildings, inventory
and equipment from natural disasters, including hurricanes, windstorms,
earthquakes, hail, explosions, severe winter weather and other events such as
theft and vandalism, fires and storms and financial loss due to business
interruption resulting from property damage. Property also includes inland
marine, which provides coverage for goods in transit and unique, one-of-a-kind
exposures.

         FIDELITY AND SURETY provides fidelity insurance coverage which protects
an insured for loss due to embezzlement or misappropriation of funds by an
employee. Surety is a three-party agreement whereby the insurer agrees to pay a
second party or make complete an obligation in response to the default, acts or
omissions of a third party. Surety is generally provided for construction
performance, legal matters such as appeals, trustees in bankruptcy and probate
and other performance bonds.

         OTHER coverages include boiler and machinery insurance, which provides
coverage for loss or damage resulting from the malfunction of boilers and
machinery, as well as miscellaneous assumed reinsurance.

         PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION

         The Company's Commercial Lines are organized 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, primarily serving large national corporations; Commercial
Accounts, primarily serving mid-size businesses; Select Accounts, serving small
businesses; and Specialty Accounts, providing a variety of specialty coverages.
The Company also has a dedicated group within Commercial Accounts that serves
the construction industry.

         The Company distributes its commercial products primarily through
approximately 5,200 brokers and independent agencies located throughout the
United States that are serviced by 98 field offices. The Company seeks to
establish relationships with well-established, independent insurance agencies
and brokers. In selecting new independent agencies and brokers to distribute the
Company's products, the Company considers each agency's or broker's
profitability, financial stability, staff experience and strategic fit with the
Company's operating and marketing plans. Once an agency or broker is appointed,
the Company carefully monitors its performance.

         NATIONAL ACCOUNTS

         The Company's National Accounts provides a variety of casualty products
to large companies, as well as employee groups, associations and franchises. The
Company's National Accounts also includes the Company's alternative market
business (the "Alternative Market"), which primarily covers workers'
compensation products and services to voluntary and involuntary state pools.
National Accounts customers generally select products under retrospectively
rated plans, large self-insured retentions or some other loss-responsive

                                       5
<PAGE>   8
arrangement. Customers are usually national in scope and range in size from
businesses with sales of approximately $10 million per year to Fortune 2000
corporations. Products are marketed through national brokers and regional agents
with offices throughout the United States.

         National Accounts customers often demand risk service programs where
the ultimate cost is based on their own loss experience. Programs offered by the
Company include 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. Workers' compensation
accounted for approximately 69% of the products sold in 1997 to National
Accounts customers, based on net written premiums and service fee income.

         The Alternative Market business of the Company's National Accounts
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. Since 1993, most state assigned workers'
compensation risk plan contracts have been awarded through a formal
state-by-state bid process. Contracts, which are generally for three-year terms,
are awarded by state agencies based on quality of service and price. The Company
has emerged as the largest workers' compensation assigned risk plan servicing
insurer in the industry with approximately 25% share of the market in 1997.
Assigned risk plan contracts generated approximately $75 million in service fee
income in 1997 for the Company.

         The Company also services self-insurance groups, sells excess workers'
compensation coverage to these groups and markets various workers' compensation
specialty programs. Self-insurance groups and these specialty programs generated
net written premiums of $43 million and service fee income of $4 million in
1997. National Accounts also participates in various involuntary assigned risk
pools, which provide insurance coverage to individuals or other entities that
otherwise are unable to purchase such coverage in the voluntary market.
Participation in these pools in most states is generally in proportion to
voluntary writings of related lines of business in that state.

         COMMERCIAL ACCOUNTS

         The Company's Commercial Accounts sells a broad range of property and
casualty insurance products through a large network of independent agents and
brokers. Commercial Accounts casualty products target businesses with 75 to
1,000 employees, while its property products target both large and medium sized
businesses. The Company offers a full line of products to its Commercial
Accounts customers, with an emphasis on guaranteed cost products.

         Commercial Accounts targets certain industries in which the Company has
claims, engineering and underwriting expertise and to which the Company has
established dedicated operations. Industry segments include from the
manufacturing sector: advanced technology, metal products, mineral products,
plastic and rubber products and wood products. Also targeted are colleges and
universities, food, retail, financial, property management and the wholesale
industries. The Company continues to develop new industry-targeted programs both
on a national and local level. Specific industry knowledge enables the Company
to select, as customers, better managed companies in an industry segment, to
tailor specialized coverages for

                                       6
<PAGE>   9
those companies, and to link price to the individual exposure and to control
risk. Instead of relying on rating bureaus to establish rates for products, the
Company generally uses its proprietary data, which it has compiled from many
years of extensive underwriting and pricing experience. Accordingly, subject to
applicable state insurance regulations, prices are derived from those
proprietary rates and numerous variables that apply to specific risks. The
Company believes that relying on extensive proprietary data to assess individual
risk characteristics, rather than relying on data from industry rating bureaus,
provides it with a competitive advantage in pricing and underwriting commercial
risks. The Company uses components of this approach specifically in connection
with loss control and claims management processing. Through a network of field
offices, the Company's marketing and underwriting specialists, who have point of
sale authority, work closely with local brokers and agents to tailor insurance
coverage to individual customer needs.

         Construction. The Company has established dedicated operations that
exclusively target the construction industry, providing insurance and risk
management services for virtually all areas of construction, including general
contractors, heavy construction (including street and road) and special trade
contractors, except artisan or smaller trade contractors. The Company offers all
product lines to midsize and national customers in the construction market,
including both guaranteed cost and loss-responsive products, and wrap-up
insurance programs, with general liability, workers' compensation, commercial
auto, commercial property and inland marine coverages. The dedicated
construction operations provide specialized service and underwriting, with local
market expertise and national capability, that enable the Company to tailor
specialized coverages, have competitive pricing and control risk. This includes
local underwriters who understand their states' laws and claim climates,
engineering and loss control specialists, professional claim management and
legal personnel with extensive construction experience. Construction's products
are distributed through independent agents and brokers throughout the United
States. Construction operations contributed approximately 22% of the Commercial
Accounts premium-based business in 1997. Additionally, construction operations
service-based business contributed $6 million of service fees to the Company in
1997.

         SELECT ACCOUNTS

         Select Accounts serves individuals who have commercial exposures and
firms typically with one to 75 employees. Products offered to Select Accounts
are generally guaranteed cost policies, often a packaged product covering
property and liability exposures. Products are sold through independent agents,
who are often the same agents that sell the Company's Commercial Accounts and
Personal Lines products.

         Personnel in the Company's field offices and other points of local
service, which are located throughout the United States, work closely with
agents to ensure a strong local presence in the marketplace. The Company
utilizes a marketing and underwriting approach based on agency automation and
defined underwriting criteria. Agency automation allows agents access to the
Company's price quotation and policy issuance systems and enables agents to
provide faster and more cost-effective service to customers with supervision and
underwriting control. Agents that do not utilize the automated quotation and
policy issuance systems work with the

                                       7
<PAGE>   10
Company's sales and marketing representatives who have point of sale authority.
Agents serving Select Accounts are given greater control and discretion over
underwriting decisions, within predefined parameters, than brokers selling to
larger accounts. Because underwriting criteria and pricing tend to be more
standardized for smaller businesses, Select Accounts uses a standard industry
classification (S.I.C.) based process to allow agents and field marketing
representatives to make underwriting and pricing decisions within predetermined
classifications. Business in other classifications is subject to consultative
review by in-house underwriters. The Company believes that its breadth of
products, highly qualified field staff and its technology offer distinct
competitive advantages.

         SPECIALTY ACCOUNTS

         Specialty Accounts markets products to national, midsize and small
customers, as well as individuals, and distributes them through both wholesale
brokers and retail agents and brokers throughout the United States. The
Company's fast response time on underwriting decisions, industry expertise,
broad range of products and quality service are important to maintaining
relationships with Specialty Accounts insureds and producers. The Company
believes that it has a competitive advantage with respect to many of these
products based on its reputation for clear, timely decision-making, underwriting
and industry expertise and strong producer and customer relationships as well as
its ability to cross-sell with National Accounts, Commercial Accounts and Select
Accounts.

         The Company has two separate marketing and underwriting groups within
Specialty Accounts:

         Gulf Specialty focuses on many non-traditional lines of business with a
particular emphasis on the financial services market. Products include
directors' and officers' liability insurance, errors and omissions coverage for
bankers, investment counselors and mutual fund advisors, and fidelity and surety
coverage for related classes. In addition, Gulf Specialty offers errors and
omissions coverage for professionals and non-professionals such as lawyers,
architects and engineers, insurance agents, podiatrists and chiropractors
medical malpractice, primary and excess property, and various coverages that
target the transportation industry. Gulf Specialty also writes umbrella coverage
for various industries, provides insurance products to the entertainment
industry and to municipalities and provides insurance products for other
industry specific programs. In addition, Gulf Specialty has developed a book of
excess and surplus lines business through Gulf Underwriters Insurance Company.
Effective January 1, 1998, the Company's former Travelers Specialty unit has
been combined with Gulf Specialty, and it is anticipated that during 1998 and
1999 renewal policies within the former Travelers Specialty unit will be written
as Gulf Specialty policies.

         Bond Specialty's range of products includes fidelity and surety bonds,
directors' and officers' and other professional liability insurance, employment
practices liability insurance, fiduciary liability insurance and other related
coverages. The customer base ranges from large financial services companies and
commercial entities to small businesses and individuals. Products and services
are distributed primarily through agents and brokers. Bond Specialty is


                                       8
<PAGE>   11
organized around three broad customer segments: Financial Services, Construction
and Commercial Risk and one specialized product niche: National Commercial
Surety.

         PRICING AND UNDERWRITING

         Pricing levels for property and casualty insurance products by the
Company's Commercial Lines are generally developed based upon the frequency and
severity of estimated losses, the expenses of producing business and
administering claims, and a reasonable allowance for profit. The Company's
strategy emphasizes a profit-oriented approach rather than a premium volume or
market share-oriented approach to underwriting. The Company's National Accounts
business sells primarily risk management services and loss sensitive products.
Commercial Accounts and Select Accounts primarily sell guaranteed cost products.
The market conditions for all Commercial Lines products are characterized by
difficult pricing and increased competition.

         A significant portion of Commercial Lines business is written with
retrospectively rated insurance policies as well as large deductible policies in
which the ultimate cost of insurance for the insured is dependent on the loss
experience of the insured. Retrospectively rated policies are primarily used in
workers' compensation coverage. Although the retrospectively rated feature of
the policy substantially reduces insurance risk to the Company, it introduces
credit risk to the Company. Receivables on unpaid losses from holders of
retrospectively rated policies totaled approximately $502 million at December
31, 1997. Collateral, primarily letters of credit and, to a lesser extent, cash
collateral, is generally requested for contracts that provide for deferred
collection of ultimate premiums. The amount of collateral requested is
predicated upon the creditworthiness of the customer and the nature of the
insured risks. Commercial Lines continually monitors the credit exposure on
individual accounts and the adequacy of collateral.

         Under certain workers' compensation insurance contracts with deductible
features, the Company is obligated to pay the claimant the full amount of the
claim. The Company is subsequently reimbursed by the contractholder for the
deductible amount, and is subject to credit risk until such reimbursement is
made. At December 31, 1997, contractholder receivables and payables on unpaid
losses were each approximately $1.9 billion.

         The Company has developed an underwriting methodology that incorporates
underwriting, claims, engineering, actuarial and product development disciplines
for particular industries. This approach is designed to maintain high quality
underwriting and pricing discipline. This approach utilizes proprietary data
gathered and analyzed by the Company with respect to its Commercial Lines
business over many years. The underwriters and engineers use this information to
assess and evaluate risks prior to quotation. This information provides
specialized knowledge about industry segments and catastrophe management and
helps analyze risk based on account characteristics and pricing parameters
designed to ensure that the Company does not compromise its underwriting
integrity. This process is linked with strong underwriting interaction and
review at the Company's local offices and agents' locations.

         The Company is also a member of and participates in the underwriting
operations of insurance and reinsurance pools and associations, several of which
make independent


                                       9
<PAGE>   12
underwriting decisions on behalf of their members. These pools insure
specialized risks such as exposures related to the aviation and nuclear power
industries.

         The Company continually reviews its exposure to catastrophic losses and
attempts to mitigate such exposure. See "Reinsurance." The Company uses
sophisticated computer modeling techniques to assess underwriting risks and
renewal of business in catastrophe-prone areas.

         GEOGRAPHIC DISTRIBUTION

         The following table shows the distribution of Commercial Lines' direct
written premiums for the states that accounted for the majority of premium
volume for the year ended December 31, 1997:

<TABLE>
<CAPTION>

           STATE                                      % OF TOTAL
           -----                                      ----------
<S>                                                   <C>
           New York                                      12.6%
           California                                     8.0
           Texas                                          6.4
           Massachusetts                                  6.4
           Pennsylvania                                   4.5
           Florida                                        4.3
           New Jersey                                     4.0
           Connecticut                                    3.8
           Illinois                                       3.7
           North Carolina                                 3.3
           All Others (1)                                43.0
                                                        ------
           TOTAL                                        100.0%
                                                        ======
</TABLE>
---------------------

(1)      No other single state accounted for 3.0% or more of the total direct
         written premiums written in 1997 by the Company.

PERSONAL LINES

         The Company is the second largest writer of personal lines insurance
through independent agents and the eighth largest writer of personal lines
insurance overall in the United States based on 1996 direct written premiums
published by A.M. Best. In 1997, Personal Lines generated net written premiums
of approximately $3.1 billion. Personal Lines primarily offers personal
automobile and homeowners insurance.

         Personal Lines distributes products primarily through approximately
5,000 independent agencies located throughout the United States. The Company is
also marketing its Personal Lines products through alternative distribution
channels, including sponsoring organizations such as employee and affinity
groups, joint marketing arrangements with other insurers and through the
independent agents of Primerica Financial Services ("PFS"), a unit of Travelers
Group. The property-casualty licensed PFS agents market Personal Lines products
under the name TRAVELERS SECURE(R) in 39 states. At the end of 1997,
approximately 8,700 PFS agents were


                                       10
<PAGE>   13
licensed to sell TRAVELERS SECURE(R) products and approximately 10,000 new
automobile and homeowners policies are now being sold through this program each
month. Approximately one-third of Personal Lines new business originated from
alternative distribution channels in 1997.

         SELECTED PRODUCT INFORMATION

         The following table sets forth by product line net written premiums for
Personal Lines for the periods indicated. For a description of the product lines
referred to in the table below, see "-- Product Lines."

         Because the Acquisition occurred on April 2, 1996, the Company's
results of operations for periods prior to April 2, 1996 do not include the
results of Aetna P&C. Accordingly, premium and other operational information
provided for the Company's combined businesses prior to such time is for
informational purposes only.


                          COMBINED NET WRITTEN PREMIUMS

<TABLE>
<CAPTION>                                                                               PERCENTAGE OF TOTAL 
                                                                                        NET WRITTEN PREMIUMS 
                                                  YEAR ENDED DECEMBER 31,              YEAR ENDED DECEMBER 31,
                                                  -----------------------              
                                              1997            1996         1995                1997
                                              ----            ----         ----                ----
                                                   (Dollars in millions)
<S>                                          <C>             <C>         <C>         <C>
NET WRITTEN PREMIUMS BY PRODUCT
LINE:
   Personal automobile                       $1,950          $1,851      $ 1,822              63.4%
   Homeowners and other                       1,124             824          721              36.6
                                             ------          ------      -------             ------
      Total Personal Lines                   $3,074  (1)     $2,675      $ 2,543             100.0%
                                             ======          ======      =======             ======
</TABLE>

(1)      In 1997, $371 million of Personal Lines net written premiums were
         generated by alternative distribution channels.

         PRODUCT LINES

         The Company writes virtually all types of property and casualty
insurance covering personal risks. Personal Lines had approximately 4.4 million
policies in force at December 31, 1997. The primary coverages in Personal Lines
are personal automobile and homeowners insurance sold to individuals.

         PERSONAL AUTOMOBILE provides 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. In 1997, the Company introduced a nonstandard
automobile product in Texas and Alabama, distributed through independent agents.
In February 1998, the Company expanded its nonstandard auto product into New
York, and later this year it plans to further expand such product into its
larger markets, including Pennsylvania, Florida and Connecticut.


                                       11
<PAGE>   14
         HOMEOWNERS AND OTHER provides protection against losses to dwellings
and contents from a wide variety of perils, as well as coverage for liability
arising from ownership or occupancy. The Company writes homeowners insurance for
dwellings, condominiums, mobile homes and rental property contents. Other
products include coverage for boats, personal articles such as jewelry, and
umbrella liability protection.

         PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION

         The Company's Personal Lines products are distributed primarily through
approximately 5,000 independent agencies located throughout the United States,
supported by a network of 15 field marketing offices and five customer service
centers. Personal Lines also markets through affinity groups, the sales force of
PFS and under joint marketing arrangements with other insurers. While the
Company's principal markets for Personal Lines insurance are in states along the
East Coast, in the South, and Texas, Personal Lines is expanding its
geographical presence across the United States. In the states of Florida, New
Jersey and Massachusetts, the Company operates stand-alone domestic companies to
enhance its competitive capability in these highly regulated markets. In
addition, in October 1997, the Company commenced operations in stand-alone
California domestic companies, which sell personal automobile policies.

         Insurance companies generally market personal automobile and homeowners
insurance through one of two distribution systems: independent agents or direct
writing. The independent agents that distribute the Company's Personal Lines
products usually represent several unrelated property and casualty companies. In
contrast, direct writing companies operate either by mail or through exclusive
agents or sales representatives. Due in part to the expense advantage that
direct writers may have relative to companies using independent agents, the
direct writing companies have gradually expanded their market share in recent
years.

         The Company's Personal Lines continues to distribute its products
through the independent agency distribution system, recognizing the service and
underwriting advantages the agent can deliver. In addition to its agency
distribution system, the Company has broadened its distribution channels for
Personal Lines products to include sponsoring organizations such as employee and
affinity groups, joint marketing arrangements with other insurers and sales
through the independent agents of PFS, who primarily sell life insurance
products issued by affiliates of the Company, as well as mutual funds and other
Travelers Group products. This program is available in 39 states. In general,
the PFS agents contact potential customers directly, and then transmit
information about the customer to one of four regional telemarketing centers. An
authorized telemarketing sales representative contacts the customer to
underwrite, sell and ultimately process new business.

         In 1995, Aetna P&C entered into a marketing agreement with GEICO to
write the majority of GEICO's homeowners business, and to receive referrals from
GEICO for new homeowners business. This agreement added historically profitable
business and helped geographically diversify the homeowners line of business.
New business referrals began in July 1995 and, on January 1, 1996, Aetna P&C
began writing renewal policies. This marketing

                                       12
<PAGE>   15
agreement provided for limits on Personal Lines' obligation to write new and
renewal business in certain catastrophe-prone areas.

         The Company believes that its focus on service and development of
long-term relationships with individual agents gives it a competitive advantage
in the Personal Lines market. The Company believes that its expense management
practices, including prompt and efficient claims handling and high level of
automation, allow it to offer a competitively priced product. In addition, the
Company is leveraging its service, claims handling and automation experience in
the expansion of the distribution of Personal Lines products through its
alternative channels.

         PRICING AND UNDERWRITING

         Pricing for personal automobile insurance is driven by changes in the
relative frequency of claims and by inflation in the cost of automobile repairs,
medical care and litigation of liability claims. As a result, the profitability
of the business is largely dependent on promptly identifying and rectifying
disparities between premium levels and expected claim costs, and obtaining
approval of the state regulatory authorities for indicated rate increases.
Premiums charged for physical damage coverage reflect insured car values and,
accordingly, premium levels are somewhat related to the volume of new car sales.

         Pricing in the homeowners business is also driven by changes in the
frequency of claims and by inflation in building supplies, labor costs and
household possessions. Most homeowners policies offer (but do not require)
automatic increases in coverage to reflect growth in replacement costs and
property values. In addition to the normal risks associated with any multiple
peril coverage, the profitability and pricing of homeowners insurance is
affected by the incidence of natural disasters, particularly hurricanes, winter
storms, earthquakes and tornadoes. In order to reduce its exposure to
catastrophe losses, the Company has limited the writing of new homeowners
business and selectively non-renewed existing homeowners business in certain
markets, tightened underwriting standards and implemented price increases in
certain catastrophe-prone areas, subject to restrictions imposed by insurance
regulatory authorities. In California, the Company introduced in 1996 an
endorsement that reduces its exposure to catastrophic earthquake claims by
increasing the deductible and limiting other policy coverages in the event of an
earthquake loss. The Company uses computer modeling techniques to assess its
level of exposure to loss in catastrophe-prone areas. Changes to methods of
marketing and underwriting in coastal areas of Florida and New York, and in
California are subject to state-imposed restrictions, the general effect of
which is to make it more difficult for an insurer to reduce exposures.

         Insurers writing property-casualty policies are generally unable to
increase rates until some time after the costs associated with coverage have
increased, primarily as a result of state insurance rate regulation laws. The
pace at which an insurer can change rates in response to competition or to
increased costs depends, in part, on whether the applicable rate regulation law
requires prior approval of a rate increase or notification to the regulator
either before or after a rate increase is imposed. In states having prior
approval laws, a rate must be approved by the

                                       13
<PAGE>   16
regulator before it may be used by the insurer. In states having "file-and-use"
laws, the insurer must file the rate with the regulator, but does not need to
wait for approval before using it. A "use-and-file" law requires an insurer to
file rates within a certain period of time after the insurer begins using the
new rate. Approximately one-half of the states, including New York and New
Jersey, require prior approval of most rate increases.

         Underwriting of Personal Lines products is conducted primarily by
independent agents. Agents underwrite Personal Lines policies under strict
underwriting guidelines established and monitored by the Company. Each agent is
assigned to a specific employee of the Company or team of employees responsible
for working with the agent on business plan development, marketing, and overall
growth and profitability. The Company uses agency level management information
to analyze and understand results and to identify problems and opportunities.

         GEOGRAPHIC DISTRIBUTION

         The following table shows the distribution of Personal Lines' direct
written premiums for the states that accounted for the majority of premium
volume for the year ended December 31, 1997:

<TABLE>
<CAPTION>
STATE                               % OF TOTAL
-----                               ----------
<S>                                 <C>
New York                               22.0%
New Jersey                              9.4
Texas                                   9.2
Pennsylvania                            8.7
Florida                                 7.2
Connecticut                             5.9
Massachusetts                           5.7
Virginia                                3.8
Georgia                                 3.2
All others (1)                         24.9
                                      -----
TOTAL                                 100.0%
                                      =====
</TABLE>
---------------------

(1)      No other single state accounted for 3.0% or more of the total direct
         written premiums written in 1997 by the Company.

CLAIM ADMINISTRATION

         The Company employs approximately 8,200 claim adjusters, appraisers,
investigators, staff attorneys, system specialists and training, management and
support personnel in the claim department. These employees manage over 90% of
the Company's claims. Approved external vendors, such as claim adjusters,
appraisers, investigators and attorneys, are used only when the geographic
location or unique issues raised by a claim warrant such use. To be approved,
these vendors must have a proven record and have demonstrated cost-consciousness
and relevant technical skills.

                                       14
<PAGE>   17
         The Company is dedicated to providing outstanding service standards to
its customers while seeking to reach optimal levels of losses and loss
adjustment expenses. During 1997, the Company reorganized the claim department
to more effectively meet these goals. The new structure features seven operating
regions, and grants to the regions wider authority to address the needs of local
customers, underwriters, agents and brokers across Commercial Lines and Personal
Lines. In addition, the home office and legal personnel created teams around
technical specialties to better support the regional operations. This
streamlined structure of the claim department permits the Company to maintain
the economies of scale of a larger, established company while enjoying the
flexibility of a smaller company that can more quickly respond to the needs of
its customers, underwriters, agents and brokers. The home office continues to
monitor adherence to claims policies and procedures, the adequacy of case
reserves, loss and expense controls and productivity and service standards.

         In 1997, the Company also introduced TravComp, a workers' compensation
claim and medical management program that assists adjusters in promptly
investigating, validating or rejecting workers' compensation claims. New medical
management workstations also permit nurse professionals to access additional
information that supports the Company's emphasis on early return to work
strategies for these claims. These new technologies, together with better
matching of professional skills and authority to specific claim issues, have
resulted in workers' compensation cases closing faster and with lower losses and
loss adjustment expenses. A new, loss and analytical reporting tool made
possible by the implementation of the new workers' compensation process is now
available to employers.

         Environmental, asbestos and cumulative injury claims are separately
managed by the Company's Special Liability Group. This group is comprised of
dedicated legal, claim, finance and engineering professionals. See
"Environmental, Asbestos and Cumulative Injury Claims."

REINSURANCE

         The Company reinsures a portion of the risks it underwrites in order to
control its exposure to losses, stabilize earnings and protect capital
resources. The Company cedes to reinsurers a portion of these risks and pays
premiums based upon the risk and exposure of the policies subject to such
reinsurance. Reinsurance involves credit risk and is subject to aggregate loss
limits. Although the reinsurer is liable to the Company to the extent of the
reinsurance ceded, the Company remains primarily liable as the direct insurer on
all risks reinsured. Reinsurance recoverables are reported after allowances for
uncollectible amounts. The Company also holds collateral, including escrow funds
and letters of credit, under certain reinsurance agreements. The Company
monitors the financial condition of reinsurers on an ongoing basis, and reviews
its reinsurance arrangements periodically. Reinsurers are selected based on
their financial condition, business practices and the price of their product
offerings. For additional information concerning reinsurance, see Note 5 of
Notes to Consolidated Financial Statements.

         The Company utilizes a variety of reinsurance agreements to control its
exposure to large property and casualty losses. The Company utilizes the
following types of reinsurance: (i)

                                       15
<PAGE>   18
facultative reinsurance, in which reinsurance is provided for all or a portion
of the insurance provided by a single policy and each policy reinsured is
separately negotiated; (ii) treaty reinsurance, in which reinsurance is provided
for a specified type or category of risks; and (iii) catastrophe reinsurance, in
which the Company is indemnified for an amount of loss in excess of a specified
retention with respect to losses resulting from a catastrophic event.

         The following presents the Company's top five reinsurers (except
Lloyd's of London ("Lloyd's") which is discussed in more detail below) by
reinsurance recoverable at December 31, 1997 (in millions):


<TABLE>
<CAPTION>
                                                           REINSURANCE
                     REINSURER                             RECOVERABLE         A.M. BEST RATING OF REINSURER
                     ---------                             -----------     ------------------------------------
<S>                                                        <C>             <C>
General Reinsurance Corporation                                $444        A++        highest of 15 ratings
American Re-Insurance Company                                   428        A+         2nd highest of 15 ratings
Executive Risk Indemnity Inc.                                   182        A          3rd highest of 15 ratings
Employers Reinsurance Corporation                                97        A++        highest of 15 ratings
New England Reinsurance Corporation (Subsidiary of               77        NR-3       rating not applicable
      The Hartford Insurance Group)                                                   because company is in
                                                                                      run-off
</TABLE>

         As of December 31, 1997, the Company had ceded insurance losses and
loss adjustment expenses to Lloyd's of $352 million. In 1996, Lloyd's
restructured its operations with respect to claims for years prior to 1993 and
reinsured these into Equitas Limited ("Equitas"). Approximately $266 million of
the Company's Lloyd's reinsurance recoverable at year end relates to Equitas
liabilities and is currently unrated. The remaining recoverables of $86 million
is from Lloyd's continuing market which was recently rated A (3rd highest of 15
ratings) by A.M. Best.

         The impact of the Lloyd's restructuring on the 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 operating
results in a future period. However, the Company believes that it is not likely
that the outcome of these matters could have a material adverse effect on the
Company's financial condition or liquidity.

         The Company participates in pools with other insurers to provide
capacity for unique and high-valued risks such as exposures related to the
aviation and nuclear power industries. The Company's maximum net exposure to
this type of business at December 31, 1997 was $15 million per risk.

         At December 31, 1997, the Company had $9.2 billion in reinsurance
recoverables. Of this amount, $3.4 billion is for pools and associations that
relate primarily to workers' compensation service business and have the strength
of the participating insurance companies on a joint basis supporting these
cessions. Also, $2.5 billion is attributable to structured settlements relating
primarily to personal injury claims for which the Company has purchased an
annuity and remains contingently liable in the event of a default by the company
issuing the annuity. Of the

                                       16
<PAGE>   19
remaining $3.5 billion ceded to reinsurers at December 31, 1997, $755 million
was environmental, asbestos and cumulative injury-related and the remainder
principally reflects reinsurance in support of ongoing business. In addition, at
December 31, 1997, $397 million of reinsurance recoverables were collateralized
by letters of credit.

         Net Retention Policy. The descriptions below relate to reinsurance
arrangements of the Company in effect at January 1, 1998. For third-party
liability, including automobile no-fault, the reinsurance agreements used by
Commercial Accounts and Select Accounts limit the net retention to a maximum of
$4 million per insured, per occurrence. Gulf Specialty utilizes various
reinsurance mechanisms and has limited its net retention to $4.5 million per
risk for any line of business. For commercial property insurance, there is a $5
million maximum retention per risk with 100% reinsurance coverage for risks with
higher limits. The reinsurance agreement in place for workers' compensation
policies written by Commercial Accounts and Select Accounts, and some segments
of Alternative Markets and Gulf Specialty covers 100% of each loss between $1
million and $10 million. For National Accounts, reinsurance arrangements are
typically tiered, or layered, such that only levels of risk acceptable to the
Company are retained. The reinsurance agreement in place for Personal Lines
umbrella policies covers 100% of each loss between $1 million and $5 million.
For personal property insurance, there is a $6 million maximum retention per
risk. For directors' and officers' liability, employment practices liability and
blended insurance, Bond Specialty retains up to $5 million per risk. For surety
protection, Bond Specialty has reinsurance coverage for 95% of up to $50 million
of liability in excess of $50 million of liability. In addition, Bond
Specialty's accident year results are protected by an aggregate excess of loss
treaty that provides 100% of approximately $53 million of reinsurance coverage
in excess of a $122 million retention.

         Catastrophe Reinsurance. The Company utilizes reinsurance agreements
with nonaffiliated reinsurers to control its exposure to losses resulting from
one occurrence. For the accumulation of net property losses arising out of one
occurrence, reinsurance agreements cover 40% of total losses between $250
million and $750 million. For multiple workers' compensation losses arising from
a single occurrence, reinsurance agreements cover 100% of losses between $10
million and $250 million and, for workers' compensation losses caused by
property perils, reinsurance agreements cover 40% of losses between $250 million
and $750 million.

         For commercial property insurance sold through Commercial Accounts and
certain National Accounts, 10% of all losses are reinsured in 1998, subject to
an occurrence limitation of $200 million. For Personal Lines homeowners
insurance, in 1998, 25% of losses in states along the East Coast are reinsured
up to a maximum recovery of $187 million per occurrence. The covered territory
of this Homeowners Quota Share includes Maine, New Hampshire, Massachusetts,
Rhode Island, Connecticut, New York, New Jersey, Delaware, Maryland, Virginia,
North Carolina, South Carolina, Georgia, Florida and Washington, D.C.

         For the accumulation of net casualty losses arising out of one
occurrence, a casualty clash agreement covers 95% of losses between $10 million
and $50 million.

                                       17
<PAGE>   20
         REINSURANCE FUND

         The Company also participates in the Florida Hurricane Catastrophe Fund
("FHCF"), which is a state-mandated catastrophe reinsurance fund. FHCF is
primarily funded by premiums from insurance companies that write residential
property business in Florida and, if insufficient, assessments on insurance
companies that write other property and casualty insurance, excluding workers'
compensation. FHCF's resources are limited to these contributions and to its
borrowing capacity at the time of a significant catastrophe. There can be no
assurance that these resources will be sufficient to meet the obligations of
FHCF.

         The Company's recovery of less than contracted amounts from FHCF could
have a material adverse effect on the Company's results of operations in the
event of a significant catastrophe in Florida. However, the Company believes
that it is not likely that the Company's recovery of less than contracted
amounts from FHCF would have a material adverse effect on the Company's
financial condition or liquidity.

RESERVES

         Property and casualty claim reserves are established to account for the
estimated ultimate costs of claims and claim adjustment expenses for claims that
have been reported but not yet settled and claims that have been incurred but
not reported. The Company establishes reserves by line of business, coverage and
year.

         The process of estimating claim reserves is imprecise due to a number
of variables. These variables are affected by both internal and external events
such as changes in claims handling procedures, inflation, judicial trends and
legislative changes. Many of these items are not directly quantifiable,
particularly on a prospective basis. Additionally, there may be significant
reporting lags between the occurrence of the insured event and the time it is
actually reported to the insurer. The Company continually refines reserve
estimates in a regular ongoing process as experience develops and further claims
are reported and settled. The Company reflects adjustments to reserves in the
results of operations in the periods in which the estimates are changed. In
establishing reserves, the Company takes into account estimated recoveries for
reinsurance, salvage and subrogation.

         The Company derives estimates for unreported claims and development on
reported claims principally from actuarial analyses of historical patterns of
claims development by accident year for each line of business and market
segment. Similarly, the Company derives estimates of unpaid claim adjustment
expenses principally from actuarial analyses of historical development patterns
of the relationship of claim adjustment expenses to losses for each line of
business and market segment. For a description of the Company's reserving
methods for environmental and asbestos claims, see "Environmental, Asbestos and
Cumulative Injury Claims."

         Discounting. The liability for losses for certain long-term disability
payments under workers' compensation insurance and workers' compensation excess
insurance has been

                                       18
<PAGE>   21
discounted using a maximum interest rate of 5%. At December 31, 1997, 1996 and
1995 the combined amounts of discount for the Company were $912 million, $1.012
billion and $1.206 billion, respectively.

         For a reconciliation of beginning and ending property and casualty
insurance claims and claim adjustment expense reserves of the Company for each
of the last three years, see Note 6 of Notes to Consolidated Financial
Statements.

         The following table sets forth the year-end reserves from 1987 through
1997 and the subsequent changes in those reserves, presented on a historical
basis for the Company. Accordingly, the original estimates, cumulative amounts
paid and reestimated reserves in the table for the years 1987-1995 have not been
restated to include Aetna P&C. Beginning in 1996, the table includes the reserve
activity of Aetna P&C. The data in the table are presented in accordance with
reporting requirements of the Securities and Exchange Commission. Care must be
taken to avoid misinterpretation by those unfamiliar with such information or
familiar with other data commonly reported by the insurance industry. The
following data is not accident year data, but rather a display of 1987-1997
year-end reserves and the subsequent changes in those reserves.

         For instance, the "cumulative deficiency or redundancy" shown in the
following table for each year represents the aggregate amount by which original
estimates of reserves as of that year-end have changed in subsequent years.
Accordingly, the cumulative deficiency for a year relates only to reserves at
that year-end and such amounts are not additive. Expressed another way, if the
original reserves at the end of 1987 included $4 million for a loss that is
finally settled in 1997 for $5 million, the $1 million deficiency (the excess of
the actual settlement of $5 million over the original estimate of $4 million)
would be included in the cumulative deficiencies in each of the years 1987-1996
shown in the following table.

         Certain factors may distort the re-estimated reserves and cumulative
deficiency or redundancy shown in the following table. For example, a
substantial portion of the cumulative deficiencies in each of the years
1987-1997 arises from claims on policies written prior to the mid-1970s
involving liability exposures such as environmental, asbestos and cumulative
injury claims. In the post-1984 period, the Company has developed more stringent
underwriting standards and policy exclusions and has significantly contracted or
terminated the writing of such risks. See "Environmental, Asbestos and
Cumulative Injury Claims." General conditions and trends that have affected the
development of these liabilities in the past will not necessarily recur in the
future.

         Other factors that affect the data in the following table include the
discounting of workers' compensation reserves and the use of retrospectively
rated insurance policies. To the extent permitted under applicable accounting
practices, workers' compensation reserves are discounted to reflect the time
value of money, due to the relatively long time period over which these claims
are to be paid. Apparent deficiencies will continue to occur as the discount on
these workers' compensation reserves is accreted at the appropriate interest
rates. Also, a significant portion of National Accounts business is underwritten
with retrospectively rated insurance

                                       19
<PAGE>   22
policies in which the ultimate loss experience is primarily borne by the
insured. Increases in loss experience result in an increase in reserves, and an
offsetting increase in amounts recoverable from insureds. Likewise, decreases in
loss experience result in a decrease in reserves, and an offsetting decrease in
amounts recoverable from insureds. These amounts recoverable mitigate the impact
of the cumulative deficiencies or redundancies but are not reflected in the
following table. Retrospective rating is particularly significant for National
Accounts business for workers' compensation, and to a lesser extent in general
liability and commercial automobile coverages. This mechanism affords the
Company significant financial protection against adverse development on a large
block of net reserves.

         Because of these and other factors, it is difficult to develop
meaningful extrapolation of estimated future redundancies or deficiencies in
loss reserves from the data in the following table.

         The differences between the reserves for claims and claim adjustment
expenses shown in the following table, which is prepared in accordance with
GAAP, and those reported in the annual statements of the Company filed with
state insurance departments, which are prepared in accordance with statutory
accounting practices, were: $31 million, $14 million and $(7) million for the
years 1997, 1996 and 1995 respectively.

                                       20
<PAGE>   23
<TABLE>
<CAPTION>

                                                                           YEAR ENDED DECEMBER 31,
                                         1987(a)  1988(a)  1989(a)  1990(a)  1991(a)  1992(a)
                                         ------------------------------------------------------
                                                                         (Dollars in millions)
<S>                                      <C>      <C>      <C>      <C>      <C>      <C>
Reserves for Loss and Loss Adjustment
  Expense Originally Estimated:          $6,569   $6,954   $7,729   $8,022   $8,360   $8,955
Cumulative amounts paid as of
One year later                            2,061    1,828    2,091    2,135    1,869    2,005
Two years later                           3,132    3,101    3,488    3,422    3,161    3,199
Three years later                         4,003    4,063    4,415    4,351    4,041    4,063
Four years later                          4,666    4,710    5,095    4,996    4,706    4,662
Five years later                          5,141    5,227    5,597    5,492    5,182    5,465
Six years later                           5,550    5,620    5,995    5,887    5,878
Seven years later                         5,870    5,952    6,333    6,466
Eight years later                         6,152    6,251    6,851
Nine years later                          6,421    6,725
Ten years later                           6,875

Reserves re-estimated as of
One year later                            6,732    7,080    7,832    8,128    8,362    9,058
Two years later                           6,890    7,243    7,929    8,197    8,637    9,139
Three years later                         7,057    7,405    8,077    8,592    8,906    9,183
Four years later                          7,246    7,585    8,560    9,003    9,026    9,189
Five years later                          7,466    8,098    8,991    9,159    9,123    9,405
Six years later                           7,988    8,531    9,189    9,295    9,367
Seven years later                         8,411    8,715    9,328    9,551
Eight years later                         8,567    8,871    9,592
Nine years later                          8,732    9,163
Ten years later                           9,058

Cumulative deficiency (redundancy)        2,489    2,209    1,863    1,529    1,007      450


Gross liability -- end of year                                                              
Reinsurance recoverables


Net liability -- end of year



Gross reestimated liability -- latest                                                       

Reestimated reinsurance
   recoverables -- latest

Net reestimated liability -- latest

Gross cumulative deficiency (redundancy)



                                        1993(a)    1994(a)    1995(a)   1996(b)    1997(b)
                                        -------    -------    ------    -------    -------

<S>                                    <C>        <C>        <C>      <C>         <C>
Reserves for Loss and Loss Adjustment
  Expense Originally Estimated:         $9,319      $9,712   $10,090    $21,816    $21,406
Cumulative amounts paid as of
One year later                           1,706       1,595     1,521      3,704
Two years later                          2,843       2,631     2,809
Three years later                        3,610       3,798
Four years later                         4,563
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later

Reserves re-estimated as of
One year later                           9,270       9,486     9,848     21,345
Two years later                          9,234       9,310     9,785
Three years later                        9,108       9,395
Four years later                         9,271
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later

Cumulative deficiency (redundancy)         (48)       (317)     (305)      (471)


Gross liability -- end of year         $14,638     $15,013   $15,213    $30,969   $30,138
Reinsurance recoverables                 5,319       5,301     5,123      9,153     8,732
                                       -------     -------   -------    -------   -------


Net liability -- end of year            $9,319      $9,712   $10,090    $21,816   $21,406
                                        ======      ======   =======    =======   =======



Gross reestimated liability -- latest  $14,684     $15,061   $14,891    $30,504

Reestimated reinsurance
   recoverables -- latest                5,413       5,666     5,106      9,159
                                         -----       -----     -----      -----

Net reestimated liability -- latest     $9,271      $9,395    $9,785    $21,345
                                        ======      ======    ======    =======

Gross cumulative deficiency                $46         $48     $(322)     $(465)
(redundancy)                               ===         ===     =====      =====
</TABLE>

(a)      Reflects reserves of Travelers P&C, excluding Aetna P&C reserves which
         were acquired on April 2, 1996. Accordingly, the reserve development
         (net reserves for loss and loss adjustment expense recorded at the end
         of the year, as originally estimated, less net reserves reestimated as
         of subsequent years) relates only to losses recorded by Travelers P&C
         and does not include reserve development recorded by Aetna P&C.

(b)      Includes Aetna P&C gross reserves of $16,775 million and net reserves
         of $11,752 million acquired on April 2, 1996 and subsequent development
         recorded by Aetna P&C.


                                       21
<PAGE>   24
STATUTORY COMBINED RATIO INFORMATION

         The following table sets forth the statutory loss and LAE ratios,
underwriting expense ratios and combined ratios for the periods indicated for
the Company.

         The statutory combined ratio is an industry measurement of the results
of property and casualty insurance underwriting. This ratio is the sum of the
ratio of incurred losses and loss adjustment expenses to net premiums earned
(the "loss and LAE ratio"), the ratio of underwriting expenses incurred to net
premiums written (the "underwriting expense ratio") and, where applicable, the
ratio of dividends to policyholders to net premiums earned. A combined ratio
under 100% generally indicates an underwriting profit; a combined ratio over
100% generally indicates an underwriting loss. However, investment income,
federal income taxes and other non-underwriting income or expenses are not
reflected in the statutory combined ratio. The profitability of property and
casualty insurance companies depends on income from underwriting, investment and
service operations. Lines of business where claims are paid out over a longer
period of time, such as workers' compensation ("long-tail"), also provide
investment income over a longer period of time and therefore can be profitable
at higher combined ratios than lines where claims are paid out over a shorter
period ("short-tail"). Insurers with a high proportion of long-tail policies
will generally have higher combined ratios than insurers with more short-tail
business.

         The ratios shown in the table below are computed based upon statutory
accounting practices, not generally accepted accounting principles ("GAAP"). For
information on GAAP combined ratios, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

                            STATUTORY COMBINED RATIOS

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                     ----------------------------------------
                                                     1997              1996              1995
                                                     ----              ----              ----
<S>                                                <C>               <C>               <C>
Commercial Lines:
   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 (1)         105.0
   Combined ratio                                   111.0             129.6             106.3
Personal Lines:
   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 (2)         104.4
Total:
   Loss and 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
</TABLE>

                                              (See footnotes on following page.)

                                       22
<PAGE>   25
(1)      Includes the effect of charges associated with the Acquisition and also
         includes statutory charges made to conform accounting policies and
         Company strategies in connection with the Acquisition (but not for GAAP
         reporting purposes due to purchase accounting). Excluding such changes,
         the combined ratio before policyholder dividends was 110.0%.

(2)      Includes the effect of the Company's review of reserves associated with
         the Acquisition. The combined ratio excluding this item was 100.1%.

ENVIRONMENTAL, ASBESTOS AND CUMULATIVE INJURY CLAIMS

         Environmental, asbestos and cumulative injury claims are segregated
from other claims and are handled separately by the Company's Special Liability
Group, a special unit staffed by dedicated legal, claim, finance and engineering
professionals.

         ENVIRONMENTAL CLAIMS

         As a result of various state and federal regulatory efforts aimed at
environmental remediation, the insurance industry has been, and continues to be,
involved in extensive litigation involving policy coverage and liability issues.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") was first enacted in 1980, and significantly expanded in 1984. CERCLA
enables private parties and the federal and state governments to take action
with respect to releases and threatened releases of hazardous substances and to
recover their response costs from certain liable parties or such parties may be
ordered to undertake remedial action directly. Liability under CERCLA may be
joint and several with other responsible persons. In addition to the regulatory
pressures, the Company believes that certain court decisions have expanded
insurance coverage beyond the original intent of the insurers and insureds,
frequently involving policies that were issued prior to the mid-1970s. The
results of court decisions affecting the industry's coverage positions continue
to be inconsistent. Accordingly, the ultimate responsibility and liability for
environmental remediation costs remain uncertain.

         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. Environmental loss and loss expense
reserves of the Company at December 31, 1997 were $1.119 billion, net of
reinsurance of $74 million. Approximately 17% of such loss and loss expense
reserves (i.e., approximately $192 million) were case reserves for resolved
claims. The balance, approximately 83% of the net aggregate

                                       23
<PAGE>   26
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.

         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 often 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 each
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 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
environmental (Superfund remediation type) claims, the Company establishes a
claim file for each insured on a per site, per

                                       24
<PAGE>   27
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 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 100 claimants file a lawsuit against five policyholders alleging
bodily injury and property damage as a result of the discharge of wastes or
pollutants, 1,000 claims (500 for the bodily injury claims and 500 for the
property damage claims) would be established.

         As it pertains to the 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
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 basis, per site basis. For
example, if 100 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.

         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

                                       25
<PAGE>   28
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 which 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
which 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, asbestos claims reserves of the Company were
$1.114 billion, net of reinsurance of $249 million. 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.

                                       26
<PAGE>   29
         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
discussed above.

         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

         Cumulative injury other than asbestos ("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

                                       27
<PAGE>   30
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.

         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 $360 million, net
of reinsurance ($234 million after tax).

         At December 31, 1997, CIOTA claims reserves of the Company were $1.088
billion, net of reinsurance of $432 million. 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.

INSURANCE POOLS

                                       28
<PAGE>   31
         Most of the Company's insurance subsidiaries are members of one of two
separate intercompany property and casualty reinsurance pooling arrangements:
the Travelers Property Casualty pool and the Gulf pool. Each of these insurance
pools permits the participating companies to rely on the capacity of the entire
pool rather than on its own capital and surplus. Under the arrangements of each
insurance pool, the members share substantially all insurance business that is
written and prorate the combined premiums, losses and expenses. Travelers
Casualty and Surety Company of America does not participate in either pool and
is dedicated to the Bond Specialty business.

RATINGS

         Insurance companies are rated by rating agencies to provide both
industry participants and insurance consumers with meaningful information on
specific insurance companies. Higher ratings generally indicate financial
stability and a strong ability to pay claims. These ratings are based upon
factors relevant to policyholders and are not directed toward protection of
investors. Such ratings are neither a rating of securities nor a recommendation
to buy, hold or sell any security and may be revised or withdrawn at any time.
Ratings focus primarily on the following factors: capital resources, financial
strength, demonstrated management expertise in the insurance business, credit
analysis, systems development, market segment position and growth opportunities,
marketing, sales conduct practices, investment operations, minimum
policyholders' surplus requirements and capital sufficiency to meet projected
growth, as well as access to such traditional capital as may be necessary to
continue to meet standards for capital adequacy.

         The following table summarizes the current claims-paying and financial
strength ratings of the Company's property-casualty insurance pools and
Travelers Casualty and Surety Company of America ("Travelers C&S of America") by
A. M. Best, Duff & Phelps Corp. ("Duff & Phelps"), Moody's Investor's Service
Inc. ("Moody's") and Standard & Poor's Ratings Group ("Standard & Poor's"). The
table also presents the position of each rating in the applicable agency's
rating scale.

<TABLE>
<CAPTION>
                                                                                                      STANDARD &
                                             A.M. BEST        DUFF & PHELPS         MOODY'S             POOR'S
                                             ---------        -------------         -------             ------

<S>                                      <C>                 <C>               <C>                <C>
Travelers Property Casualty pool (1)     A  (3rd of 15)      AA- (4th of 18)   Aa3 (4th of 19)    A+ (5th of 18)
Gulf pool (2)                            A+ (2nd of 15)              --                --         AA (3rd of 18)
Travelers C&S of America                 A+ (2nd of 15)      AA- (4th of 18)   Aa3 (4th of 19)    A+ (5th of 18)
</TABLE>
---------------------

(1)      The Travelers Property Casualty pool consists of The Travelers
         Indemnity Company, Travelers Casualty and Surety Company, The Phoenix
         Insurance Company, The Standard Fire Insurance Company, Travelers
         Casualty and Surety Company of Illinois, Farmington Casualty Company,
         The Travelers Indemnity Company of Connecticut, The Automobile
         Insurance Company of Hartford, Connecticut, The Charter Oak Fire
         Insurance Company, The Travelers Indemnity Company of America, The
         Travelers Indemnity Company of Missouri, Travelers Casualty Company of
         Connecticut, Travelers Commercial Insurance Company, The Travelers
         Indemnity Company of Illinois, Travelers Property Casualty Insurance
         Company, TravCo Insurance Company, The Travelers Home and Marine
         Insurance Company, Travelers Personal Security Insurance

                                        (footnotes continued on following page)

                                                             
                                       29


<PAGE>   32
         Company, Travelers Property Casualty Insurance Company of Illinois and
         Travelers Excess and Surplus Lines Company.

(2)      The Gulf pool consists of Gulf Insurance Company, Gulf Insurance
         Company U.K. Limited, Gulf Underwriters Insurance Company, Select
         Insurance Company, Atlantic Insurance Company and Gulf Group Lloyds.

INVESTMENTS

         Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities, mortgage
loans, real estate and certain other investments.

         The Company's investment policies are determined by its Board of
Directors and are reviewed on a regular basis. At December 31, 1997, the
carrying value of the Company's investment portfolio was $31.0 billion, of which
92.3% was invested in fixed maturity investments and short-term investments,
2.5% in mortgage loans and real estate held for sale, 3.3% in common stocks and
other equity securities and 1.9% in other investments. The average duration of
the fixed maturity portfolio, including short-term investments, was 5.2 years at
such date. Non-investment grade securities totaled $832 million, representing
approximately 3.1% of the Company's fixed maturity investment portfolio as of
December 31, 1997.

         For additional information regarding these investment portfolios, see
Note 4 of Notes to Consolidated Financial Statements and the discussion of
Investment Portfolio in Item 7 of this Form 10-K.

        The table on the next page sets forth information regarding the 
investments of the Company. It reflects the average amount of investments, net
investment income earned and the yield thereon for the years ended December 31,
1997, 1996 and 1995. The table includes information on the investments of Aetna
P&C for periods prior to April 2, 1996 (the date of the Acquisition). See Note 
4 of Notes to Consolidated Financial Statements and Note 3 of Notes to the 1995
Combined Financial Statements of Aetna P&C for information regarding the
investment portfolio of the Company.

                                       30
<PAGE>   33
<TABLE>
<CAPTION>

                                                                       YEAR ENDED DECEMBER 31,
                                                       -------------------------------------------------------
                                                          1997                  1996                   1995
                                                          ----                  ----                   ----
                                                                        (Dollars in millions)

<S>                                                    <C>                    <C>                    <C>
Average investments                                    $30,197.7              $28,018.7              $24,824.9
Net investment income                                   $2,050.8               $1,898.6               $1,611.8
Average yield (1)                                            7.4%                   7.2%                   6.4%
Average tax equivalent yield (1)                             8.0%                   7.7%                   6.9%
Average tax equivalent yield excluding
  real estate (1)                                            7.7%                   7.6%                   6.8%
</TABLE>

---------------------

(1)      Excluding realized and unrealized capital gains and losses.

         MORTGAGE LOANS AND REAL ESTATE HELD FOR SALE

         At December 31, 1997, the mortgage loan and real estate held for sale
portfolios of the Company consisted of approximately $691 million and $95
million, respectively. The 1997 decrease in mortgage loans and real estate held
for sale is primarily attributable to asset sales and payoff of mortgage loans.

         Management evaluates the real estate portfolio on an ongoing basis,
assessing the probabilities of loss with respect to a comprehensive series of
projections, including a host of variables relating to the borrower, the
property, the term of the loan, the tenant composition, rental rates, other
supply and demand factors, and overall economic conditions.


                                       31
<PAGE>   34
         The following table summarizes by property type the mortgage loan
portfolio and real estate held for sale included in the investment portfolio of
the Company as of December 31, 1997, 1996 and 1995. For informational purposes
only, the table includes the investments of Aetna P&C for all periods presented.

<TABLE>
<CAPTION>
                                          MORTGAGE LOANS                               REAL ESTATE
                                ------------------------------------          ------------------------------------
                                                              (Dollars in millions)
                                1997           1996           1995           1997           1996            1995
                                ----           ----           ----           ----           ----            ----
<S>                             <C>           <C>            <C>             <C>            <C>             <C>
Property Type:
Commercial:
    Office                      $368.5         $503.4          $591.0         $25.9          $69.2          $139.7
    Apartment                    112.7          181.6           243.3           5.7            7.7             4.8
    Hotel                          6.7           26.6            74.4          50.4           35.8            56.8
    Retail                       140.7          210.8           285.4          12.3           19.6            20.2
    Industrial                    33.1           47.8            51.9           -             21.9            22.6
    Other                         20.2           26.0            52.1           0.8            0.6            41.5
                                ------         ------         -------        ------         ------          -------
Total commercial                 681.9          996.2         1,298.1          95.1          154.8           285.3
Agriculture                        8.8            9.4            20.8           -              1.9             2.2
Less:  valuation
  reserve (1)                       -              -            (44.4)           -              -              -

                                ------         ------         -------        ------         ------          -------
Total                           $690.7       $1,005.6        $1,274.5         $95.1         $156.7          $287.5
                                ======       ========        ========        ======         ======          =======
</TABLE>

---------------------


(1) In 1996, decrease reflects purchase accounting adjustments related to the
Acquisition.

         For additional information regarding the mortgage loan and real estate
held for sale portfolios of the Company, see Note 4 of Notes to Consolidated
Financial Statements and Notes 3 and 15 of Notes to the 1995 Combined Financial
Statements of Aetna P&C. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay loans with or without
prepayment penalties. The Company's combined unscheduled payments and sales of
mortgage loans were $297 million in 1997 and $163 million in 1996. The average
remaining life of the mortgage portfolio is five years.

         DERIVATIVES

         See Note 12 of Notes to Consolidated Financial Statements for a
discussion of the policies and transactions related to derivatives of the
Company.

COMPETITION

         The property and casualty insurance industry is highly competitive in
the areas of price, service, product offerings, agent relationships and, in the
case of personal property and casualty business, method of distribution (i.e.,
use of independent agents, captive agents and/or salaried employees). There are
approximately 1,140 property-casualty organizations in the United States,
comprised of approximately 2,400 property-casualty companies. Of those
organizations, the top

                                       32
<PAGE>   35
200 account for over 90% of the consolidated industry's total net written
premiums. In addition, an increasing amount of commercial risks are covered by
purchaser self-insurance, large deductibles, risk-purchasing groups,
risk-retention groups and captive companies.

         COMMERCIAL LINES. The insurance industry is represented in the
commercial lines marketplace by many insurance companies of varying size. The
industry is comprised of small local firms, large regional firms and large
national firms, as well as self-insurance programs or captive insurers. Market
competition works to set the price charged for insurance products and the level
of service provided within the insurance regulatory framework. Growth is driven
by a company's ability to provide insurance and services at a price that is
reasonable and acceptable to the customer. In addition, the marketplace is
affected by available capacity of the insurance industry as measured by
policyholders' surplus. Surplus expands and contracts primarily in conjunction
with profit levels generated by the industry. Growth in premium and service
business is also measured by a company's ability to retain existing customers
and to attract new customers.

         The National Accounts market is highly competitive. Competition is
based primarily on price and breadth of products and services. National Accounts
business is generally written through national brokers and regional agents. The
Company also competes for state contracts to provide claims and policy
management services. These contracts, which generally have three-year terms, are
selected by state agencies through a bid process based on quality of service and
price. The Company has emerged as the largest assigned risk plan service insurer
in the industry with approximately 25% of the market in 1997.

         The Commercial Accounts market is highly competitive. Commercial
Accounts business has historically been written through independent agents and
brokers, although some companies use direct writing. Competitors in this market
are primarily national property-casualty insurance companies willing to write
most classes of business using traditional products and pricing and, to a lesser
extent, regional insurance companies and companies that have developed niche
programs for specific industry segments. Companies compete on price, product
offerings, response time in policy issuance and claim and loss prevention
services. Additionally, reduced overhead and improved efficiency through
automation and response time to customer needs are key to success in this
market. The construction market has become a focused industry segment for
several large insurance companies. Construction market business is written
through agents and brokers. Insurance companies compete in this market based
upon price, product offering and claim and risk management service. The Company
utilizes its specialized underwriters, engineers, auditors and claim handlers,
who have extensive experience and knowledge of the construction industry, to
work with agents and brokers to compete effectively in this market.

         The Select Accounts market is highly competitive and is typically
written through independent agents and, to a lesser extent, regional brokers.
Both national and regional property-casualty insurance companies compete in the
Select Accounts market which is generally comprised of low risk, "main street"
business customers. Risks are underwritten and priced using standard industry
practices and a combination of proprietary and standard industry product
offerings. Competition in this market is primarily based on price, product
offerings and response

                                       33
<PAGE>   36
time in policy services. The Company has established a strong marketing
relationship with its distribution network and has provided it with defined
underwriting policies, competitive prices and efficient automated environments.

         The market in which Specialty Accounts competes includes small to
mid-sized niche companies that target certain lines of insurance and larger,
multi-line companies that focus on various segments of the Specialty Accounts
market. Specialty Accounts business is generally written through wholesale
brokers and retail agents and brokers throughout the United States. Gulf
Specialty derives a competitive advantage through its underwriting practices,
low expense levels and broad product offering base. Bond Specialty's reputation
for clear, timely decision-making, a nationwide network of local underwriting
and industry experts and strong producer and customer relationships as well as
its ability to offer its customers a full range of financial services products,
enable it to compete effectively. Its ability to cross-sell Bond Specialty
products to customers of National Accounts, Commercial Accounts, Select Accounts
and through other Travelers Group units provides further competitive advantages
for the Company.

         PERSONAL LINES. Personal lines insurance is written by hundreds of
insurance companies of varying sizes. Although national companies write the
majority of the business, the Company also faces competition from local or
regional companies which often have a competitive advantage because of their
knowledge of the local marketplace and their relationship with local independent
agents. The Company believes that the principal competitive factors are price,
service, perceived stability of the insurer and name recognition. The Company
also competes for business within each of the independent agencies representing
it, because these agencies also offer policies of competing independent agency
companies. At the agency level, the Company believes that competition is
primarily based on price and the level of service, including claims handling, as
well as the level of automation and the development of long-term relationships
with individual agents. The Company also competes with insurance companies that
use captive agents or salaried employees to sell their products. Because these
companies generally pay lower commissions than independent agency companies,
they may be able to generate business at a lower cost than the Company. Due to
this expense advantage, the direct writing companies have gradually expanded
their market share in recent years. However, in addition to its traditional
independent agency distribution, Personal Lines has broadened its distribution
of Personal Lines products to include marketing through the PFS sales force,
marketing to sponsoring organizations including employee and affinity groups,
and establishment of joint marketing arrangements with other insurers. The
Company believes that its continued focus on expense management practices
enables it to price its products competitively in all of its distribution
channels.

REGULATION

         STATE REGULATION

         The Company's insurance subsidiaries are subject to regulation in the
various states and jurisdictions in which they transact business. The extent of
regulation varies but generally has its source in statutes that delegate
regulatory, supervisory and administrative authority to a

                                       34
<PAGE>   37
department of insurance in each state. The regulation, supervision and
administration relate, among other things, to the standards of solvency that
must be met and maintained, the licensing of insurers and their agents, the
nature of and limitations on investments, premium rates, restrictions on the
size of risks that may be insured under a single policy, reserves and provisions
for unearned premiums, losses and other obligations, deposits of securities for
the benefit of policyholders, approval of policy forms and the regulation of
market conduct including the use of credit information in underwriting as well
as other underwriting and claims practices. In addition, many states have
enacted variations of competitive rate-making laws which allow insurers to set
certain premium rates for certain classes of insurance without having to obtain
the prior approval of the state insurance department. State insurance
departments also conduct periodic examinations of the affairs of insurance
companies and require the filing of annual and other reports relating to the
financial condition of companies and other matters.

         At the present time, the Company's insurance subsidiaries are
collectively licensed to transact insurance business in all states, the District
of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands, as well as Canada
and the United Kingdom.

         Although the Company is not regulated as an insurance company, it is
the owner of the capital stock of its insurance subsidiaries and as such is
subject to state insurance holding company statutes, as well as certain other
laws, of each of the states of domicile of its insurance subsidiaries. All
holding company statutes, as well as certain other laws, require disclosure and,
in some instances, prior approval of material transactions between an insurance
company and an affiliate. The holding company statutes, as well as certain other
laws, also require, among other things, prior approval of an acquisition of
control of a domestic insurer and the payment of extraordinary dividends or
distributions.

         The Company's insurance subsidiaries are subject to various state
statutory and regulatory restrictions in each company's state of domicile, which
limit the amount of dividends or distributions by an insurance company to its
stockholders. As a holding company whose principal assets are the capital stock
of The Travelers Indemnity Company, Travelers Casualty and Standard Fire, the
Company relies primarily on dividends from these subsidiaries to meet its
obligations for payment of interest and principal on outstanding debt
obligations, dividends to stockholders and corporate expenses. The ability of
these subsidiaries to pay dividends to the Company in the future will depend on
their statutory surplus, future earnings and regulatory restrictions. Dividend
payments to the Company from its insurance subsidiaries are limited to $805
million in 1998 without prior approval of the Connecticut Insurance Department.

         The Company's principal insurance subsidiaries are domiciled in the
State of Connecticut. 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, which 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 ending 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.


                                       35
<PAGE>   38
The insurance holding company laws of other states in which the Company's
insurance subsidiaries are domiciled generally contain similar (although in
certain instances somewhat more restrictive) limitations on the payment of
dividends.

         Virtually all states require insurers licensed to do business in their
state to bear a portion of the loss suffered by certain insureds as a result of
the insolvency of other insurers. Depending upon state law, insurers can be
assessed an amount that is generally equal to between 1% and 2% of premiums
written for the relevant lines of insurance in that state each year to pay the
claims of an insolvent insurer. Most of these payments are recoverable through
premium rates, premium tax credits or policy surcharges. Significant increases
in assessments could limit the ability of the Company's insurance subsidiaries
to recover such assessments through tax credits. In addition, there have been
some legislative efforts to limit or repeal the tax offset provisions, which
efforts, to date, have been generally unsuccessful. These assessments may
increase or decrease in the future depending upon the rate of insolvencies of
insurance companies.

         The Company also participates in FHCF, which is a state-mandated
catastrophe reinsurance fund that provides reimbursement to insurers for a
portion of their future catastrophic hurricane losses. FHCF is primarily funded
by premiums from the insurance companies that write residential property
business in Florida and, if insufficient, assessments on insurance companies
that write other property and casualty insurance in Florida, excluding workers'
compensation. FHCF's resources are limited to these contributions and to its
borrowing capacity at the time of a significant catastrophe in Florida.

         The Company's insurance subsidiaries are also required to participate
in various involuntary assigned risk pools, principally involving workers'
compensation and automobile insurance, which provide various insurance coverages
to individuals or other entities that otherwise are unable to purchase such
coverage in the voluntary market. Participation in these pools in most states is
generally in proportion to voluntary writings of related lines of business in
that state. Combined earned premiums related to such pools and assigned risks
for the Company were $226 million, $379 million and $315 million in 1997, 1996
and 1995, respectively. The related combined underwriting losses for the Company
were $16 million, $39 million and $152 million in 1997, 1996 and 1995,
respectively.

         Proposed legislation and regulatory changes have been introduced in the
states from time to time that would modify certain laws and regulations
affecting the financial services industry, including the provisions governing
relationships among insurance companies and agents, investment banks and
commercial banks. The potential impact of such legislation on the Company's
businesses cannot be predicted at this time.

         INSURANCE REGULATIONS CONCERNING CHANGE OF CONTROL

         Many state insurance regulatory laws intended primarily for the
protection of policyholders contain provisions that require advance approval by
state agencies of any change in control of an insurance company that is
domiciled (or, in some cases, having such substantial business that it is deemed
to be commercially domiciled) in that state. The Company owns, directly or
indirectly, all of the shares of stock of certain property and casualty
insurance

                                       36
<PAGE>   39
companies domiciled in the States of California, Connecticut, Florida, Illinois,
Indiana, Massachusetts, Missouri, New Jersey and Texas. "Control" is generally
presumed to exist through the ownership of 10% or more of the voting securities
of a domestic insurance company or of any company that controls a domestic
insurance company. Any purchaser of shares of Common Stock representing 10% or
more of the voting power of the Company will be presumed to have acquired
control of the Company's domestic insurance subsidiaries unless, following
application by such purchaser in each insurance subsidiary's state of domicile,
the relevant Insurance Commissioner determines otherwise. In addition, many
state insurance regulatory laws contain provisions that require prenotification
to state agencies of a change in control of a nondomestic admitted insurance
company in that state. While such prenotification statutes do not authorize the
state agency to disapprove the change of control, such statutes do authorize
issuance of a cease and desist order with respect to the nondomestic admitted
insurer if certain conditions exist such as undue market concentration. Any
future transactions that would constitute a change in control of the Company
would generally require prior approval by the insurance departments of the
states in which the Company's insurance subsidiaries are domiciled or
commercially domiciled and may require preacquisition notification in those
states that have adopted preacquisition notification provisions and in which
such insurance subsidiaries are admitted to transact business.

         A subsidiary of the Company is domiciled in the United Kingdom.
Insurers in the United Kingdom are subject to certain change of control
restrictions in the Insurance Companies Act of 1982 which require the approval
of The Department of Trade and Industry if any person is to become a
"controller" (which is defined as a person entitled to exercise control of 15%
or more of the voting power) of an authorized insurance company.

         Certain other insurance subsidiaries of the Company are domiciled in,
or authorized to conduct insurance business in Canada. Authorized insurers in
Canada are subject to certain change of control restrictions in Section 407 of
the Insurance Companies Act, which requires the approval of the Minister of
Finance if any person acquires a "significant interest" (beneficial ownership,
directly or through one or more entities controlled by such person, of 10% of
the outstanding shares of such Company) in an authorized insurance company.

         Such requirements may deter, delay or prevent certain transactions
affecting the control of or the ownership of Common Stock, including
transactions that could be advantageous to the stockholders of the Company.


                                       37
<PAGE>   40
         INSURANCE REGULATORY INFORMATION SYSTEM

         The NAIC has developed a set of financial relationships or "tests"
called the Insurance Regulatory Information System ("IRIS") that were designed
for early identification of companies that may require special attention by
insurance regulatory authorities. These tests were developed primarily to assist
state insurance departments in executing their statutory mandate to oversee the
financial condition of insurance companies. Insurance companies submit data on
an annual basis to the NAIC, which in turn analyzes the data using ratios
covering twelve categories of financial data with defined "usual ranges" for
each category.

         Falling outside the usual range of IRIS ratios is not considered a
failing result; rather, unusual values are viewed as part of the regulatory
early monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges of four or more of the ratios. In normal years,
15% of the companies included in the IRIS system are expected by the NAIC to be
outside the usual range on four or more ratios.

         In each of the last three years, certain of the Company's insurance
subsidiaries have been outside of the usual range for certain IRIS ratios. In
all such instances, the regulators have been satisfied upon follow-up that there
is no solvency problem. It is possible that similar events could occur this
year, and management believes that the resolution would be the same. No
regulatory action has been taken by any state insurance department or the NAIC
with respect to IRIS ratios of any of the Company's insurance subsidiaries for
the three years ended December 31, 1997.

         For 1997, Travelers Indemnity was outside the usual range for the
liabilities to liquid assets ratio. Travelers Indemnity is the lead company for
the Travelers Property Casualty pool and is also the parent of 19 insurance
companies and several other non-insurance entities. As a result, this ratio is
distorted because all of the liabilities are included in the calculation while
Travelers Indemnity's significant investment in affiliates, which increased in
1997, is excluded from liquid assets. For 1996, both the two-year overall
operating ratio and the two-year reserve development to surplus ratios were
outside the usual range for Travelers Casualty and Standard Fire because of
actions taken during 1996 and 1995 to strengthen reserves for environmental and
asbestos-related claims. In addition, the change in writings ratio produced an
unusual value for Standard Fire and the estimated current reserve deficiency to
surplus ratio was outside the usual range for Travelers C&S of America, both as
a result of a decision in 1995 to combine its two intercompany pooling
arrangements (one for Personal Lines and one for Commercial Lines) into one
pool. If these two ratios were recalculated to have all items reflect the new
agreement, the ratios would not produce unusual values. Concurrent with the
change in the intercompany pooling arrangements, capital was reallocated among
Aetna P&C insurers, which resulted in an unusual value in the change in surplus
ratio for Standard Fire.

                                       38
<PAGE>   41
         The following table sets forth information regarding the premium to
surplus ratios of the Company. For informational purposes only, the table
includes Aetna P&C for all periods presented.


             SCHEDULE OF PREMIUM TO SURPLUS RATIOS (STATUTORY BASIS)

<TABLE>
<CAPTION>

                                                    YEAR ENDED DECEMBER 31,
                                                    -----------------------
                                                 1997        1996         1995
                                                 ----        ----         ----
                                                     (Dollars in millions)
<S>                                             <C>         <C>          <C>
Net written premiums                            $7,832      $7,343       $7,701
Capital and surplus                              6,188       5,423        5,231
Ratio of net written premiums to capital
   and surplus                                    1.27x        1.35x       1.47x
</TABLE>

         RISK-BASED CAPITAL (RBC) REQUIREMENTS

         In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement RBC requirements for most property
and casualty insurance companies, which is designed to assess minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. 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 RBC formula for property and casualty insurance
companies measures four major areas of risk facing property and casualty
insurers: (i) underwriting, which encompasses the risk of adverse loss
developments and inadequate pricing; (ii) declines in asset values arising from
credit risk; (iii) declines in asset values arising from investment risks; and
(iv) off-balance sheet risk arising from adverse experience from non-controlled
assets, guarantees for affiliates or other contingent liabilities and reserve
and premium growth. Pursuant to the law, insurers having less statutory surplus
than that required by the RBC calculation will be subject to varying degrees of
regulatory action, depending on the level of capital inadequacy.

         The RBC law provides for four levels of regulatory action. The extent
of regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the Company Action Level (as defined by the NAIC),
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing corrective
actions and permits the relevant Insurance Commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) allows the relevant Insurance Commissioner to rehabilitate or liquidate an
insurer in addition to the aforementioned actions if surplus falls below 100% of
the RBC amount. The fourth action level is the Mandatory Control Level (as
defined by the NAIC) which requires the relevant Insurance Commissioner to
rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC
amount. Based on the foregoing formula, at December 31, 1997, the RBC ratios of
the

                                       39
<PAGE>   42
Company's insurance subsidiaries were in excess of levels that would require
company or regulatory action.

         The formulas have not been designed to differentiate among adequately
capitalized companies which operate with higher levels of capital. 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 property-casualty
insurance companies had adjusted capital in excess of amounts requiring
regulatory action at any of the four levels.

         FEDERAL REGULATION

         Although the federal government does not directly regulate the business
of insurance, other than flood insurance, federal initiatives often have an
impact on the insurance industry. Legislation has been introduced in Congress
during the past several sessions that, if enacted, would result in substantially
greater federal regulation of the insurance business. Current and proposed
federal measures that may affect the property and casualty industry may include:
possible changes to CERCLA and the tax laws governing property and casualty
insurance companies; proposals regarding natural disaster protection, tort
reform (including limits to product liability lawsuits) and the use of credit
history; and the enforcement of territorial underwriting in Personal Lines. In
addition, proposed legislation has been introduced in Congress from time to time
that would modify certain laws and regulations affecting the financial services
industry, including the provisions regarding affiliations among insurance
companies, investment banks and commercial banks.

         President Clinton's recent budget proposal (the "Budget Proposal")
contains a number of tax provisions that could adversely impact the Company,
including a provision relating to tax-exempt interest obligations. The Budget
Proposal, which is in its early stages of consideration, has not yet been
introduced as part of any legislation in Congress but has engendered
considerable opposition from the public and members of Congress.

         It is not possible to predict whether the Budget Proposal or any of the
proposed legislation discussed above will be enacted, what form such legislation
might take when enacted, or the potential effects of such legislation on the
Company and its competitors.

CORPORATE AND OTHER OPERATIONS

         In addition to its two business segments, the Company's Corporate and
Other segment consists primarily of financing costs associated with the
Acquisition.

OTHER INFORMATION

         GENERAL BUSINESS FACTORS

         In the judgment of the Company, no material part of the business of the
Company and its subsidiaries is dependent upon a single customer or group of
customers, the loss of any one of

                                       40
<PAGE>   43
which would have a materially adverse effect on the Company, and no one customer
or group of affiliated customers accounts for as much as 10% of the Company's
consolidated revenues.

         At December 31, 1997, the Company had approximately 19,500 full-time
and 630 part-time employees. The Company believes that its employee relations
are satisfactory. None of the Company's employees is subject to collective
bargaining agreements.

         SOURCE OF FUNDS

         For a discussion of the Company's sources of funds and maturities of
the long-term debt of the Company, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," and Note 7 of Notes to Consolidated Financial Statements.

         TAXATION

         For a discussion of tax matters affecting the Company and its
operations, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Note 8 of Notes to Consolidated
Financial Statements.

         FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

         For financial information regarding industry segments of the Company,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Note 3 of Notes to Consolidated Financial
Statements.

         EXECUTIVE OFFICERS OF THE COMPANY

         The current executive officers of the Company are indicated below. Ages
are given as of March 4, 1998.

<TABLE>
<CAPTION>
                                                                                   Officer
Name                     Age      Positions                                        Since
----                     ---      ---------                                        -----

<S>                      <C>      <C>                                              <C>
Robert I. Lipp           59       Chairman of the Board, President and Chief       1996
                                  Executive Officer
Jay S. Fishman           45       Vice Chairman; President and Chief               1996
                                  Executive Officer - Commercial Lines
Stanton F. Long          56       Vice Chairman                                    1997
Jon C. Madonna           54       Vice Chairman                                    1997
Charles J. Clarke        62       Vice Chairman; Chairman - Commercial             1996
                                  Lines
Joseph P. Kiernan        57       Chairman and Chief Executive Officer -           1996
                                  Bond Specialty
Robert P. Restrepo, Jr   47       Chairman and Chief Executive Officer -           1996
                                  Personal Lines
</TABLE>

                                       41
<PAGE>   44
<TABLE>
<CAPTION>
                                                                                   Officer
Name                     Age      Positions                                        Since
----                     ---      ---------                                        -----

<S>                      <C>      <C>                                              <C>
Ronald E. Foley          52       Chairman and Chief Executive Officer -           1996
                                  Risk Management
William P. Hannon        49       Chief Financial Officer                          1996
James M. Michener        45       Senior Vice President, General Counsel and       1996
                                  Secretary
Thomas P. Shugrue        40       Vice President and Chief Accounting              1996
                                  Officer
</TABLE>
         Mr. Lipp has been Chairman of the Board, President and Chief Executive
Officer of the Company since January 1996. Mr. Lipp has been a director of
Travelers Group since 1991 and is a Vice Chairman of Travelers Group. Mr. Lipp
has been Chairman of the Board and Chief Executive Officer of The Travelers
Insurance Group Inc. since December 1993. From 1991 to 1993, he was Chairman and
Chief Executive Officer of Travelers Group's Consumer Finance Services group.
From April 1986 through September 1991, he was an Executive Vice President of
Travelers Group and its corporate predecessor. Prior to joining Travelers Group
in 1986, he was a President and a director of Chemical New York Corporation and
Chemical Bank where he held senior executive positions for more than five years
prior thereto. Mr. Lipp is a director of The New York City Ballet, Wadsworth
Atheneum and the Massachusetts Museum of Contemporary Art and Chairman of
Dance-On Inc., a private foundation.

         Mr. Fishman was named Chief Executive Officer of Commercial Lines in
January 1998, and has been President of Commercial Lines since October 1996.
From October 1996 through January 1998, he also served as Chief Operating
Officer of Commercial Lines. Mr. Fishman has been Vice Chairman of the Company
since January 1996, and from January 1996 through January 1998 he was the Chief
Administrative Officer of the Company. Mr. Fishman has also served as Vice
Chairman of The Travelers Insurance Group Inc. since September 1995, and has
been Chief Financial Officer and Chief Administrative Officer of that Company
since December 1993 and June 1996, respectively. Mr. Fishman has also served as
Senior Vice President of Travelers Group since October 1991, and as Treasurer of
Travelers Group from 1991 to December 1993. From 1989 to 1991, he held various
other positions with Travelers Group and its subsidiaries.

         Mr. Long was elected Vice Chairman of the Company in January 1997.
Prior to joining the Company, Mr. Long was Vice President of American
International Group since 1992. From 1988 to 1992, he was President and Chief
Executive Officer of SAIF Corporation. Prior to his association with SAIF
Corporation in 1988, Mr. Long was an attorney in private practice for 20 years.

         Mr. Madonna joined the Company in February 1997 as Vice Chairman and
also serves as Vice Chairman of Travelers Group. Prior to joining the Company,
Mr. Madonna was Chairman of KPMG International since October 1995. From 1990 to
1996, he was Chairman and Chief Executive Officer of KPMG Peat Marwick LLP.

                                       42
<PAGE>   45
         Mr. Clarke was named Vice Chairman of the Company in January 1998. He
has been Chairman of Commercial Lines since 1990, and served as Chief Executive
Officer of Commercial Lines from January 1996 through January 1998. From 1990 to
January 1996, Mr. Clarke was Chairman of Commercial Lines of Travelers P&C.
Prior thereto, Mr. Clarke was Senior Vice President of the National Accounts and
the Reinsurance business units of Travelers P&C. Mr. Clarke has served in
several positions at Travelers P&C since 1958.

         Mr. Kiernan has been Chairman and Chief Executive Officer--Bond
Specialty of the Company since March 1996. From 1989 to March 1996, Mr. Kiernan
was Vice President of Aetna's bond business and has worked in the bond business
lines at Aetna since 1963. From June 1995 to March 1996, Mr. Kiernan was Vice
President of Standard Commercial Accounts of Aetna.

         Mr. Restrepo has been Chairman and Chief Executive Officer--Personal
Lines of the Company since March 1996. Mr. Restrepo was Senior Vice President of
the Personal Auto and Homeowners business units of Aetna from 1995 to 1996 and
was head of the Homeowners business unit of Aetna from 1993 to 1996. Prior
thereto, Mr. Restrepo served in a variety of property/casualty business areas of
Aetna.

         Mr. Foley has been Chairman and Chief Executive Officer--Risk
Management of the Company since January 1996. Mr. Foley served as Chairman of
Personal Lines of Travelers P&C from 1994 until his present appointment and from
1987 to 1991 and served as Chief Financial Officer of The Travelers Corporation
from 1991 through 1993.

         Mr. Hannon has been Chief Financial Officer of the Company since
January 1996. Prior to joining the Company, Mr. Hannon served as Deputy Managing
Partner of the Financial Services practice of KPMG Peat Marwick LLP, which he
joined in 1969, and also served as a member of the firm's Securities and
Exchange Commission reviewing partner's committee.

         Mr. Michener has been Senior Vice President, General Counsel and
Secretary of the Company since July 1996. Prior to joining the Company, Mr.
Michener was General Counsel of The MetraHealth Companies, Inc. from January
1995 to October 1995 and Deputy General Counsel of United HealthCare Corporation
from October 1995 to May 1996. From August 1977 to December 1994, Mr. Michener
served in several positions at TIGI.

         Mr. Shugrue has been Vice President and Controller of the Company since
October 1996 and Chief Accounting Officer of the Company since November 1996.
Mr. Shugrue has served in several positions at TIGI since 1983.

GLOSSARY OF INSURANCE TERMS


Accident year........................   The annual accounting period in which
                                        loss events occurred, regardless of when
                                        the losses are actually reported, booked
                                        or paid.


                                       43
<PAGE>   46
Adjusted unassigned surplus..........   Unassigned surplus as of the most recent
                                        statutory annual report reduced by
                                        twenty-five percent of that year's
                                        unrealized appreciation in value or
                                        revaluation of assets or unrealized
                                        profits on investments, as defined in
                                        such report.

Admitted insurer.....................   A company licensed to transact
                                        insurance business within a state.

Alternative market...................   The segment of the insurance market
                                        which has developed in response to
                                        volatility in cost and availability of
                                        traditional commercial insurance
                                        coverage and consists of various risk
                                        financing mechanisms, including self
                                        insurance, captive insurance companies,
                                        risk retention groups and residual
                                        market business.

Annuity..............................   A contract that pays a periodic income
                                        benefit for the life of a person (the
                                        annuitant), the lives of two or more
                                        persons or for a specified period of
                                        time.

Assigned risk pools..................   Reinsurance pools which cover risks for
                                        those unable to purchase insurance in
                                        the voluntary market because the risk is
                                        too great or rate inadequacy has reduced
                                        the supply of insurance. The costs of
                                        the risks associated with these pools
                                        are charged back to insurance carriers
                                        in proportion to their direct writings.

Assumed reinsurance..................   Insurance liabilities acquired from a
                                        ceding company.

Assumption reinsurance...............   A transaction whereby the ceding
                                        company transfers its entire obligation
                                        under the policy to the reinsurer, who
                                        becomes directly liable to the
                                        policyholder in all respects, including
                                        collecting premiums and paying benefits.
                                        See "Reinsurance."

Attachment point.....................   The amount of losses above which excess
                                        of loss reinsurance becomes operative.

Broker...............................   One who negotiates contracts of
                                        insurance or reinsurance on behalf of an
                                        insured party, receiving a commission
                                        from the insurer or reinsurer for
                                        placement and other services rendered.

Capacity.............................   The percentage of surplus, or the
                                        dollar amount of exposure, that an
                                        insurer or reinsurer is willing or able
                                        to place at risk. Capacity may apply to
                                        a single risk, a program, a line of
                                        business or an entire book of business.
                                        Capacity may be constrained by legal
                                        restrictions, corporate restrictions or
                                        indirect restrictions.

                                       44
<PAGE>   47
Captive company......................   An insurance company formed to insure
                                        the risks of its parent entity or
                                        entities.

Case reserves........................   Loss reserves, established with respect
                                        to specific, individual reported claims.

Casualty insurance...................   Insurance which is primarily concerned
                                        with the losses caused by injuries to
                                        third persons (i.e., not the insured)
                                        and the legal liability imposed on the
                                        insured resulting therefrom. It
                                        includes, but is not limited to,
                                        employers' liability, workers'
                                        compensation, public liability,
                                        automobile liability, personal liability
                                        and aviation liability insurance. It
                                        excludes certain types of losses that by
                                        law or custom are considered as being
                                        exclusively within the scope of other
                                        types of insurance, such as fire or
                                        marine.

Catastrophe..........................   A severe loss, usually involving risks
                                        such as fire, earthquake, windstorm,
                                        explosion and other similar events.

Catastrophe loss.....................   Loss and directly identified loss
                                        adjustment expenses from catastrophes.

Catastrophe reinsurance..............   A form of excess of loss property
                                        reinsurance which, subject to a
                                        specified limit, indemnifies the ceding
                                        company for the amount of loss in excess
                                        of a specified retention with respect to
                                        an accumulation of losses resulting from
                                        a catastrophic event. The actual
                                        reinsurance document is called a
                                        "catastrophe cover."

Cede; ceding company.................   When an insurer reinsures its liability
                                        with another insurer (a "cession"), it
                                        "cedes" business and is referred to as
                                        the "ceding company."

Ceded reinsurance....................   Risks transferred to another company as
                                        reinsurance. See "Reinsurance."

Claim................................   Request by an insured for
                                        indemnification by an insurance company
                                        for loss incurred from an insured peril.

Claim adjustment expense.............   See "Loss adjustment expense."

Claims and claim adjustment
       expense.......................   See "Loss and loss adjustment expenses."

Claims and claim adjustment
       expense reserves..............   See "Loss reserves."

                                       45
<PAGE>   48
Clash agreement......................   An excess of loss agreement with a
                                        retention higher than the limits on any
                                        one reinsured policy. The agreement is
                                        thus only exposed to loss when two or
                                        more policies (perhaps from different
                                        lines of business) are involved in a
                                        common occurrence in an amount greater
                                        than the clash agreement retention. Also
                                        known as contingency cover.

Combined ratio.......................   The sum of the loss and LAE ratio, the
                                        underwriting expense ratio and, where
                                        applicable, the ratio of dividends to
                                        policyholders to net premiums earned. A
                                        combined ratio under 100% generally
                                        indicates an underwriting profit. A
                                        combined ratio over 100% generally
                                        indicates an underwriting loss.

Commercial lines.....................   The various kinds of property and
                                        casualty insurance which are written for
                                        businesses.

Commutation agreement................   An agreement between a reinsurer and a
                                        ceding company whereby the reinsurer
                                        pays an agreed upon amount in exchange
                                        for a complete discharge of all
                                        obligations, including future
                                        obligations, between the parties for
                                        reinsurance losses incurred.

Deductible...........................   The amount of loss that an insured
                                        retains.

Deferred acquisition costs...........   Commissions and premium taxes, which
                                        vary with and are primarily related to
                                        the production of new business, are
                                        deferred and amortized to achieve a
                                        matching of revenues and expenses when
                                        reported in financial statements
                                        prepared in accordance with GAAP.

Direct written premiums..............   The amounts charged by a primary
                                        insurer to insureds in exchange for
                                        coverages provided in accordance with
                                        the terms of an insurance contract.

Earned premiums or premiums
       earned........................   That portion of property-casualty
                                        premiums written that applies to the
                                        expired portion of the policy term.
                                        Earned premiums are recognized as
                                        revenues under both SAP and GAAP.

Excess liability.....................   Additional casualty coverage above the
                                        first layer.

Excess of loss reinsurance...........   Reinsurance that indemnifies the
                                        reinsured against all or a specified
                                        portion of losses under reinsured
                                        policies in excess of a specified dollar
                                        amount or "retention."

Expense ratio........................   See "Underwriting expense ratio."

                                       46
<PAGE>   49
Extra contractual obligations........   Amounts incurred by an insurer, beyond
                                        those that would have been incurred as
                                        specified in the insurance agreement
                                        with an insured, due to monetary awards
                                        required by a court of law against the
                                        insurer for its negligence to or bad
                                        faith in dealing with its insured.

Facultative reinsurance..............   The reinsurance of all or a portion of
                                        the insurance provided by a single
                                        policy. Each policy reinsured is
                                        separately negotiated.

Fidelity and surety programs.........   Insurance which guarantees performance
                                        of an obligation or indemnifies for loss
                                        due to embezzlement or wrongful
                                        abstraction of money, securities or
                                        other property.

Guaranteed cost products.............   An insurance policy where the premiums
                                        charged will not be adjusted for actual
                                        loss experience during the covered
                                        period.

Guaranty fund........................   State-regulated mechanism which is
                                        financed by assessing insurers doing
                                        business in those states. Should
                                        insolvencies occur, these funds are
                                        available to meet some or all of the
                                        insolvent insurer's obligations to
                                        policyholders.

Incurred but not reported
       ("IBNR") reserves.............   Reserves for estimated losses and LAE
                                        which have been incurred but not yet
                                        reported to the insurer.

Indemnity reinsurance................   A transaction whereby the reinsurer
                                        agrees to indemnify the ceding company
                                        against all or part of the loss that the
                                        latter may sustain under the policies it
                                        issued that are being reinsured. The
                                        ceding company remains primarily liable
                                        as the direct insurer on all risks
                                        ceded. See "reinsurance."

Inland marine........................   A broad type of insurance generally
                                        covering articles that may be
                                        transported from one place to another,
                                        as well as bridges, tunnels and other
                                        instrumentalities of transportation. It
                                        includes goods in transit (generally
                                        other than transoceanic) and may include
                                        policies for movable objects such as
                                        personal effects, personal property,
                                        jewelry, furs, fine art and others.

IRIS ratios..........................   Financial ratios calculated by the NAIC
                                        to assist state insurance departments in
                                        monitoring the financial condition of
                                        insurance companies.

Large deductible policy..............   An insurance policy where the customer
                                        assumes at least $25,000 or more of each
                                        loss.

                                       47
<PAGE>   50
Loss.................................   An occurrence that is the basis for
                                        submission and/or payment of a claim.
                                        Losses may be covered, limited or
                                        excluded from coverage, depending on the
                                        terms of the policy.

Loss adjustment expenses
       ("LAE").......................   The expenses of settling claims,
                                        including legal and other fees and the
                                        portion of general expenses allocated to
                                        claim settlement costs.

Loss and LAE ratio...................   For SAP it is the ratio of incurred
                                        losses and loss adjustment expenses to
                                        net earned premiums. For GAAP it is the
                                        ratio of incurred losses and loss
                                        adjustment expenses reduced by an
                                        allocation of fee income to net earned
                                        premiums.

Loss reserves........................   Liabilities established by insurers and
                                        reinsurers to reflect the estimated cost
                                        of claims incurred that the insurer or
                                        reinsurer will ultimately be required to
                                        pay in respect of insurance or
                                        reinsurance it has written. Reserves are
                                        established for losses and for LAE, and
                                        consist of case reserves and IBNR
                                        reserves.

Losses and loss adjustment
       expenses......................   The sum of losses incurred and loss
                                        adjustment expenses.

Losses incurred......................   The total losses sustained by an
                                        insurance company under a policy or
                                        policies, whether paid or unpaid.
                                        Incurred losses include a provision for
                                        IBNR.

Multi-peril policies.................   Refers to policies which cover both
                                        property and third party liability
                                        exposures.

National Association of
       Insurance Commissioners
       ("NAIC")......................   An organization of the insurance
                                        commissioners or directors of all 50
                                        states and the District of Columbia
                                        organized to promote consistency of
                                        regulatory practice and statutory
                                        accounting standards throughout the
                                        United States.

Net written premiums.................   Direct written premiums plus assumed
                                        reinsurance less premiums ceded to
                                        reinsurers.

Non-admitted coverage................   Insurance coverage written in a given
                                        state by an insurer not licensed in that
                                        state.

Novation.............................   A transaction in which the original
                                        direct insurer's obligations are
                                        completely extinguished, resulting in no
                                        further exposure to loss arising on the
                                        business novated.

                                       48
<PAGE>   51
Personal lines.......................   Types of property and casualty
                                        insurance written for individuals or
                                        families, rather than for businesses.

Pool.................................   An organization of insurers or
                                        reinsurers through which particular
                                        types of risks are underwritten with
                                        premiums, losses and expenses being
                                        shared in agreed-upon percentages.

Premiums.............................   The amount charged during the year on
                                        policies and contracts issued, renewed
                                        or reinsured by an insurance company.

Producer.............................   Contractual entity which directs
                                        insureds to the insurer for coverage.
                                        See "Broker."

Property insurance...................   Insurance that provides coverage to a
                                        person with an insurable interest in
                                        tangible property for that person's
                                        property loss, damage or loss of use.

Quota share reinsurance..............   Reinsurance wherein the insurer cedes
                                        an agreed-upon fixed percentage of
                                        liabilities, premiums and losses for
                                        each policy covered on a pro rata basis.

Rate of renewal/retention
       ratio.........................   Current period renewal accounts or
                                        policies as a percentage of total
                                        accounts or policies available for
                                        renewal.

Rates................................   Amounts charged per unit of insurance.

Reinsurance..........................   The practice whereby one insurer,
                                        called the reinsurer, in consideration
                                        of a premium paid to such insurer,
                                        agrees to indemnify another insurer,
                                        called the ceding company, for part or
                                        all of the liability assumed by the
                                        ceding company under one or more
                                        policies or contracts of insurance which
                                        it has issued.

Reinsurance agreement................   A contract specifying the terms of a
                                        reinsurance transaction.

Residual market (involuntary
       business).....................   Insurance market which provides
                                        coverage for risks unable to purchase
                                        insurance in the voluntary market either
                                        because the risk is too great or rate
                                        inadequacy has reduced the supply of
                                        insurance. Residual markets are
                                        frequently created by state legislation
                                        either because of lack of available
                                        coverage such as property coverage in a
                                        windstorm prone area or protection of
                                        the accident victim as in the case of
                                        workers' compensation. The costs of the
                                        residual market are usually charged back
                                        to the direct insurance carriers in
                                        proportion to the carriers' voluntary
                                        market shares for the type of coverage
                                        involved.

                                       49
<PAGE>   52
Retention............................   The amount of exposure an insurance
                                        company retains on any one risk or group
                                        of risks.

Retrospective premiums...............   Premiums related to retrospectively
                                        rated policies.

Retrospective rating.................   A plan or method which permits
                                        adjustment of the final premium or
                                        commission on the basis of actual loss
                                        experience, subject to certain minimum
                                        and maximum limits.

Risk-based capital ("RBC")...........   A measure adopted by the NAIC for
                                        assessing the minimum statutory capital
                                        and surplus requirements of insurers.

Risk retention.......................   The amount or portion of a risk an
                                        insurer retains for its own account
                                        after ceded reinsurance. Losses above
                                        the stated retention level are
                                        collectible from the reinsurer. The
                                        retention level may be stated as a
                                        percentage or dollar amount.

Salvage..............................   The amount of money an insurer recovers
                                        through the sale of property transferred
                                        to the insurer as a result of a loss
                                        payment.

Second injury fund...................   The employer of an injured, impaired
                                        worker is responsible only for the
                                        workers' compensation benefit for the
                                        most recent injury; the second injury
                                        fund would cover the cost of any
                                        additional benefits for aggravation of a
                                        prior condition. The cost is shared by
                                        the insurance industry, funded through
                                        assessments to insurance companies based
                                        on either premiums or losses.

Self-insured retentions..............   That portion of the risk retained by a
                                        person for its own account.

Servicing carrier....................   An insurance company that provides, for
                                        a fee, various services including policy
                                        issuance, claims adjusting and customer
                                        service for insureds in a reinsurance
                                        pool.

Standard policy forms................   Self-contained pre-printed policy
                                        language used when a large number of
                                        insureds face similar loss exposures.

Statutory accounting practices
       ("SAP").......................   The rules and procedures prescribed or
                                        permitted by United States state
                                        insurance regulatory authorities for
                                        recording transactions and preparing
                                        financial statements. Statutory
                                        accounting practices generally reflect a
                                        modified going concern basis of
                                        accounting.

                                       50
<PAGE>   53
Statutory surplus....................   As determined under SAP, the amount
                                        remaining after all liabilities,
                                        including loss reserves, are subtracted
                                        from all admitted assets. Admitted
                                        assets are assets of an insurer
                                        prescribed or permitted by a state to be
                                        recognized on the statutory balance
                                        sheet. Statutory surplus is also
                                        referred to as "surplus" or "surplus as
                                        regards policyholders" for statutory
                                        accounting purposes.

Structured settlements...............   Periodic payments to an injured person
                                        or survivor for a determined number of
                                        years or for life, typically in
                                        settlement of a claim under a liability
                                        policy, usually funded through the
                                        purchase of an annuity.

Subrogation..........................   A principle of law incorporated in
                                        insurance policies, which enables an
                                        insurance company, after paying a loss
                                        to its insured, to recover the amount of
                                        the loss from another who is legally
                                        liable for it.

Third party liability................   A liability owed to a claimant (or
                                        "third party") who is not one of the two
                                        parties to the insurance contract.
                                        Insured liability claims are referred to
                                        as third party claims.

Treaty reinsurance...................   The reinsurance of a specified type or
                                        category of risks defined in a
                                        reinsurance agreement (a "treaty")
                                        between a primary insurer or other
                                        reinsured and a reinsurer. Typically, in
                                        treaty reinsurance, the primary insurer
                                        or reinsured is obligated to offer and
                                        the reinsurer is obligated to accept a
                                        specified portion of all such type or
                                        category of risks originally written by
                                        the primary insurer or reinsured.

Umbrella coverage....................   A form of insurance protection against
                                        losses in excess of amounts covered by
                                        other liability insurance policies or
                                        amounts not covered by the usual
                                        liability policies.

Unassigned funds (surplus)...........   The undistributed and unappropriated
                                        amount of statutory surplus.

Underwriter..........................   An employee of an insurance company who
                                        examines, accepts or rejects risks and
                                        classifies accepted risks in order to
                                        charge an appropriate premium for each
                                        accepted risk. The underwriter is
                                        expected to select business that will
                                        produce an average risk of loss no
                                        greater than that anticipated for the
                                        class of business.

Underwriting.........................   The insurer's or reinsurer's process of
                                        reviewing applications for insurance
                                        coverage, and the decision whether to
                                        accept all


                                       51
<PAGE>   54
                                        or part of the coverage and
                                        determination of the applicable
                                        premiums; also refers to the acceptance
                                        of such coverage.

Underwriting expense ratio...........   For SAP it is the ratio of underwriting
                                        expenses incurred to net written
                                        premiums. For GAAP it is the ratio of
                                        underwriting expenses incurred reduced
                                        by an allocation of fee income to net
                                        written premiums.

Underwriting gain or
       underwriting loss.............   The pre-tax profit or loss experienced
                                        by a property and casualty insurance
                                        company after deducting loss and loss
                                        adjustment expenses and operating
                                        expenses from net earned premiums. This
                                        profit or loss calculation includes
                                        reinsurance assumed and ceded but
                                        excludes investment income.

Unearned premium.....................   The portion of premiums written that is
                                        allocable to the unexpired portion of
                                        the policy term.

Voluntary market.....................   The market in which a person seeking
                                        insurance obtains coverage without the
                                        assistance of residual market
                                        mechanisms.

Wholesale broker.....................   An independent or exclusive agent that
                                        represents both admitted and non
                                        admitted insurers in market areas which
                                        include standard, non-standard,
                                        specialty and excess and surplus lines
                                        of insurance. The wholesaler does not
                                        deal directly with the insurance
                                        consumer. The wholesaler deals with the
                                        retail agent or broker.

Workers' compensation................   A system (established under state and
                                        federal laws) under which employers
                                        provide insurance for benefit payments
                                        to their employees for work-related
                                        injuries, deaths and diseases,
                                        regardless of fault.

ITEM 2.       PROPERTIES.

         The Company's executive offices are located in Hartford, Connecticut.
The Company rents from an affiliate of Travelers Group approximately 1,030,000
square feet of office space in Hartford, Connecticut, under a ten-year lease
that expires on April 1, 2006 and, subject to certain conditions, is renewable
by the Company for additional five-year terms. Under certain circumstances, the
Company may be required to purchase the leased premises. In addition, the
Company leases 248 field offices totaling approximately 5,890,000 square feet
throughout the United States under leases or subleases with third parties. The
Company also rents from Aetna approximately 373,000 square feet of office space
at CityPlace, located in Hartford, Connecticut, under an eight-year sublease
that expires in 2004.

                                       52
<PAGE>   55
         The Company believes its properties are adequate and suitable for its
business as presently conducted and are adequately maintained. For further
information concerning leases, see Note 11 of Notes to Consolidated Financial
Statements.

ITEM 3.       LEGAL PROCEEDINGS.


         This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which the Company or
its subsidiaries is a party or to which any of their property is subject.

         A number of cases have been filed against large segments of the
property-casualty insurance industry, including certain industry organizations,
relating to service fee charges and premium calculations on certain workers'
compensation insurance. A subsidiary of the Company is one of ten defendants in
South Carolina ex rel. Medlock v. National Council on Compensation Insurance
("NCCI"), an action filed by the Attorney General of South Carolina in August
1994 in the Court of Common Pleas, County of Greenville, South Carolina. Suing
on behalf of all employers insured through the South Carolina workers'
compensation assigned risk pool, the plaintiff alleges that the pool's
administrator and servicing carriers conspired to set excessive fees in
violation of the state's unfair trade practices law. The plaintiff seeks
declaratory and injunctive relief, disgorgement of unspecified excess profits,
and additional statutory penalties. In August 1997, all pending motions to
dismiss were denied in this case.

         Beginning in January 1997, nine purported class actions were commenced
in various courts against certain subsidiaries of the Company, dozens of other
insurers, and the NCCI. The allegations in these nine lawsuits are substantially
the same. The plaintiffs generally allege that the defendants conspired to
collect excessive or improper premiums on certain loss-sensitive workers'
compensation insurance policies, in violation of state insurance laws, antitrust
laws, and state unfair trade practices laws. Plaintiffs seek unspecified 
monetary damages. In January 1997, two of these purported class actions, both 
entitled El Chico Restaurants, Inc. v. The Aetna Casualty and Surety Company, 
et. al., were filed in the Chancery Court, Davidson County, Tennessee, and 
Superior Court, Richmond County, Georgia. In February 1997, the Tennessee 
action was removed to the U.S. District Court for the Middle District of 
Tennessee and the Georgia action was removed to the U.S. District Court for 
the Southern District of Georgia. In October 1997, the Georgia action was 
remanded to the Superior Court, Richmond County, Georgia. In December 1997, the
Tennessee action was remanded to the Chancery Court, Davidson County, 
Tennessee. In July 1997, Bristol Hotel Management Corp. et al. v. The Aetna 
Casualty and Surety Company, et al., was filed in the U.S. District Court for 
the Southern District of

                                       53
<PAGE>   56
Florida. In December 1997, three actions, entitled Foodarama Supermarkets, 
Inc., et al. v. The Aetna Casualty and Surety Company, et al.; Bristol Hotel 
Management Corp. et al. v. The Aetna Casualty and Surety Company, et al., 
and Hill-Behan Lumber Co. v. Hartford Insurance Co., et al. were
commenced, respectively, in the Superior Court of New Jersey (Law Division),
Morris County, New Jersey; the Circuit Court of Palm Beach County, Florida and
the Circuit Court of Madison County, Illinois. In February 1998, three
additional lawsuits were commenced: CR/PL Management Co., et al. v. Allianz
Insurance Company Group, et al., in the Circuit Court of Cook County, Illinois,
Foodarama Supermarkets, Inc., et al. v. The Aetna Casualty and Surety Company,
et al. in the Court of Common Pleas, Philadelphia, Pennsylvania, and Hill-Behan
Lumber Co. v. Hartford Insurance Co., et al., in the Circuit Court of the City
of St. Louis, Missouri.

         The Company intends to contest vigorously all of the above-described
cases.

         In January 1997, a purported class of Texas workers' compensation
insureds filed a petition to intervene in a lawsuit pending in District Court,
Travis County, Texas, entitled Travelers Indemnity Company of Connecticut v.
Texas Workers Compensation Insurance Facility. In its most recent pleadings, the
purported class challenges certain premium calculations on certain workers'
compensation policies from 1992 through 1994. In July 1997, the Texas Department
of Insurance issued a rule addressing the same premium calculation issues raised
by the purported class. The Company joined with several other insurers in an
appeal proceeding, entitled Highlands Insurance Company v. Texas Department of
Insurance, which was filed in July 1997 in the District Court of Travis County,
Texas, challenging the rule on the ground that it exceeds the Department's
regulatory authority. In January 1998, the Company, the Department and the
purported class reached an agreement in principle to settle all claims among
themselves, subject to court approval. If approved, the settlement will not have
a material effect on the Company's results of operations, financial condition or
liquidity.

         In the ordinary course of business, certain of the Company's
subsidiaries receive claims asserting alleged injuries and damages from asbestos
and other hazardous waste and toxic substances. The conditions surrounding the
final resolution of these claims continue to change. Currently, it is not
possible to predict legal and legislative changes 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

                                       54
<PAGE>   57
excess of current reserves. The magnitude of 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.

         The Company is involved in numerous other lawsuits (other than
environmental and asbestos claims) arising, from the most part, in the ordinary
course of its business operations either as a liability insurer defending
third-party claims brought against its insureds or as an insurer defending
coverage claims brought against it. Although there can be no assurances, 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 the Company's results of operations, financial condition or
liquidity. 

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

              Not Applicable.
                                     PART II
                                     -------

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND
              RELATED STOCKHOLDER MATTERS.

         The Company's Class A Common Stock is listed on the NYSE under the
symbol "TAP." There is no established public trading market for the Company's
Class B Common Stock. The high and low sale prices, as reported on the
consolidated transaction reporting system, for the Class A Common Stock for the
periods indicated, and the dividends per share, are set forth below
<TABLE>
<CAPTION>

                                      1996                                       1997                           1998
                        ---------------------------------     -------------------------------------------    ----------
                           2ND Q*      3RD Q     4TH Q          1ST Q      2ND Q      3RD Q      4TH Q         1ST Q**
                        ----------- ---------- ----------     ---------- ---------- ---------- ----------    ----------
Class A Common
Stock Price

<S>                     <C>         <C>        <C>            <C>        <C>        <C>        <C>           <C>
High                       $28.500    $29.375    $36.000        $39.625    $40.375    $43.563    $45.000       $46.063
Low                        $26.000    $23.125    $28.000        $31.750    $31.375    $37.875    $34.875       $39.125

Dividends per
Share of Class A
Common Stock                            $.075      $.075          $.075      $.075      $.075      $.075          $.10
</TABLE>

-----------------------
*   From April 23, 1996
** Through March 4, 1998

         At March 4, 1998, the Company had approximately 630 holders of record
of its Class A Common Stock. This figure does not represent the actual number of
beneficial owners of common stock because shares are frequently held in "street
name" by securities dealers and

                                       55
<PAGE>   58
others for the benefit of individual owners who may vote the shares. At March 4,
1998, TIGI was the sole holder of record of the Company's Class B Common Stock.

         For information on dividend restrictions in certain long-term loan and
credit agreements of the Company and its subsidiaries, as well as restrictions
on the ability of certain of the Company's subsidiaries to transfer funds to the
Company in the form of cash dividends or otherwise, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

ITEM 6.       SELECTED FINANCIAL DATA.

         See "Five-Year Summary of Selected Financial Data" on page 17 of the
Company's 1997 Annual Report to Stockholders (the "1997 Annual Report"),
included as part of Exhibit 13 to this Form 10-K and incorporated herein by
reference.

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS.

         See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 18 of the 1997 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
              MARKET RISK.

         See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 18 of the 1997 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         See Index to Consolidated Financial Statements and Schedules on page
F-1 hereof. There is also incorporated by reference herein in response to this
Item the material under the caption "Selected Quarterly Financial Data
(unaudited)" on page 54 of the 1997 Annual Report, which material is included as
part of Exhibit 13 to this Form 10-K.

         The combined financial statements of Aetna P&C as of December 31, 1995
and 1994 and for the years ended December 31, 1995, December 31, 1994 and
December 31, 1993, together with the notes thereto and the related report of
Independent Accountants, are included as Exhibit 99.01 to this Form 10-K and are
incorporated herein by reference.

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE.

         None.

                                       56
<PAGE>   59
                                    PART III
                                    --------
ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         For information on the directors of the Company, see the material under
the caption "Election of Directors," in the definitive Proxy Statement for the
Company's Annual Meeting of Stockholders to be held on April 22, 1998, filed
with the Securities and Exchange Commission (the "Proxy Statement"),
incorporated herein by reference. For information on executive officers, see
Item 1, "Business -- Other Information -- Executive Officers of the Company"
herein.

ITEM 11.      EXECUTIVE COMPENSATION.

         See the material under the caption "Executive Compensation" of the
Proxy Statement, incorporated herein by reference.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
              AND MANAGEMENT.

         See the material under the captions "Voting Rights," "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of Management"
of the Proxy Statement, incorporated herein by reference.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         See the material under the captions "Election of Directors" and
"Executive Compensation" of the Proxy Statement, incorporated herein by
reference.


                                       57


<PAGE>   60
                                     PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
              REPORTS ON FORM 8-K.

(a)      Documents filed as a part of the report:

         (1)      Financial Statements. See Index to Consolidated Financial
                  Statements and Schedules on page F-1 hereof. Also filed as a
                  part of this report are the combined financial statements of
                  Aetna P&C as of December 31, 1995 and 1994 and for the years
                  ended December 31, 1995, December 31, 1994 and December 31,
                  1993, together with the notes thereto and the related report
                  of Independent Accountants. See Exhibit 99.01.

         (2)      Financial Statement Schedules. See Index to Consolidated
                  Financial Statements and Schedules on page F-1 hereof.

         (3)      Exhibits:

                  See Exhibit Index.

(b)      Reports on Form 8-K:

                  On October 14, 1997, the Company filed a Current Report on
                  Form 8-K dated October 13, 1997, reporting under Item 5
                  thereof the results of its operations for the three and nine
                  months ended September 30, 1997, and certain other selected
                  financial data.

                  No other reports on Form 8-K were filed during the fourth
                  quarter of 1997.


                                       58


<PAGE>   61
                                  EXHIBIT INDEX



         EXHIBIT
         NUMBER   DESCRIPTION OF EXHIBIT
         ------   ----------------------

         3.01     Restated Certificate of Incorporation of Travelers Property
                  Casualty Corp. (the "Company"), Certificate of Designations,
                  Powers, Preferences and Rights of 7.5% Redeemable Preferred
                  Stock, Series Z, of the Company, Certificate of Amendment to
                  the Restated Certificate of Incorporation, filed March 7,
                  1997, and Certificate of Amendment to the Restated Certificate
                  of Incorporation, filed April 23, 1997, incorporated by
                  reference to Exhibit 3.01 to the Company's Quarterly Report on
                  Form 10-Q for the fiscal quarter ended March 31, 1997 (File
                  No.1-14328) (the "Company's 3/31/97 10-Q").

         3.02     Restated By-Laws of the Company, effective April 23, 1997,
                  incorporated by reference to Exhibit 3.02 to the Company's
                  3/31/97 10-Q.

         4.01     Intercompany Agreement, dated as of April 2, 1996, between
                  Travelers Group Inc. and the Company, incorporated by
                  reference to Exhibit 4.1 to the Company's Form S-1.

         4.02.1   Shareholders Agreement, dated as of April 2, 1996, by and
                  among the Company, The Travelers Insurance Group Inc., Aetna
                  Life and Casualty Company (now known as Aetna Services, Inc.),
                  J.P. Morgan Capital Corporation, The Trident Partnership L.P.
                  and Fund American Enterprises Holdings, Inc., incorporated by
                  reference to Exhibit 4.2 to the Company's Form S-1.

         4.02.2+  Amendment to Shareholders Agreement, dated June 20, 1997, by
                  and among the Company, Aetna Services, Inc., J.P. Morgan
                  Capital Corporation, The Trident Partnership L.P. and Fund
                  American Enterprises Holdings, Inc.

         
                                       59


<PAGE>   62
         EXHIBIT
         NUMBER   DESCRIPTION OF EXHIBIT
         ------   ----------------------

         10.01*   Travelers Property Casualty Corp. Capital Accumulation Plan
                  (as amended through July 23, 1997), incorporated by reference
                  to Exhibit 10.01 to the Company's Quarterly Report on Form
                  10-Q for the fiscal quarter ended September 30, 1997 (File No.
                  1-14328).

         10.02*   Travelers Property Casualty Corp. 1996 Executive Option Plan
                  (as amended through March 7, 1997), incorporated by reference
                  to Exhibit 10.03 to the Company's Annual Report on Form 10-K
                  for the fiscal year ended December 31, 1996 (File No.1-14328)
                  (the "Company's 1996 10-K").

         10.03*   Travelers Property Casualty Corp. Executive Performance
                  Compensation Plan (as amended through March 7, 1997),
                  incorporated by reference to Exhibit 10.04 to the Company's
                  1996 10-K.

         10.04*   Travelers Property Casualty Corp. 1996 Deferred Compensation
                  Plan for Non-Employee Directors (as amended through September
                  25, 1996), incorporated by reference to Exhibit 10.02 to the
                  Company's Quarterly Report on Form 10-Q for the fiscal quarter
                  ended September 30, 1996 (File No.1-14328).

         10.05*   Travelers Group Capital Accumulation Plan (as amended through
                  July 23, 1997), incorporated by reference to Exhibit 10.02 to
                  the Quarterly Report on Form 10-Q of Travelers Group Inc. for
                  the fiscal quarter ended September 30, 1997 (File No. 1-9924)
                  (the "TRV 9/30/97 10-Q").

         10.06.1* Travelers Group Stock Option Plan (as amended and restated as
                  of April 24, 1996), incorporated by reference to Exhibit
                  10.02.1 to the Annual Report on Form 10-K of Travelers Group
                  Inc. for the fiscal year ended December 31, 1996 (File No.
                  1-9924) (the "TRV 1996 10-K").

         10.06.2* Amendment No. 14 to the Travelers Group Stock Option Plan,
                  incorporated by reference to Exhibit 10.01 to the Quarterly
                  Report on Form 10-Q of Travelers Group Inc. for the fiscal
                  quarter ended September 30, 1996 (File No. 1-9924).

         10.06.3* Amendment No. 15 to the Travelers Group Stock Option Plan,
                  incorporated by reference to Exhibit 10.04 to the TRV 9/30/97
                  10-Q. 

                                       60


<PAGE>   63
         EXHIBIT
         NUMBER   DESCRIPTION OF EXHIBIT
         ------   ----------------------

         10.07*   Travelers Group 1996 Stock Incentive Plan (as amended through
                  July 23, 1997), incorporated by reference to Exhibit 10.03 to
                  the TRV 9/30/97 10-Q.

         10.08*   Retirement Benefit Equalization Plan of Travelers Group Inc.
                  (as amended and restated as of January 1, 1994), incorporated
                  by reference to Exhibit 10.04 to the TRV 1996 10-K.

         10.09*   The Travelers Corporation Supplemental Benefit Plan, effective
                  December 20, 1992, incorporated by reference to Exhibit 10(d)
                  to the Annual Report on Form 10-K of The Travelers Corporation
                  ("old Travelers") for the fiscal year ended December 31, 1992
                  (File No. 1-5799).

         10.10    TAPC Tax Allocation Agreement, effective as of January 1, 1996
                  between Travelers Group Inc. and the Company, incorporated by
                  reference to Exhibit 10.9 to the Company's Form S-1.

         10.11    Lease for office space at CityPlace, dated March 28, 1996, by
                  and between Aetna Life and Casualty Company and The Travelers
                  Indemnity Company, incorporated by reference to Exhibit 10.10
                  to the Company's Form S-1.

         10.12    Lease for office space in Hartford, Connecticut, dated as of
                  April 2, 1996, by and between The Travelers Insurance Company
                  and The Travelers Indemnity Company, incorporated by reference
                  to Exhibit 10.14 to the Company's 1996 10-K.

         10.13*   Letter Agreement, dated November 17, 1996, between the Company
                  and Stanton F. Long, incorporated by reference to Exhibit
                  10.15 to the Company's 1996 10-K.

         10.14*+  The Travelers Insurance Deferred Compensation Plan (formerly
                  The Travelers Corporation TESIP Restoration and Non-Qualified
                  Savings Plan) (as amended and restated through January 1,
                  1997).

         10.15.1  License Agreement, dated November 28, 1995, by and between
                  Aetna Life and Casualty Company and The Aetna Casualty and
                  Surety Company and The Standard Fire Insurance Company,
                  incorporated by reference to Exhibit 10.7 to the Company's
                  Form S-1.

         10.15.2+ License Agreement Amendment, dated April 2, 1996, by and
                  between Aetna Life and Casualty Company and The Aetna Casualty
                  and Surety Company and The Standard Fire Insurance Company.

         
                                       61


<PAGE>   64
         EXHIBIT
         NUMBER   DESCRIPTION OF EXHIBIT
         ------   ----------------------

         11.01+  Computation of Earnings Per Share.

         12.01+   Computation of Ratio of Earnings to Fixed Charges.

         13.01+   Pages 17 through 55 of the 1997 Annual Report to Stockholders
                  of the Company (pagination of exhibit does not correspond to
                  pagination in the 1997 Annual Report to Stockholders).

         21.01+   Subsidiaries of the Registrant.

         23.01+   Consent of KPMG Peat Marwick LLP, Independent Certified Public
                  Accountants.

         23.02+   Consent of KPMG Peat Marwick LLP, Independent Certified Public
                  Accountants.

         24.01+   Powers of Attorney.

         27.01+   Financial Data Schedule.

         99.01    Combined Financial Statements of The Aetna Casualty and Surety
                  Company and The Standard Fire Insurance Company as of December
                  31, 1995 and 1994 and for the years ended December 31, 1995,
                  December 31, 1994 and December 31, 1993, together with the
                  notes thereto and the related reports of Independent
                  Accountants, incorporated by reference to Exhibit 99.01 to the
                  Company's 1996 10-K.


         The total amount of securities authorized pursuant to any instrument
         defining rights of holders of long-term debt of the Company does not
         exceed 10% of the total assets of the Company and its consolidated
         subsidiaries. The Company will furnish copies of any such instrument to
         the Commission upon request.

         The financial statements required by Form 11-K for 1997 for the
         Travelers Group 401(k) Savings Plan will be filed as an exhibit by
         amendment to this Form 10-K pursuant to Rule 15d-21 of the Securities
         Exchange Act of 1934, as amended.

         Copies of any of the exhibits referred to above will be furnished at a
         cost of $.25 per page (although no charge will be made for the 1997
         Annual Report on Form 10-K) to security holders who make written
         request therefor to Corporate Communications, Travelers Property
         Casualty Corp., One Tower Square, Hartford, Connecticut 06183.

-------------------

*        Denotes a management contract or compensatory plan or arrangement
         required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.

+        Filed herewith.


                                       62


<PAGE>   65

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 23rd day of
March, 1998.

                                        TRAVELERS PROPERTY CASUALTY CORP.
                                        (Registrant)

                                        By: /s/ Robert I. Lipp
                                        ----------------------------------------
                                          Robert I. Lipp, Chairman of the Board,
                                          President and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on the 23rd day of March, 1998.

<TABLE>
<CAPTION>
                    SIGNATURE                                                      TITLE
                    ---------                                                      -----

<S>                                                           <C>
               /s/ Robert I. Lipp                                Chairman of the Board, President and Chief
-------------------------------------------------             Executive Officer (Principal Executive Officer)
                  Robert I. Lipp                                                and Director

             /s/ William P. Hannon                                        Chief Financial Officer
-------------------------------------------------                      (Principal Financial Officer)
                William P. Hannon

             /s/ Thomas P. Shugrue                              Vice President and Chief Accounting Officer
-------------------------------------------------                      (Principal Accounting Officer)
                Thomas P. Shugrue

                        *                                                         Director
-------------------------------------------------
                Kenneth J. Bialkin

                        *                                                         Director
-------------------------------------------------
                  John J. Byrne

                        *                                                         Director
-------------------------------------------------
                   James Dimon
</TABLE>


                                       63

<PAGE>   66
<TABLE>
<CAPTION>
                    SIGNATURE                                                      TITLE
                    ---------                                                      -----

<S>                                                           <C>


                        *                                                         Director
-------------------------------------------------
                 Dudley C. Mecum


                        *                                                         Director
-------------------------------------------------
                Roberto G. Mendoza


                        *                                                         Director
-------------------------------------------------
                  Frank J. Tasco


                        *                                                         Director
-------------------------------------------------
                 Sanford I. Weill


                        *                                                         Director
-------------------------------------------------
                  Arthur Zankel
</TABLE>



*By:
           /s/ Jay S. Fishman
     --------------------------------------------
           Jay S. Fishman
           Attorney-in-fact

                                       64

<PAGE>   67
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

           INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES *


<TABLE>
<CAPTION>
                                                                                           Incorporated
                                                                                         by reference from
                                                                                         the Company's 1997
                                                                                         Annual Report to
                                                                          Page            Stockholders at
                                                                         Herein           page indicated
                                                                         ------           --------------
<S>                                                                      <C>             <C>
Independent Auditors' Report                                               F-2                   55

Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995                                                                 32

Consolidated Balance Sheet at
December 31, 1997 and 1996                                                                       33

Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 1997, 1996 and 1995                                      34

Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995                                                                 35

Notes to Consolidated Financial Statements                                                       36-54

Schedules:

         Schedule II - Condensed Financial Information of
         Registrant (Parent Company only)                                  F-3 - F-6

         Schedule III - Supplementary Insurance Information                F-7 - F-9

         Schedule VI - Supplementary Information Concerning
         Property-Casualty Insurance Operations                            F-10
</TABLE>


* Schedules not listed are omitted as not applicable or not required by
  Regulation S-X.


                                       F-1
<PAGE>   68
                          Independent Auditors' Report


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

Under date of January 26, 1998, except for note 1, Accounting Policies -
Earnings per Share, as to which the date is February 3, 1998, we reported on the
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, as contained in
the 1997 annual report to stockholders. These consolidated financial statements
and our report thereon are incorporated by reference in the annual report on
Form 10-K for the year ended December 31, 1997. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related financial statement schedules which are listed on the accompanying
index. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.

In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.



/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 26, 1998


                                       F-2
<PAGE>   69
                                                                     SCHEDULE II

                        Travelers Property Casualty Corp.
                              (Parent Company Only)

                  Condensed Financial Information of Registrant
                                  (In millions)

                          CONDENSED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                                                   For the period
                                                                              For the year        January 16, 1996
                                                                           ended December 31,      to December 31,
                                                                                  1997                  1996
                                                                                  ----                  ----
<S>                                                                        <C>                    <C>
REVENUES
Net investment income and other                                                 $      9             $       2

EXPENSES
Interest                                                                             165                   120
Other                                                                                  7                    36
                                                                                --------             ---------
                                                                                     172                   156
                                                                                --------             ---------
Loss before federal income taxes and equity in
  net income of subsidiaries                                                        (163)                 (154)
Federal income tax benefit                                                            59                    54
                                                                                --------             ---------
Loss before equity in net income of subsidiaries                                    (104)                 (100)
Equity in net income of subsidiaries                                               1,340                   491
                                                                                --------             ---------
Net income                                                                      $  1,236             $     391
                                                                                ========             =========
</TABLE>


The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.


                                       F-3
<PAGE>   70
                                                                     SCHEDULE II

                        Travelers Property Casualty Corp.
                              (Parent Company Only)

                  Condensed Financial Information of Registrant
                                  (In millions)

                             CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                        1997           1996
                                                                                     ----------     ----------
<S>                                                                                  <C>            <C>
ASSETS
Cash                                                                                 $        -     $        1
Investment in subsidiaries at equity                                                     10,122          8,686
Federal income taxes receivable                                                               -             32
Deferred federal income taxes                                                                14             12
Other assets                                                                                 19             16
                                                                                     ----------     ----------
                  Total assets                                                       $   10,155     $    8,747
                                                                                     ==========     ==========

LIABILITIES
Commercial paper                                                                     $      108     $       25
Long-term debt                                                                            2,177          2,177
Other liabilities                                                                            93             65
                                                                                     ----------     ----------
                  Total liabilities                                                       2,378          2,267
                                                                                     ----------     ----------

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                         $   10,155     $    8,747
                                                                                     ==========     ==========
</TABLE>

The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.


                                       F-4
<PAGE>   71
                                                                     SCHEDULE II

                        Travelers Property Casualty Corp.
                              (Parent Company Only)

                  Condensed Financial Information of Registrant
                                  (In millions)

                        CONDENSED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                   For the period
                                                                              For the year        January 16, 1996
                                                                           ended December 31,      to December 31,
                                                                                  1997                  1996
                                                                                  ----                  ----
<S>                                                                         <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net Income                                                                 $    1,236            $      391
     Adjustments to reconcile net income to net
       cash provided by operating activities:
       Equity in net income of subsidiaries                                       (1,340)                 (491)
       Dividends received from consolidated subsidiaries                             340                   299
       Amortization expense                                                            2                     1
       Deferred federal income tax benefit                                            (2)                  (12)
       Federal income taxes receivable                                                32                   (32)
       Other assets                                                                    -                   (14)
       Other liabilities                                                               6                    52
                                                                              ----------            ----------
         Net cash provided by operating activities                                   274                   194
                                                                              ----------            ----------

CASH FLOWS FROM INVESTING ACTIVITIES
   Capital contribution to subsidiaries                                                -                  (710)
   Short-term securities, purchases, net                                              (5)                   (6)
   Business acquisition                                                                -                (4,160)
                                                                              ----------            ----------
         Net cash used in investing activities                                        (5)               (4,876)
                                                                              ----------            ----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Issuance of commercial paper, net                                                  83                    25
   Issuance of long-term debt                                                          -                 2,177
   Borrowings on revolving line of credit                                              -                 2,650
   Payments on revolving line of credit                                                -                (2,650)
   Contributions 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 Series Z preferred stock                                                -                   540
   Redemptions of Series Z preferred stock                                             -                  (540)
   Fees paid on behalf of subsidiaries                                                 -                   (33)
   Dividends on Series Z preferred stock                                               -                    (4)
   Restricted stock issuance                                                          34                     -
   Dividends to TIGI                                                                 (98)                  (49)
   Dividends to minority shareholders                                                (21)                  (11)
                                                                              ----------            ----------
         Net cash provided by (used in) financing activities                        (270)                4,683
                                                                              ----------            ----------
   Net increase (decrease) in cash                                                    (1)                    1
   Cash at beginning of period                                                         1                     -
                                                                              ----------            ----------
   Cash at end of period                                                      $        -            $        1
                                                                              ==========            ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Cash paid during the period for interest                                   $      163            $      100
                                                                              ==========            ==========
   Cash received during the period for taxes                                  $       79            $       10
                                                                              ==========            ==========
</TABLE>

The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.


                                       F-5
<PAGE>   72
                                                                     SCHEDULE II

NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT


1.  GENERAL

    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.) was organized on January 16, 1996. In
    April 1996, TIGI contributed The Travelers Indemnity Company and its
    subsidiaries to TAP. In addition, TAP purchased 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 a purchase price of approximately $4.2 billion
    in cash.

2.  PRINCIPLES OF CONSOLIDATION

    The accompanying financial statements include the accounts of TAP and, on an
    equity basis, its subsidiaries and affiliates and should be read in
    conjunction with the Consolidated Financial Statements and notes thereto.

3.  DEBT

    The annual maturities of the outstanding debt are as follows: $400 million
    in 1999; $500 million in 2001 and $1,277 million after 2002.

4.  SUPPLEMENTARY DISCLOSURE OF NON-CASH FINANCING ACTIVITIES

    In 1996, 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.


                                       F-6
<PAGE>   73
                                  SCHEDULE III

               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

                       Supplementary Insurance Information

                                      1997
                                  (In millions)


<TABLE>
<CAPTION>

Segment            Deferred policy       Claims and         Unearned       Premium         Net             Claims
                   acquisition costs     claim adjust-      premiums       revenue         investment      and claim
                                         ment expense                                      income          adjustment
                                         reserves                                          (a)             expenses
----------------------------------------------------------------------------------------------------------------------
<S>                <C>                   <C>               <C>             <C>             <C>             <C>
Commercial
   Lines               $     309          $    27,356      $   2,519       $   4,308       $  1,695        $   3,631

Personal
   Lines                     192                2,782          1,348           2,917            353            1,853

Corporate
  and Other
  Operations                   -                  186              -               -              3                -
                       ---------          -----------      ---------       ---------       --------        ---------

Consolidated           $     501          $    30,324      $   3,867       $   7,225       $  2,051        $   5,484
                       =========          ===========      =========       =========       ========        =========
</TABLE>


<TABLE>
<CAPTION>
                   Amortization
Segment            of deferred          Other            Premiums
                   policy               operating        written
                   acquisition          expenses
                   costs                (b)
-----------------------------------------------------------------
<S>                <C>                  <C>             <C>
Commercial
   Lines           $     622            $    980        $   4,758

Personal
   Lines                 505                 366            3,074

Corporate
  and Other
  Operations               -                 202                -
                   ---------            --------        ---------

Consolidated       $   1,127            $  1,548        $   7,832
                   =========            ========        =========
</TABLE>


(a) Net investment income for each segment is accounted for separately,
    except for the portion earned on the investment of stockholders' equity
    which is allocated based on assigned capital.

(b) Expense allocations are determined in accordance with prescribed statutory
    accounting practices. These practices make a reasonable allocation of all
    expenses to those product lines with which they are associated.


                                       F-7
<PAGE>   74
                                  SCHEDULE III

               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES


                       Supplementary Insurance Information

                                      1996
                                  (In millions)

<TABLE>
<CAPTION>

Segment              Deferred policy        Claims and          Unearned          Premium        Net               Claims
                     acquisition costs      claim adjust-       premiums          revenue        investment        and claim
                                            ment expense                                         income            adjustment
                                            reserves                                             (a)               expenses
---------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                    <C>                 <C>                <C>           <C>               <C>
Commercial
   Lines                 $    253           $    28,017         $   2,303          $    3,695    $     1,343       $  3,679

Personal
   Lines                      173                 2,952             1,251               2,323            311          1,599

Corporate
  and Other
  Operations                    -                   208                 -                  10              2              4
                         --------           -----------         ---------          ----------    -----------       --------

Consolidated             $    426           $    31,177         $   3,554          $    6,028    $     1,656       $  5,282
                         ========           ===========         =========          ==========    ===========       ========
</TABLE>


<TABLE>
<CAPTION>
                     Amortization
Segment              of deferred        Other        Premiums
                     policy             operating    written
                     acquisition        expenses
                     costs              (b)
--------------------------------------------------------------
<S>                  <C>                <C>          <C>
Commercial
   Lines             $       533        $   1,081    $   3,973

Personal
   Lines                     373              294        2,359

Corporate
  and Other
  Operations                   -              147           10
                     -----------        ---------    ---------

Consolidated         $       906        $   1,522    $   6,342
                     ===========        =========    =========
</TABLE>


(a) Net investment income for each segment is accounted for separately, except
    for the portion earned on the investment of stockholders' equity which is
    allocated based on assigned capital.

(b) Expense allocations are determined in accordance with prescribed statutory
    accounting practices. These practices make a reasonable allocation of all
    expenses to those product lines with which they are associated.


                                       F-8
<PAGE>   75
                                  SCHEDULE III

               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES

                       Supplementary Insurance Information

                                      1995
                                  (In millions)

<TABLE>
<CAPTION>

Segment              Deferred policy        Claims and          Unearned          Premium        Net               Claims
                     acquisition costs      claim adjust-       premiums          revenue        investment        and claim
                                            ment expense                                         income            adjustment
                                            reserves                                             (a)               expenses
--------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                    <C>                 <C>                <C>           <C>               <C>
Commercial
  Lines               $       122           $    13,725         $   1,154         $  2,017       $     548         $  1,853

Personal
   Lines                       80                 1,488               541            1,284             161              957

Corporate
  and Other
  Operations                    -                   247                 -               14               1                7
                      -----------           -----------         ---------         --------       ---------         --------

Consolidated          $       202           $    15,460         $   1,695         $  3,315       $     710         $  2,817
                      ===========           ===========         =========         ========       =========         ========
</TABLE>


<TABLE>
<CAPTION>
                           Amortization
Segment                    of deferred        Other        Premiums
                           policy             operating    written
                           acquisition        expenses
                           costs              (b)
--------------------------------------------------------------------
<S>                        <C>                <C>          <C>
Commercial
  Lines                    $     291          $    502     $   2,309

Personal
   Lines                         221               157         1,298

Corporate
  and Other
  Operations                       -                30            14
                           ---------          --------     ---------

Consolidated               $     512          $    689     $   3,621
                           =========          ========     =========
</TABLE>


(a) Net investment income for each segment is accounted for separately, except
    for the portion earned on the investment of stockholders' equity which is
    allocated based on assigned capital.

(b) Expense allocations are determined in accordance with prescribed statutory
    accounting practices. These practices make a reasonable allocation of all
    expenses to those product lines with which they are associated.


                                       F-9
<PAGE>   76
                                   SCHEDULE VI

               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES


SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (1)

                                    1995-1997

                                  (IN MILLIONS)

<TABLE>
<CAPTION>
                                                      Reserves for
                                                        unpaid         Discount
                                      Deferred          claims            from
           Affiliation                 policy          and claim         reserves                                      Net
              with                   acquisition      adjustment       for unpaid       Unearned        Earned      investment
           registrant                   costs          expenses        claims (2)       premiums       premiums       income
           ----------                   -----          --------        ----------       --------       --------       ------
<S>    <C>                           <C>              <C>              <C>              <C>            <C>          <C>
1997   Consolidated property -
       casualty operations . . .       $    501       $   30,138         $    912       $  3,867       $   7,225      $   2,048


1996   Consolidated  property -
       casualty operations . . .       $    426       $   30,969         $  1,012       $  3,554       $   6,018      $   1,654


1995   Consolidated property -
       casualty operations . . .       $    202       $   15,213         $    528       $  1,695       $   3,301      $     709
</TABLE>

<TABLE>
<CAPTION>
                                      
                                      
                                      
                                      
                                          Claims and
                                         claim adjust-
                                         ment expenses           Amortization
                                      incurred related to:       of deferred         Paid claims
           Affiliation                --------------------          policy            and claim
              with                    Current      Prior         acquisition         adjustment        Premiums
           registrant                   Year         Year           costs              expenses         written
           ----------                   ----         ----           -----              --------         -------
<S>    <C>                             <C>        <C>             <C>                <C>             <C>
1997   Consolidated property -
       casualty operations . . .        $5,730     $  (492)        $  1,127           $ 5,648         $   7,832


1996   Consolidated  property -
       casualty operations . . .        $4,839     $   192         $    906           $ 5,057         $   6,332


1995   Consolidated property -
       casualty operations . . .        $2,903     $  (226)        $    512           $ 2,819         $   3,607
</TABLE>


(1)    Excludes accident and health business.

(2)    See "Discounting" on page 20.


                                      F-10
<PAGE>   77
                                  EXHIBIT INDEX



         EXHIBIT
         NUMBER   DESCRIPTION OF EXHIBIT
         ------   ----------------------

         3.01     Restated Certificate of Incorporation of Travelers Property
                  Casualty Corp. (the "Company"), Certificate of Designations,
                  Powers, Preferences and Rights of 7.5% Redeemable Preferred
                  Stock, Series Z, of the Company, Certificate of Amendment to
                  the Restated Certificate of Incorporation, filed March 7,
                  1997, and Certificate of Amendment to the Restated Certificate
                  of Incorporation, filed April 23, 1997, incorporated by
                  reference to Exhibit 3.01 to the Company's Quarterly Report on
                  Form 10-Q for the fiscal quarter ended March 31, 1997 (File
                  No.1-14328) (the "Company's 3/31/97 10-Q").

         3.02     Restated By-Laws of the Company, effective April 23, 1997,
                  incorporated by reference to Exhibit 3.02 to the Company's
                  3/31/97 10-Q.

         4.01     Intercompany Agreement, dated as of April 2, 1996, between
                  Travelers Group Inc. and the Company, incorporated by
                  reference to Exhibit 4.1 to the Company's Form S-1.

         4.02.1   Shareholders Agreement, dated as of April 2, 1996, by and
                  among the Company, The Travelers Insurance Group Inc., Aetna
                  Life and Casualty Company (now known as Aetna Services, Inc.),
                  J.P. Morgan Capital Corporation, The Trident Partnership L.P.
                  and Fund American Enterprises Holdings, Inc., incorporated by
                  reference to Exhibit 4.2 to the Company's Form S-1.

         4.02.2+  Amendment to Shareholders Agreement, dated June 20, 1997, by
                  and among the Company, Aetna Services, Inc., J.P. Morgan
                  Capital Corporation, The Trident Partnership L.P. and Fund
                  American Enterprises Holdings, Inc.

         
                                  


<PAGE>   78
         EXHIBIT
         NUMBER   DESCRIPTION OF EXHIBIT
         ------   ----------------------

         10.01*   Travelers Property Casualty Corp. Capital Accumulation Plan
                  (as amended through July 23, 1997), incorporated by reference
                  to Exhibit 10.01 to the Company's Quarterly Report on Form
                  10-Q for the fiscal quarter ended September 30, 1997 (File No.
                  1-14328).

         10.02*   Travelers Property Casualty Corp. 1996 Executive Option Plan
                  (as amended through March 7, 1997), incorporated by reference
                  to Exhibit 10.03 to the Company's Annual Report on Form 10-K
                  for the fiscal year ended December 31, 1996 (File No.1-14328)
                  (the "Company's 1996 10-K").

         10.03*   Travelers Property Casualty Corp. Executive Performance
                  Compensation Plan (as amended through March 7, 1997),
                  incorporated by reference to Exhibit 10.04 to the Company's
                  1996 10-K.

         10.04*   Travelers Property Casualty Corp. 1996 Deferred Compensation
                  Plan for Non-Employee Directors (as amended through September
                  25, 1996), incorporated by reference to Exhibit 10.02 to the
                  Company's Quarterly Report on Form 10-Q for the fiscal quarter
                  ended September 30, 1996 (File No.1-14328).

         10.05*   Travelers Group Capital Accumulation Plan (as amended through
                  July 23, 1997), incorporated by reference to Exhibit 10.02 to
                  the Quarterly Report on Form 10-Q of Travelers Group Inc. for
                  the fiscal quarter ended September 30, 1997 (File No. 1-9924)
                  (the "TRV 9/30/97 10-Q").

         10.06.1* Travelers Group Stock Option Plan (as amended and restated as
                  of April 24, 1996), incorporated by reference to Exhibit
                  10.02.1 to the Annual Report on Form 10-K of Travelers Group
                  Inc. for the fiscal year ended December 31, 1996 (File No.
                  1-9924) (the "TRV 1996 10-K").

         10.06.2* Amendment No. 14 to the Travelers Group Stock Option Plan,
                  incorporated by reference to Exhibit 10.01 to the Quarterly
                  Report on Form 10-Q of Travelers Group Inc. for the fiscal
                  quarter ended September 30, 1996 (File No. 1-9924).

         10.06.3* Amendment No. 15 to the Travelers Group Stock Option Plan,
                  incorporated by reference to Exhibit 10.04 to the TRV 9/30/97
                  10-Q. 

                                      


<PAGE>   79
         EXHIBIT
         NUMBER   DESCRIPTION OF EXHIBIT
         ------   ----------------------

         10.07*   Travelers Group 1996 Stock Incentive Plan (as amended through
                  July 23, 1997), incorporated by reference to Exhibit 10.03 to
                  the TRV 9/30/97 10-Q.

         10.08*   Retirement Benefit Equalization Plan of Travelers Group Inc.
                  (as amended and restated as of January 1, 1994), incorporated
                  by reference to Exhibit 10.04 to the TRV 1996 10-K.

         10.09*   The Travelers Corporation Supplemental Benefit Plan, effective
                  December 20, 1992, incorporated by reference to Exhibit 10(d)
                  to the Annual Report on Form 10-K of The Travelers Corporation
                  ("old Travelers") for the fiscal year ended December 31, 1992
                  (File No. 1-5799).

         10.10    TAPC Tax Allocation Agreement, effective as of January 1, 1996
                  between Travelers Group Inc. and the Company, incorporated by
                  reference to Exhibit 10.9 to the Company's Form S-1.

         10.11    Lease for office space at CityPlace, dated March 28, 1996, by
                  and between Aetna Life and Casualty Company and The Travelers
                  Indemnity Company, incorporated by reference to Exhibit 10.10
                  to the Company's Form S-1.

         10.12    Lease for office space in Hartford, Connecticut, dated as of
                  April 2, 1996, by and between The Travelers Insurance Company
                  and The Travelers Indemnity Company, incorporated by reference
                  to Exhibit 10.14 to the Company's 1996 10-K.

         10.13*   Letter Agreement, dated November 17, 1996, between the Company
                  and Stanton F. Long, incorporated by reference to Exhibit
                  10.15 to the Company's 1996 10-K.

         10.14*+  The Travelers Insurance Deferred Compensation Plan (formerly
                  The Travelers Corporation TESIP Restoration and Non-Qualified
                  Savings Plan) (as amended and restated through January 1,
                  1997).

         10.15.1  License Agreement, dated November 28, 1995, by and between
                  Aetna Life and Casualty Company and The Aetna Casualty and
                  Surety Company and The Standard Fire Insurance Company,
                  incorporated by reference to Exhibit 10.7 to the Company's
                  Form S-1.

         10.15.2+ License Agreement Amendment, dated April 2, 1996, by and
                  between Aetna Life and Casualty Company and The Aetna Casualty
                  and Surety Company and The Standard Fire Insurance Company.

         
                                  


<PAGE>   80
         EXHIBIT
         NUMBER   DESCRIPTION OF EXHIBIT
         ------   ----------------------

         11.01+  Computation of Earnings Per Share.

         12.01+   Computation of Ratio of Earnings to Fixed Charges.

         13.01+   Pages 17 through 55 of the 1997 Annual Report to Stockholders
                  of the Company (pagination of exhibit does not correspond to
                  pagination in the 1997 Annual Report to Stockholders).

         21.01+   Subsidiaries of the Registrant.

         23.01+   Consent of KPMG Peat Marwick LLP, Independent Certified Public
                  Accountants.

         23.02+   Consent of KPMG Peat Marwick LLP, Independent Certified Public
                  Accountants.

         24.01+   Powers of Attorney.

         27.01+   Financial Data Schedule.

         99.01    Combined Financial Statements of The Aetna Casualty and Surety
                  Company and The Standard Fire Insurance Company as of December
                  31, 1995 and 1994 and for the years ended December 31, 1995,
                  December 31, 1994 and December 31, 1993, together with the
                  notes thereto and the related reports of Independent
                  Accountants, incorporated by reference to Exhibit 99.01 to the
                  Company's 1996 10-K.


         The total amount of securities authorized pursuant to any instrument
         defining rights of holders of long-term debt of the Company does not
         exceed 10% of the total assets of the Company and its consolidated
         subsidiaries. The Company will furnish copies of any such instrument to
         the Commission upon request.

         The financial statements required by Form 11-K for 1997 for the
         Travelers Group 401(k) Savings Plan will be filed as an exhibit by
         amendment to this Form 10-K pursuant to Rule 15d-21 of the Securities
         Exchange Act of 1934, as amended.

         Copies of any of the exhibits referred to above will be furnished at a
         cost of $.25 per page (although no charge will be made for the 1997
         Annual Report on Form 10-K) to security holders who make written
         request therefor to Corporate Communications, Travelers Property
         Casualty Corp., One Tower Square, Hartford, Connecticut 06183.

-------------------

*        Denotes a management contract or compensatory plan or arrangement
         required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.

+        Filed herewith.