<PAGE>   1
                                                                   Exhibit 13.01


               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES


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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
At and for the Year Ended December 31, (1)                     1998         1997         1996         1995         1994
------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>          <C>          <C>          <C>          <C>
Total revenues                                               $10,451      $ 9,911      $ 8,197      $ 4,569      $ 4,168
                                                           
Net income                                                   $ 1,343      $ 1,236      $   391      $   419      $   188
                                                           
                                                           
Total assets                                                 $51,274      $50,682      $49,779      $24,062      $22,481
Long-term debt                                               $ 1,250      $ 1,249      $ 1,249         --           --
TAP-obligated mandatorily redeemable securities            
   of subsidiary trusts holding solely junior              
   subordinated debt securities of TAP                       $   900      $   900      $   900         --           --
Stockholders' equity                                         $ 9,125      $ 7,777      $ 6,480      $ 3,601      $ 2,581
Stockholders' equity excluding accumulated other           
   changes in equity from nonowner sources                   $ 8,204      $ 7,055      $ 6,195      $ 3,321      $ 3,024
Year-end common shares outstanding (2)                         391.9        393.1        399.6          N/A          N/A
                                                           
Per common share data:                                     
Net income (3, 5)                                            $  3.43      $  3.13      $  1.02      $  1.28      $  0.57
Net income-assuming dilution (4, 5)                          $  3.42      $  3.12      $  1.02      $  1.28      $  0.57
Cash dividends                                               $  0.40      $  0.30      $  0.15          N/A          N/A
Book value                                                   $ 23.28      $ 19.78      $ 16.22          N/A          N/A
Book value excluding accumulated other changes             
   in equity from nonowner sources                           $ 20.93      $ 17.95      $ 15.50          N/A          N/A
------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Includes amounts related to Aetna P&C from April 2, 1996, the date of the
     acquisition.
(2)  In April 1996, in conjunction with the acquisition of Aetna P&C, the
     Company issued common stock through its IPO. See Note 3 of Notes to
     consolidated financial statements.
(3)  Net income per common share is computed by dividing income available to
     common stockholders by the weighted average number of common shares
     outstanding for the period.
(4)  Net income per common share-assuming dilution (diluted EPS) reflects the
     effect of potentially dilutive securities, principally stock-based
     incentive plans.
(5)  For purposes of computing basic and diluted earnings per share for periods
     prior to the IPO, the 328 million shares of common stock issued to TIGI in
     April 1996 were assumed to be outstanding for all reported periods. See
     Note 3 of Notes to consolidated financial statements.

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

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

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

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

On October 8, 1998, Citicorp merged with and into a newly formed wholly-owned
subsidiary of Travelers Group Inc. (Travelers Group) (the Merger), the indirect
owner of approximately 84% of the outstanding common stock of TAP. Following the
Merger, Travelers Group changed its name to Citigroup Inc. (Citigroup).

Upon consummation of the Merger, Citigroup became a bank holding company subject
to the provisions of the Bank Holding Company Act of 1956 (the BHCA). The BHCA
precludes a bank holding company and its affiliates from engaging in certain
activities, generally including insurance underwriting. Under the BHCA in its
current form, Citigroup has two years from the date it became a bank holding
company to comply with all applicable provisions (the BHCA Compliance Period).
The BHCA Compliance Period may be extended, at the discretion of the Federal
Reserve Board, for three additional one-year periods so long as the extension is
not deemed to be detrimental to the public interest.

It is not expected that the restrictions of the BHCA will impede the Company's
existing businesses in any significant respect, although the Company may be
limited in its ability to make certain acquisitions. At this time, the Company
believes that its compliance with applicable laws associated with the Merger
will not have a significant adverse effect on its financial condition or results
of operations.

There is pending federal legislation that would, if enacted, amend the BHCA to
authorize a bank holding company to own certain insurance underwriters. There is
no assurance that such legislation will be enacted. At the expiration of the
BHCA Compliance Period, the Company and Citigroup each will evaluate its
alternatives in order to comply with whatever laws are then applicable.

On April 2, 1996, TAP purchased from Aetna Services, Inc. (Aetna) all of the
outstanding capital stock of Travelers Casualty and Surety Company (formerly The
Aetna Casualty and Surety Company) and The Standard Fire Insurance Company
(collectively, Aetna P&C) for approximately $4.2 billion in cash. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the consolidated financial statements include the results of Aetna
P&C's operations only from the date of acquisition. For additional information
about the financing of the purchase price see Note 3 of Notes to Consolidated
Financial Statements.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
(in millions, except per share data)                        1998        1997          1996
-------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>          <C>
Revenues ...........................................      $10,451      $ 9,911      $ 8,197
-------------------------------------------------------------------------------------------
Net income (1) .....................................      $ 1,343      $ 1,236      $   391
Preferred dividends ................................         --           --              4
-------------------------------------------------------------------------------------------
Net income available to common stockholders ........      $ 1,343      $ 1,236      $   387
===========================================================================================
Net income per share - assuming dilution ...........      $  3.42      $  3.12      $  1.02
===========================================================================================
Weighted average number of common shares outstanding
and common stock equivalents - assuming dilution ...        392.7        395.8        379.8
-------------------------------------------------------------------------------------------
</TABLE>

(1) Net income includes $93 million, $110 million and $12 million of realized
    investment gains in 1998, 1997 and 1996, respectively.

                                       2
<PAGE>   3
Net income was $1.343 billion in 1998, $1.236 billion in 1997 and $391 million
in 1996. Net income included $423 million of net charges related to the
acquisition and integration of Aetna P&C by the Company in 1996. The net
acquisition-related charges included, on an after-tax basis, $318 million in
reserve increases, net of reinsurance, primarily related to cumulative injury
claims other than asbestos, insurance products involving financial guarantees,
reserve strengthening, and assumed reinsurance, $55 million in an additional
asbestos liability pursuant to an existing settlement agreement with a customer
of Aetna P&C, $39 million in charges related to premium collection issues on
loss sensitive programs, specifically large deductible products, a $27 million
provision for uncollectibility of reinsurance recoverables of Aetna P&C
determined by applying the Company's normal guidelines for estimating
collectibility of such accounts, and $23 million in lease and severance costs of
The Travelers Indemnity Company (Travelers Indemnity) related to the
restructuring plan for the acquisition, partially offset by $39 million in
decreases in Personal Lines automobile reserves.

Excluding realized investment gains and the net acquisition-related charges,
operating income was $1.250 billion, $1.126 billion and $802 million in 1998,
1997 and 1996, respectively. The increase in 1998 from 1997 was primarily due to
higher net investment income, lower environmental and cumulative injury incurred
losses and expense reductions, partially offset by higher catastrophe and other
weather-related losses and the difficult pricing environment in Commercial
Lines. The increase in 1997 was due to higher net investment income, lower
catastrophe losses, favorable reserve development in personal auto lines and
expense reductions. The increase in 1997 was also due to the inclusion of the
results of operations of Aetna P&C for twelve months in 1997 and only nine
months in 1996.

Revenues of $10.451 billion in 1998 increased $540 million from 1997. Revenues
of $9.911 billion in 1997 increased $1.714 billion from 1996. The 1998 increase
was primarily attributable to growth in earned premiums, principally in Personal
Lines, and higher net investment income, partially offset by lower fee income
and lower realized investment gains. The 1997 increase was primarily
attributable to the inclusion of Aetna P&C for the entire year compared to only
nine months in 1996 and growth in Personal Lines earned premiums.

Commercial Lines earned premiums increased $217 million to $4.525 billion in
1998, reflecting lower ceded premiums in 1998 compared to 1997 as well as lower
negative premium adjustments related to retrospectively rated policies.
Commercial Lines earned premiums increased $613 million to $4.308 billion in
1997, primarily reflecting the post-acquisition results of operations for the
entire year compared to only nine months in 1996. The increases in Commercial
Lines earned premiums are net of continued decreases resulting from the
Company's selective underwriting and market conditions characterized by
difficult pricing and increased competition. Personal Lines earned premiums of
$3.271 billion in 1998 increased $354 million from 1997. Personal Lines earned
premiums of $2.917 billion in 1997 increased $594 million from $2.323 billion in
1996. These increases in earned premiums reflected growth in sales in target
markets served by independent agents and growth in affinity marketing, joint
marketing arrangements and TRAVELERS SECURE(R). The TRAVELERS SECURE(R) program
markets Personal Lines products through the independent agents of Primerica
Financial Services, a unit of Citigroup. The 1997 increase also reflects lower
ceded premiums due to a change in a reinsurance arrangement in January 1997 and
the post-acquisition results of operations for the entire year compared to only
nine months in 1996.

Net investment income was $2.100 billion in 1998, an increase of $49 million
from 1997, reflecting the higher level of invested assets in 1998, partially
offset by an increase in tax-exempt securities in 1998. Net investment income
was $2.051 billion in 1997, an increase of $395 million from 1996, reflecting
the higher level of invested assets in 1997.

Fee income was $306 million in 1998, a $59 million decrease from 1997. Fee
income was $365 million in 1997, a $27 million decrease from 1996. National
Accounts within Commercial Lines is the primary source of fee income due to its
service fee business. Fee income in both 1998 and 1997 was negatively impacted
by the depopulation of involuntary pools serviced by the Company as the loss
experience of workers' compensation improved and insureds moved to voluntary
markets and the Company's success in lowering workers' compensation losses of
service customers.

                                       3
<PAGE>   4
Claims and expenses of $8.614 billion in 1998 increased $455 million from 1997.
This increase was primarily the result of higher catastrophe and other
weather-related losses and higher claims related to the growth in premiums in
Personal Lines, partially offset by a reduction in general and administrative
expenses. Claims and expenses of $8.159 billion in 1997 increased $449 million
from 1996. The increase was due to the post-acquisition results of operations
for the entire year compared to only nine months in 1996, partially offset by
acquisition-related expense reductions and lower catastrophe losses in 1997.

The Company's effective tax rate was 27%, 29% and 20% in 1998, 1997 and 1996,
respectively. These rates differed from the statutory tax rate in those years
primarily due to municipal bond interest not taxed for federal income tax
purposes. The 1998 effective tax rate was lower than 1997 due to a
proportionately larger amount of tax-exempt income versus pre-tax income in
1998. The 1997 effective tax rate was higher than 1996 due to a proportionately
smaller amount of tax-exempt income versus pre-tax income in 1997.

The statutory and GAAP combined ratios were as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                                                  1998         1997         1996
-----------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>          <C>          <C>
STATUTORY:

     Loss and Loss Adjustment Expense (LAE) ratio...............................  73.6%        72.4%        85.5%
     Underwriting expense ratio.................................................  28.6         29.9         31.3
     Combined ratio before policyholder dividends............................... 102.2        102.3        116.8
     Combined ratio............................................................. 102.7        103.5        117.2
-----------------------------------------------------------------------------------------------------------------
GAAP:
     Loss and LAE ratio.........................................................  73.5%        72.3%        83.6%
     Underwriting expense ratio.................................................  29.1         29.6         33.2
     Combined ratio before policyholder dividends............................... 102.6        101.9        116.8
     Combined ratio............................................................. 103.1        102.6        117.4
-----------------------------------------------------------------------------------------------------------------
</TABLE>


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

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

The 1997 statutory and GAAP combined ratios include an adjustment in Commercial
Lines due to a change to conform the Aetna P&C method with the Travelers
Indemnity and its subsidiaries (Travelers P&C) method of recording certain net
written premiums, and an adjustment in Personal Lines associated with a change
in the quota share reinsurance arrangement. Excluding these adjustments, the
statutory and GAAP combined ratios before policyholder dividends for 1997 would
have been 102.5% and 102.7%, respectively. The decrease in the 1998 statutory
and GAAP combined ratios compared to the 1997 statutory and GAAP combined ratios
before policyholder dividends excluding these adjustments was due to continued
productivity improvements and expense reductions, partially offset by higher
catastrophe and other weather-related losses.

                                       4
<PAGE>   5
The decrease in the 1997 statutory and GAAP combined ratios excluding the
adjustments noted above compared to 1996 was primarily attributable to charges
taken in 1996 related to the acquisition and integration of Aetna P&C. Excluding
these amounts, the statutory and GAAP combined ratios before policyholder
dividends for 1996 would have been 106.3% and 107.0%, respectively. The decrease
in the 1997 statutory and GAAP combined ratios excluding the adjustments noted
above compared to the 1996 statutory and GAAP combined ratios excluding
acquisition-related charges was due to lower catastrophe losses, favorable prior
year reserve development in personal auto lines and expense reductions,
partially offset by the inclusion in 1997 of Aetna P&C's results for the entire
year compared to only nine months in 1996. Aetna P&C historically has had a
higher underwriting expense ratio, partially offset by a lower loss and LAE
ratio, which reflected the mix of business including the favorable effect of the
lower loss and LAE ratio of the Bond Specialty business.

RESULTS OF OPERATIONS BY SEGMENT

<TABLE>
<CAPTION>
COMMERCIAL LINES
(in millions)                                                                1998           1997            1996
-----------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>            <C>             <C>
Revenues................................................................   $ 6,699        $ 6,557         $ 5,497
Net income (1)..........................................................   $ 1,018        $   946         $   197
-----------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Commercial Lines net income includes $76 million, $100 million and $17
    million of realized investment gains in 1998, 1997 and 1996, respectively.

Net income was $1.018 billion in 1998, $946 million in 1997, and $197 million in
1996. Net income in 1996 included $453 million of after-tax charges related to
the acquisition of Aetna P&C. These acquisition-related charges included $318
million in reserve increases, net of reinsurance, principally for cumulative
injury other than asbestos, insurance products involving financial guarantees,
reserve strengthening and assumed reinsurance, a $55 million provision for an
additional asbestos liability related to an existing settlement agreement with a
customer of Aetna P&C, a $39 million charge related to premium collection issues
on loss sensitive programs, specifically large deductible products, a $22
million provision for uncollectibility of reinsurance recoverables of Aetna P&C
determined by applying the Company's normal guidelines for estimating
collectibility of such accounts, and $19 million in lease and severance costs
related to the restructuring plan for the acquisition.

Commercial Lines operating income, which excludes realized investment gains in
all years and the acquisition-related charges in 1996, was $942 million, $846
million and $633 million in 1998, 1997 and 1996, respectively. The 1998 increase
compared to 1997 was due to increased after-tax net investment income, continued
expense reductions and lower environmental and cumulative injury incurred
losses, partially offset by increased losses from catastrophes and other
weather-related events. The 1997 increase compared to 1996 was due to higher net
investment income, lower catastrophe losses, expense savings associated with the
acquisition and integration of Aetna P&C and the post-acquisition results of
operations for the entire year compared to only nine months in 1996. Operating
results also reflected market conditions characterized by difficult pricing and
increased competition. The impact of this trend in market conditions on 1998 and
1997 operating results was offset by the factors previously indicated as well as
a continued disciplined approach to underwriting and risk management.

Revenues of $6.699 billion in 1998 increased $142 million from 1997. Revenues of
$6.557 billion in 1997 increased $1.060 billion from 1996. The 1998 increase
reflected higher earned premiums and net investment income, partially offset by
declines in fee income and realized investment gains. The 1997 increase was
primarily attributed to the inclusion of Aetna P&C for the entire year compared
to only nine months in 1996.

                                       5
<PAGE>   6
Commercial Lines net written premiums in 1998 totaled $4.614 billion, down $143
million from $4.757 billion in 1997, reflecting a $142 million adjustment in the
first quarter of 1997 to net written premiums due to the change to conform the
Aetna P&C method of recording certain net written premiums to the method
employed by Travelers P&C. Without this adjustment, net written premiums were
level with the prior year reflecting the highly competitive marketplace and the
Company's continued disciplined approach to underwriting and risk management.
Commercial Lines net written premiums totaled $4.757 billion in 1997, up $695
million from $4.062 billion in 1996 (excluding an adjustment associated with a
reinsurance transaction), reflecting the inclusion in 1997 of Aetna P&C for the
entire year compared to only nine months in 1996 and the $142 million adjustment
noted above. This increase was offset in part by the highly competitive
conditions in the marketplace and the Company's continued disciplined approach
to underwriting and risk management.

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

Fee income was $306 million, $365 million and $392 million in 1998, 1997 and
1996, respectively. The decreases in fee income were the result of the
depopulation of involuntary pools serviced by the Company as the loss experience
of workers' compensation improved and insureds moved to voluntary markets and
the Company's continued success in lowering workers' compensation losses of
service customers.

National Accounts works with national brokers and regional agents providing
insurance coverages and services, primarily workers' compensation, mainly to
large corporations. National Accounts also includes the alternative market
business, which sells claims and policy management services to workers'
compensation and automobile assigned risk plans and to self-insurance pools
throughout the United States. National Accounts net written premiums were $625
million in 1998 compared to $657 million in 1997. This decrease was primarily
due to a decrease in the Company's level of involuntary pool participation, the
result of pricing declines due to the highly competitive marketplace, and the
Company's continued disciplined approach to underwriting and risk management. On
a combined total basis including Aetna P&C (for periods prior to April 2, 1996
for comparative purposes only), National Accounts net written premiums of $657
million in 1997 decreased $195 million from 1996. The 1997 decrease was
primarily due to a decrease in the Company's level of involuntary pool
participation, the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management.

National Accounts new business and business retention ratio were virtually the
same in 1998 as they were in 1997. National Accounts experienced an increase in
claim service-only business as well as favorable results from continued product
development efforts, especially in workers' compensation managed care programs.
National Accounts new business in 1997 was significantly higher than in 1996
reflecting continued product development efforts, especially in workers'
compensation managed care programs. National Accounts business retention ratio
was also significantly higher in 1997 than in 1996, reflecting the Company's
continued focus on retaining profitable business.

                                       6
<PAGE>   7
Commercial Accounts serves mid-size businesses for casualty products and both
large and mid-size businesses for property products through a network of
independent agents and brokers. Commercial Accounts net written premiums were
$1.800 billion in 1998 compared to $1.986 billion in 1997. This decrease
reflected a $127 million adjustment in the first quarter of 1997 to net written
premiums due to the change to conform the Aetna P&C method with the Travelers
P&C method of recording certain net written premiums. Excluding this adjustment,
net written premiums decreased $59 million reflecting pricing declines due to
the highly competitive marketplace and the Company's continued disciplined
approach to underwriting and risk management. On a combined total basis
including Aetna P&C (for periods prior to April 2, 1996 for comparative purposes
only), Commercial Accounts net written premiums of $1.986 billion in 1997 were
$261 million above 1996 premium levels. The increase in 1997 reflected a $127
million adjustment due to the change to conform the Aetna P&C method with the
Travelers P&C method of recording certain net written premiums and the continued
growth through programs designed to leverage underwriting experience in specific
industries, partially offset by the highly competitive marketplace and the
Company's continued disciplined approach to underwriting and risk management.

For 1998, new premium business in Commercial Accounts significantly declined
compared to 1997, reflecting the Company's focus on obtaining new accounts only
where it can maintain its selective underwriting policy. The Commercial Accounts
business retention ratio remained strong in 1998 and was virtually the same as
1997, reflecting the Company's focus on retaining profitable business. In 1997,
new business in Commercial Accounts significantly improved compared to 1996,
reflecting continued growth in programs designed to leverage underwriting
expertise in specific industries. The Commercial Accounts business retention
ratio in 1997 significantly improved compared to 1996. Commercial Accounts
continues to focus on the retention of existing profitable business while
maintaining its product pricing standards and its selective underwriting policy.

Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums of $1.494 billion in 1998 increased $62
million from $1.432 billion in 1997. The 1997 amount included a first quarter
increase of $15 million to net written premiums due to the change to conform the
Aetna P&C method with the Travelers P&C method of recording certain net written
premiums. Excluding this adjustment, the increase in Select Accounts net written
premiums reflected lower ceded premiums, partially offset by the highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management. On a combined total basis including Aetna P&C
(for periods prior to April 2, 1996 for comparative purposes only), Select
Accounts net written premiums of $1.432 billion for 1997 were $20 million higher
than 1996. This increase reflected a $15 million adjustment due to the change to
conform the Aetna P&C method with the Travelers P&C method of recording certain
net written premiums and the continued benefit from the broader industry and
product line expertise of the combined company, partially offset by the highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management.

New premium business in Select Accounts was moderately lower in 1998 compared to
1997 reflecting the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management. Select Accounts
business retention ratio remained strong in 1998 and was virtually the same as
1997. New premium business in Select Accounts was moderately higher in 1997 than
in 1996 reflecting an increase due to the acquisition of Aetna P&C, partially
offset by a decrease due to the competitive marketplace. The Select Accounts
business retention ratio remained strong in 1997 and was moderately higher than
in 1996, reflecting the Company's focus on retaining profitable business.

Specialty Accounts markets products to national, midsize and small customers and
distributes them through both wholesale brokers and retail agents and brokers
throughout the United States. Specialty Accounts net written premiums were $695
million in 1998 as compared to $682 million in 1997. This increase reflects
strong production in excess and surplus lines, partially offset by a highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management. On a combined total basis including Aetna P&C
(for periods prior to April 2, 1996 for comparative purposes only), Specialty
Accounts net written premiums of $682 million in 1997 were $3 million higher
than 1996. The 1997 increase compared to 1996 was due to increased writings of
its excess and surplus lines business, partially offset by lower directors' and
officers' liability insurance writings due to the termination of an exclusive
arrangement with a managing general agent.

                                       7
<PAGE>   8
Commercial Lines claims and expenses of $5.327 billion in 1998 increased $94
million from 1997, and decreased $59 million in 1997 compared to 1996. The 1998
increase was primarily attributable to higher catastrophe and other
weather-related losses, partially offset by lower environmental and cumulative
injury incurred losses and continued expense reductions. The 1997 decrease was
primarily attributable to the net acquisition-related charges of $697 million
associated with the acquisition of Aetna P&C in 1996, expense savings in 1997
and cost efficiencies in operations and in competitive workers' compensation
managed care delivery programs, mostly offset by the inclusion in 1997 of Aetna
P&C for the entire year compared to only nine months in 1996.

Catastrophe losses, net of tax and reinsurance, were $25 million, $5 million and
$31 million in 1998, 1997 and 1996, respectively. The 1998 catastrophe losses
were primarily due to Hurricane Georges in the third quarter and tornadoes in
Nashville, Tennessee in the second quarter. The 1997 catastrophe losses were
primarily due to tornadoes in the Midwest in the first quarter. Catastrophe
losses in 1996 were primarily due to Hurricane Fran and December storms on the
West Coast.

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

<TABLE>
<CAPTION>
                                                                              1998             1997              1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>              <C>               <C>
STATUTORY:
     Loss and LAE ratio...................................................    78.5%            78.4%             96.2%
     Underwriting expense ratio...........................................    29.7             30.6              32.7
     Combined ratio before policyholder dividends.........................   108.2            109.0             128.9
     Combined ratio.......................................................   109.1            111.0             129.6
----------------------------------------------------------------------------------------------------------------------
GAAP:
     Loss and LAE ratio...................................................    78.4%            78.3%             92.8%
     Underwriting expense ratio...........................................    31.1             30.4              36.1
     Combined ratio before policyholder dividends.........................   109.5            108.7             128.9
     Combined ratio.......................................................   110.4            109.9             129.9
----------------------------------------------------------------------------------------------------------------------
</TABLE>


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

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

The 1997 statutory and GAAP combined ratios for Commercial Lines include an
adjustment due to a change to conform the Aetna P&C method with the Travelers
P&C method of recording certain net written premiums. Excluding this adjustment,
the statutory and GAAP combined ratios before policyholder dividends for 1997
would have been 109.5% and 109.6%, respectively. The decrease in the 1998
statutory and GAAP combined ratios before policyholder dividends compared to the
1997 statutory and GAAP combined ratios before policyholder dividends excluding
this adjustment was due to continued expense reductions and lower environmental
and cumulative injury incurred losses, partially offset by higher catastrophe
and other weather-related losses and lower fee income.

                                       8
<PAGE>   9
The decrease in the 1997 statutory and GAAP combined ratios, excluding the
adjustment to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums, compared to 1996 were primarily
attributable to the 1996 charges related to the acquisition and integration of
Aetna P&C. Excluding these amounts, the statutory and GAAP combined ratios
before policyholder dividends for 1996 would have been 110.0% and 111.3%,
respectively. The decrease in the 1997 statutory and GAAP combined ratios,
excluding the adjustment to conform the Aetna P&C method with the Travelers P&C
method of recording certain net written premiums, compared to the 1996 statutory
and GAAP combined ratios, excluding acquisition-related charges, was due to
lower catastrophe losses and reduced expenses, partially offset by the
post-acquisition results of operations for the entire year compared to only nine
months in 1996. Aetna P&C has historically had a higher underwriting expense
ratio, partially offset by a lower loss ratio, which reflected the mix of
business including the favorable effect of the lower loss ratio of the Bond
Specialty business.

<TABLE>
<CAPTION>
PERSONAL LINES
(in millions)                                                               1998            1997            1996
-----------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>            <C>             <C>
Revenues................................................................   $ 3,743        $ 3,341         $ 2,685
Net income (1)..........................................................   $   437        $   413         $   282
-----------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Personal Lines net income includes $17 million and $10 million of realized
    investment gains in 1998 and 1997, respectively, and $5 million of realized
    investment losses in 1996.

Net income of $437 million in 1998 increased $24 million from $413 million in
1997, which increased $131 million from $282 million in 1996. Net income in 1996
included $30 million of net acquisition-related benefits.

Personal Lines operating income, which excludes realized investment gains and
losses in all years and the net acquisition-related benefits in 1996, was $420
million, $403 million and $257 million in 1998, 1997 and 1996, respectively. The
1998 increase was primarily due to higher net investment income and higher
profit from increased production, partially offset by higher catastrophe losses
and a decrease in favorable prior year reserve development. The 1997 increase
primarily reflected the inclusion in 1997 of Aetna P&C for the entire year
compared to only nine months in 1996, lower catastrophe losses, an increase in
favorable prior year reserve development of approximately $40 million primarily
in the automobile bodily injury line and production-related growth, partially
offset by investments in service centers and market expansions.

Revenues were $3.743 billion in 1998 compared to $3.341 billion in 1997 and
$2.685 billion in 1996. Both the 1998 and 1997 increases, compared to 1997 and
1996, respectively, reflected growth in premiums in all distribution channels
and higher net investment income. In addition, the 1997 increase compared to
1996 was partially attributable to lower ceded premiums due to a change in a
reinsurance arrangement in January 1997. Personal Lines had approximately 5.1
million, 4.6 million and 4.4 million policies in force at December 31, 1998,
1997 and 1996, respectively.

On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Personal Lines net written premiums in 1998
totaled $3.490 billion compared to $3.074 billion in 1997 and $2.675 billion in
1996. The increases in 1998 and 1997 primarily reflected growth in sales in
target markets served by independent agents and growth in affinity marketing,
joint marketing arrangements and TRAVELERS SECURE(R). In addition, the 1997
increase compared to 1996 was partially attributable to lower ceded premiums due
to a change in a reinsurance arrangement in January 1997. The growth in premiums
from the independent agent distribution channel has been primarily due to
pursuing transfers of books of business to the Company within certain
independent insurance agencies. Frequently, Personal Lines will pay these
agencies an incentive to cover their expenses related to the transfer and
include a competitive inducement to move the book. Many independent agencies are
consolidating their business to a smaller number of insurance carriers resulting
in transfers of business to their preferred carriers.

                                       9
<PAGE>   10
Personal Lines claims and expenses of $3.104 billion in 1998 increased $380
million from 1997. This increase was primarily attributable to higher
production-related claims and expenses associated with the growth in premiums
and higher catastrophe losses. Claims and expenses of $2.724 billion in 1997
increased $457 million from 1996. This increase was primarily attributable to
higher production, partially offset by lower catastrophe losses and favorable
prior year reserve development in the automobile bodily injury line in 1997. The
increase also reflects the post-acquisition results of operations for the entire
year compared to only nine months in 1996.

Included in 1998 are after-tax catastrophe losses, net of reinsurance, of $44
million compared to $10 million in 1997 and $58 million in 1996. Catastrophe
losses in 1998 were primarily due to Hurricanes Bonnie and Georges, severe first
quarter winter storms and second and third quarter hail and wind storms.
Catastrophe losses in 1996 were primarily due to Hurricane Fran, severe first
quarter winter storms and second quarter hail and wind storms.

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

<TABLE>
<CAPTION>
                                                                              1998             1997              1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>              <C>               <C>
STATUTORY:
     Loss and LAE ratio....................................................   66.7%            63.5%             68.7%
     Underwriting expense ratio............................................   27.2             28.7              28.9
     Combined ratio........................................................   93.9             92.2              97.6
----------------------------------------------------------------------------------------------------------------------
GAAP:
     Loss and LAE ratio....................................................   66.7%            63.5%             68.8%
     Underwriting expense ratio............................................   26.5             28.3              28.3
     Combined ratio........................................................   93.2             91.8              97.1
----------------------------------------------------------------------------------------------------------------------
</TABLE>


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

The 1997 statutory and GAAP combined ratios for Personal Lines include an
adjustment associated with a change in the quota share reinsurance arrangement.
Excluding this adjustment, the 1997 statutory and GAAP combined ratios would
have been 92.1% and 92.5%, respectively. The increase in the 1998 statutory and
GAAP combined ratios compared to the 1997 statutory and GAAP combined ratios
excluding this adjustment was primarily due to higher catastrophe and other
weather-related losses and a decrease in favorable prior year reserve
development, partially offset by a decrease in the underwriting expense ratio
due to a lower commission expense ratio associated with the new distribution
channels. The 1996 statutory and GAAP combined ratios for Personal Lines
included a benefit resulting from the Company's review of reserves associated
with the acquisition of Aetna P&C. Excluding this item, the 1996 statutory and
GAAP combined ratios were 100.1% and 99.7%, respectively. The decrease in the
1997 statutory and GAAP combined ratios, excluding the adjustment associated
with a change in the quota share reinsurance arrangement, compared to the 1996
statutory and GAAP combined ratios, excluding the benefit associated with the
acquisition of Aetna P&C, was due to lower catastrophe losses and favorable
prior year reserve development, primarily in the automobile bodily injury line.

<TABLE>
<CAPTION>
OTHER REVENUES AND NET LOSS
(in millions)                                                                1998            1997            1996
------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>             <C>             <C>
Revenues................................................................    $    9          $   13          $  15
Net loss................................................................    $ (112)         $ (123)         $ (88)
------------------------------------------------------------------------------------------------------------------
</TABLE>

The primary component of net loss for 1998, 1997 and 1996 was after-tax interest
expense of $105 million, $106 million and $77 million, respectively, reflecting
financing costs associated with the acquisition of Aetna P&C.

                                       10
<PAGE>   11
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. At December 31, 1998, approximately 19% of
the net environmental loss reserve (i.e., approximately $155 million) consists
of case reserve for resolved claims. The balance, approximately 81% of the net
aggregate reserve (i.e., approximately $677 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 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 appropriate indemnities and
hold harmless provisions to protect the Company. The Company's general purpose
in executing such agreements is to reduce its potential environmental exposure
and eliminate both the risks presented by coverage litigation with the insured
and the cost of such litigation.

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

                                       11
<PAGE>   12
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, vary significantly and are dependent upon a
number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and the
Company to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, the Company cannot provide a meaningful average of the
duration of an environmental claim. However, based upon the Company's experience
in resolving such claims, the duration may vary from months to several years.

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

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

As it pertains to environmental claims brought by individual claimants and
tendered on Aetna P&C policies, the Company establishes claim files on a per
insured, per site basis due to current claim system limitations. For example, if
one hundred claimants file a lawsuit against five policyholders alleging bodily
injury and property damage as a result of the discharge of wastes or pollutants,
five claims would be established for all the bodily injury claims and five
claims would be established for all of the property damage claims.

As of December 31, 1998, calculated as described above, the Company had
approximately 43,400 pending environmental-related claims tendered by 1,185
active policyholders. Of the total pending environmental-related claims, 31,100
claims relate to Travelers P&C policies tendered by 470 policyholders and 12,300
claims relate to Aetna P&C policies tendered by 810 policyholders. Approximately
95 of these Aetna P&C policyholders are also included in the 470 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 allegedly by the
policyholder.

                                       12
<PAGE>   13
The following table displays activity for environmental losses and loss expenses
and reserves for 1998, 1997 and 1996.

<TABLE>
<CAPTION>
ENVIRONMENTAL LOSSES
(in millions)                                                              1998          1997            1996
--------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>           <C>            <C>
Beginning reserves:
   Direct............................................................     $1,193        $1,369         $  454
   Ceded.............................................................        (74)         (127)           (50)
--------------------------------------------------------------------------------------------------------------
     Net.............................................................      1,119         1,242            404
                                                                          
Acquisition of Aetna P&C:                                                 
   Direct............................................................          -             -            968
   Ceded.............................................................          -             -            (39)
                                                                          
Incurred losses and loss expenses:                                        
   Direct............................................................        123            79            114
   Ceded.............................................................        (73)          (14)           (52)
                                                                          
Losses paid:                                                              
   Direct ...........................................................        388           271            167
   Ceded.............................................................        (51)          (67)           (14)
                                                                          
Other:                                                                    
   Direct............................................................          -            16              -
   Ceded.............................................................          -             -              -
--------------------------------------------------------------------------------------------------------------
Ending reserves:                                                          
   Direct............................................................        928         1,193          1,369
   Ceded.............................................................        (96)          (74)          (127)
--------------------------------------------------------------------------------------------------------------
     Net.............................................................     $  832        $1,119         $1,242
==============================================================================================================
</TABLE>


In the above table, "Other" represents reallocation of certain general liability
reserves to environmental reserves in 1997.

As indicated by the preceding table, the Company experienced in 1998 an increase
in paid activity for environmental losses over the previous two years. As
anticipated, this paid activity resulted in a significant reduction in the
number of coverage litigation disputes pending at year end 1998 as well as a
further reduction in the number of policyholders with active environmental
claims.

As of December 31, 1998, the number of policyholders with pending coverage
litigation disputes pertaining to environmental claims was 404, approximately
24% less than the number pending as of December 31, 1997. The Company generally
has been successful in resolving its coverage litigation disputes 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, 1998, the Company, for approximately $1.44 billion, has
resolved the environmental liabilities presented by 4,475 of the 5,660
policyholders who have tendered environmental claims to the Company. This
resolution comprises 79% of the policyholders who have tendered such claims. The
Company has reserves of approximately $572 million included in its bulk reserve
relating to the remaining 1,185 policyholders (21% of the total) with unresolved
environmental claims, as well as for any other policyholder that may tender an
environmental claim in the future.

                                       13
<PAGE>   14
ASBESTOS CLAIMS
In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. The Company continues to receive
asbestos claims alleging insureds' liability from claimants' asbestos-related
injuries. These claims, when submitted, rarely indicate the monetary amount
being sought by the claimant from the insured and the Company does not keep
track of the monetary amount being sought in those few claims that indicated
such a monetary amount. Originally the cases involved mainly plant workers and
traditional asbestos manufacturers and distributors. However, in the mid-1980s,
a new group of plaintiffs, whose exposure to asbestos was less direct and whose
injuries were often speculative, began to file lawsuits in increasing numbers
against the traditional defendants as well as peripheral defendants who had
produced products that may have contained small amounts of some form of
encapsulated asbestos. These claims continue to arise and on an individual basis
generally involve smaller companies with smaller limits of potential coverage.
Also, there has emerged a group of non-product claims by plaintiffs, mostly
independent labor union workers, mainly against companies, alleging exposure to
asbestos while working at these companies' premises. The Company continues to
receive this type of asbestos claim.

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

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

At December 31, 1998, approximately 21% of the net aggregate reserve (i.e.,
approximately $210 million) is for pending asbestos claims. The balance,
approximately 79% (i.e., approximately $776 million) of the net asbestos
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.

                                       14
<PAGE>   15
In general, the Company posts case reserves for pending asbestos claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for asbestos losses and loss expenses and reserves for 1998,
1997 and 1996.

<TABLE>
<CAPTION>
ASBESTOS LOSSES
(in millions)                                                              1998          1997            1996
--------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>           <C>            <C>
Beginning reserves:
   Direct.............................................................    $1,363        $1,443         $  695
   Ceded..............................................................      (249)         (370)          (293)
--------------------------------------------------------------------------------------------------------------
     Net..............................................................     1,114         1,073            402
                                                                          
Acquisition of Aetna P&C:                                                 
   Direct.............................................................         -             -            801
   Ceded..............................................................         -             -           (121)
                                                                          
Incurred losses and loss expenses:                                        
   Direct.............................................................       135            87            120
   Ceded..............................................................       (69)          (18)           (35)
                                                                          
Losses paid:                                                              
   Direct ............................................................       246           174            173
   Ceded..............................................................       (52)         (140)           (79)
                                                                          
Other:                                                                    
   Direct.............................................................         -             7              -
   Ceded..............................................................         -            (1)             -
--------------------------------------------------------------------------------------------------------------
Ending reserves:                                                          
   Direct.............................................................     1,252         1,363          1,443
   Ceded..............................................................      (266)         (249)          (370)
--------------------------------------------------------------------------------------------------------------
     Net..............................................................    $  986        $1,114         $1,073
==============================================================================================================
</TABLE>
                                                                          
In the above table, "Other" represents reallocation of certain reserves to
asbestos reserves in 1997.

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

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

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

                                       15
<PAGE>   16
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
relatively unchanged.

As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1998 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 as well as changes in
legislation applicable to such claims. Because of these future unknowns,
additional liabilities may arise for amounts in excess of the current reserves.
These additional amounts, or a range of these additional amounts, cannot now be
reasonably estimated, and could result in a liability exceeding reserves by an
amount that would be material to the Company's operating results in a future
period. However, the Company believes that it is not likely that these claims
will have a material adverse effect on the Company's financial condition or
liquidity.

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

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

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

                                       16
<PAGE>   17
Prior to the acquisition, Aetna P&C did not distinguish CIOTA from other general
liability claims or treat CIOTA claims as a special class of claims. In
addition, there were substantial differences in claim approach and resolution
between the Company and Aetna P&C regarding CIOTA claims. During the second
quarter of 1996, the Company completed its review of Aetna P&C's exposure to
CIOTA claims in order to determine an appropriate level of reserves using the
Company's approach as described above. Based on the results of that review, the
Company's general liability insurance reserves were increased by $360 million,
net of reinsurance ($234 million after tax).

At December 31, 1998, approximately 17% of the net aggregate reserve (i.e.,
approximately $163 million) is for pending CIOTA claims. The balance,
approximately 83% (i.e., approximately $791 million) of the net CIOTA reserve,
represents incurred but not reported losses for which the Company has not
received any specific claims.

In general, the Company posts case reserves for pending CIOTA claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for CIOTA losses and loss expenses and reserves for 1998, 1997
and 1996.

<TABLE>
<CAPTION>
CIOTA LOSSES
(in millions)                                                              1998          1997           1996
--------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>           <C>            <C>
Beginning reserves:
   Direct.............................................................    $1,520        $1,560         $  374
   Ceded..............................................................      (432)         (446)             -
--------------------------------------------------------------------------------------------------------------
                                                                          
     Net..............................................................     1,088         1,114            374
                                                                          
Acquisition of Aetna P&C:                                                 
   Direct.............................................................         -             -            709
   Ceded..............................................................         -             -           (293)
                                                                          
Incurred losses and loss expenses:                                        
   Direct.............................................................       (31)           32            565
   Ceded..............................................................        29            (6)          (155)

Losses paid:                                                              
   Direct ............................................................       143            72             88
   Ceded..............................................................       (11)          (20)            (2)
--------------------------------------------------------------------------------------------------------------

Ending reserves:                                                          
   Direct.............................................................     1,346         1,520          1,560
   Ceded..............................................................      (392)         (432)          (446)
--------------------------------------------------------------------------------------------------------------
     Net..............................................................    $  954        $1,088         $1,114
==============================================================================================================
</TABLE>

                                                                       
INVESTMENT PORTFOLIO
At December 31, 1998, the carrying value of the Company's investment portfolio
was $31.9 billion, representing 62% of total assets of $51.3 billion. The
average yield (excluding realized and unrealized investment gains) was 7.4%,
7.4% and 7.0% for the years ended December 31, 1998, 1997 and 1996,
respectively. The after-tax average yield (excluding realized and unrealized
investment gains) was 5.2%, 5.0% and 4.9% for the years ended December 31, 1998,
1997 and 1996, respectively. Because the primary purpose of the investment
portfolio is to fund future claims payments, the Company employs a conservative
investment philosophy. The Company's fixed maturity portfolio at December 31,
1998 totaled $28.0 billion, comprised of $25.9 billion of publicly traded fixed
maturities and $2.1 billion of private fixed maturities. The weighted average
quality ratings of the Company's publicly traded fixed maturity portfolio and
private fixed maturity portfolio at December 31, 1998 were Aa2 and A3,
respectively. Included in the fixed maturity portfolio at such date was
approximately $1.2 billion of below investment grade securities. The average
duration of the fixed maturity portfolio, including short-term investments, was
5.4 years at such date.

                                       17
<PAGE>   18
The following table sets forth the Company's combined fixed maturity investment
portfolio classified by Moody's Investor's Service Inc. ratings as of December
31, 1998:

<TABLE>
<CAPTION>
                                                                                                           PERCENT OF
(in millions)                                                                 CARRYING VALUE          TOTAL CARRYING VALUE
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                     <C> 
QUALITY RATING:
   Aaa.....................................................................   $    13,220                    47.2%
   Aa......................................................................         5,508                    19.7
   A.......................................................................         4,926                    17.6
   Baa.....................................................................         3,161                    11.3
--------------------------------------------------------------------------------------------------------------------------
   Total investment grade..................................................        26,815                    95.8
   Non-investment grade....................................................         1,162                     4.2
--------------------------------------------------------------------------------------------------------------------------
Total fixed maturity investments...........................................   $    27,977                   100.0%
==========================================================================================================================
</TABLE>

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

At December 31, 1998, the Company held CMOs with a market value of $2.3 billion.
Approximately 69% of CMO holdings were fully collateralized by GNMA, FNMA or
FHLMC securities at such date, and the balance were fully collateralized by
portfolios of individual mortgage loans. In addition, the Company held $2.1
billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
December 31, 1998. Virtually all of these securities are rated Aaa.

DISCLOSURES ABOUT MARKET RISK

Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 1998.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.

The carrying value of the Company's investment portfolio as of December 31, 1998
and 1997 was $31.9 billion and $31.0 billion, respectively, of which 88% was
invested in fixed maturity securities at both dates. The primary market risk to
the investment portfolio is interest rate risk associated with investments in
fixed maturity securities. The Company's exposure to equity price risk and
foreign exchange risk is not significant. The Company has no direct commodity
risk.

For fixed maturity securities, short-term liquidity needs and the potential
liquidity needs of the business are key factors in managing the portfolio. The
portfolio duration relative to the liabilities' duration is primarily managed
through cash market transactions. For additional information regarding the
Company's objectives and strategies pertaining to the investment portfolio, see
"Investment Portfolio" above.

                                       18
<PAGE>   19
For the Company's investment portfolio, there were no significant changes in the
Company's primary market risk exposures or in how those exposures are managed
compared to the year ended December 31, 1997. The Company does not currently
anticipate significant changes in its primary market risk exposures or in how
those exposures are managed in future reporting periods based upon what is known
or expected to be in effect in future reporting periods.

The primary market risk for all of the Company's long-term debt and mandatorily
redeemable securities of subsidiary trusts (trust securities) is interest rate
risk at the time of refinancing. All of the Company's fixed rate debt is
non-redeemable and the fixed rate trust securities are not redeemable until
April 30, 2001 at the earliest. The Company will continue to monitor the
interest rate environment and to evaluate refinancing opportunities as the
maturity/redemption date approaches. For additional information regarding the
Company's long-term debt and trust securities see Notes 8 and 10 of Notes to
Consolidated Financial Statements and "Liquidity and Capital Resources" below.

Sensitivity Analysis
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near-term" means a period of time going forward up to one year from the
date of the consolidated financial statements. Actual results may differ from
the hypothetical change in market rates assumed in this disclosure, especially
since this sensitivity analysis does not reflect the results of any actions that
would be taken by the Company to mitigate such hypothetical losses in fair
value.

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

For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and interest
rate reset features. Duration on tax exempt securities is adjusted for the fact
that the yield on such securities is less sensitive to changes in interest rates
compared to Treasury securities. Invested asset portfolio durations are
calculated on a market value weighted basis, including accrued investment
income, using holdings as of December 31, 1998 and 1997.

For long-term debt and fixed rate trust securities, the change in fair value is
determined by calculating hypothetical December 31, 1998 and 1997 ending prices
based on yields adjusted to reflect a 100 basis point change, comparing such
hypothetical ending prices to actual ending prices, and multiplying the
difference by the par or securities outstanding.

The sensitivity analysis model used by the Company produces a loss in fair value
of market sensitive instruments of $1.4 billion and $1.3 billion based on a 100
basis point increase in interest rates as of December 31, 1998 and 1997,
respectively. This loss value only reflects the impact of an interest rate
increase on the fair value of the Company's financial instruments, which
constitute approximately 60% of total assets and approximately 5% of total
liabilities as of December 31, 1998 and approximately 59% of total assets and
approximately 5% of total liabilities as of December 31, 1997. As a result, the
loss value excludes a significant portion of the Company's consolidated balance
sheet which would materially mitigate the impact of the loss in fair value
associated with a 100 basis point increase in interest rates.

                                       19
<PAGE>   20
For example, certain non-financial instruments, primarily insurance accounts for
which the fixed maturity portfolio's primary purpose is to fund future claims
payments, are not reflected in the development of the above loss value. These
non-financial instruments include premium balances receivable, reinsurance
recoverables, claims and claim adjustment expense reserves and unearned premium
reserves. The Company's sensitivity model also calculates a potential loss in
fair value with the inclusion of these non-financial instruments. For
non-financial instruments, changes in fair value are determined by calculating
the present value of the estimated cash flows associated with such instruments
using risk-free rates as of December 31, 1998 and 1997, calculating the
resulting duration, then using that duration to determine the change in value
for a 100 basis point change.

Based on the sensitivity analysis model used by the Company, the loss in fair
value of market sensitive instruments, including these non-financial
instruments, as a result of a 100 basis point increase in interest rates as of
December 31, 1998 and 1997 is not material.

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

Commercial Lines
Commercial Lines operating results for 1998 reflected the negative impact of
pricing declines in all markets. This trend in market conditions, characterized
by difficult pricing and increased competition, continued from prior years.

In National Accounts, where programs include risk transfer and risk service,
such as claims settlement, loss control and risk management services, and are
generally offered in connection with a large deductible or self-insured program,
or a guaranteed cost or retrospectively rated insurance policy, pricing declines
have continued. This business continues to reflect the negative impact of price
declines as evidenced by the decrease in premium and fee levels and, more
importantly, in the narrowing of profit margins earned on this business.
Additionally, there has been an increasing trend in this marketplace for
guaranteed cost products at what the Company believes are inadequate price
levels.

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

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

The combination of price declines associated with the highly competitive
marketplace and the Company's selective underwriting criteria has had an adverse
impact on premium and fee levels during the past several years. If the
competitive pressures on pricing do not improve in 1999, these factors may
continue to affect premium and fee levels unfavorably. Although the Company
believes that pricing in the Commercial Lines marketplace will continue to be
very competitive in 1999, recent data has suggested that the pricing environment
may be stabilizing.

                                       20
<PAGE>   21
Alliance with Winterthur International
In December 1998, the Company announced a global strategic relationship with
Winterthur International, which markets a variety of commercial lines products
to multinational corporations. The Company expects that Travelers/Winterthur
International will allow it to participate in business requiring international
underwriting and insurance services.

Personal Lines
Personal Lines strategy includes control of operating expenses to improve
competitiveness and profitability, growth in sales through independent agents
and continued expansion of new marketing channels to broaden distribution to a
wider customer base. Personal Lines is continuing its state by state rollout of
nonstandard auto insurance to broaden its product capabilities. These growth
strategies also provide opportunities to leverage the existing cost structure
and achieve economies of scale. In addition, Personal Lines continues to take
action to control its exposure to catastrophe losses, including limiting the
writing of new homeowners business in certain markets and implementing price
increases in certain hurricane-prone areas, subject to restrictions imposed by
insurance regulatory authorities.

The personal auto insurance marketplace has become more competitive in 1998 as
some personal auto carriers have reduced prices in selected markets. This trend
is expected to continue in 1999.

Travelers Group Inc. Merger with Citicorp
As a result of the Merger, the Company has developed and made investments in
various cross-selling opportunities to Citicorp's customers including selling
Personal Lines products through referrals from the call centers servicing
Citibank's credit card operations, selling Commercial Lines products to
Citicorp's small business clientele and distributing an array of bank products
through the independent agent distribution channel. The Company continues to
focus its efforts and investments in those opportunities with the greatest sales
and profit potential.

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

In relation to the Company's objective of being a low-cost provider of property
and casualty insurance, an emphasis on claim payout and performance and enhanced
productivity efforts are expected to continue.

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

As required by various state laws and regulations, TAP's insurance subsidiaries
are subject to assessments from state-administered guaranty associations, second
injury funds and similar associations. Management believes that such assessments
will not have a material impact on the Company's results of operations, except
for the effect of the cumulative catch-up adjustment associated with the
adoption of Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" (see Note 1 of Notes to
Consolidated Financial Statements), financial condition or liquidity.

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

                                       21
<PAGE>   22
LIQUIDITY AND CAPITAL RESOURCES
TAP was formed in January 1996 to hold the property and casualty insurance
subsidiaries of The Travelers Insurance Group Inc. (TIGI). TIGI contributed to
TAP all of the outstanding shares of common stock of Travelers Indemnity on
April 1, 1996. On April 2, 1996, TAP acquired the domestic property and casualty
insurance subsidiaries of Aetna for approximately $4.2 billion. TAP is a holding
company and has no direct operations. TAP's principal asset is the capital stock
of its insurance subsidiaries. For a description of the acquisition and the
manner in which it was funded, see Note 3 of Notes to Consolidated Financial
Statements.

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

Net cash flows are generally invested in marketable securities. The Company
closely monitors the duration of these investments, and investment purchases and
sales are executed with the objective of having adequate funds available to
satisfy the Company's maturing liabilities. As the Company's investment strategy
focuses on asset and liability durations, and not specific cash flows, asset
sales may be required to satisfy obligations and/or rebalance asset portfolios.
The Company's invested assets at December 31, 1998 totaled $31.9 billion and
consisted primarily of highly liquid public debt securities of $25.9 billion,
private debt securities of $2.1 billion, equity securities of $828 million,
mortgage loans and real estate of $657 million, short-term investments of $1.6
billion and other investments of $827 million.

Cash flow needs at TAP include stockholder dividends and debt service. TAP meets
its cash flow needs primarily through dividends from operating subsidiaries. In
addition, TAP has a revolving credit facility in the amount of $250 million with
a syndicate of banks (the Credit Facility). Under this facility, which expires
in December 2001, TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At December 31, 1998, this
requirement was exceeded by approximately $4.2 billion. In addition, the Credit
Facility places restrictions on the amount of consolidated debt TAP can incur.
At December 31, 1998, there were no borrowings outstanding under this facility.
If TAP had borrowings under this facility, the interest rate would be based upon
LIBOR plus a negotiated margin. TAP compensates the banks for the Credit
Facility through commitment fees. TAP also issues commercial paper directly to
investors and maintains unused credit availability under the Credit Facility at
least equal to the amount of commercial paper outstanding. At December 31, 1998,
TAP had no commercial paper outstanding. TAP also currently has available to it
a $200 million line of credit for working capital and other general corporate
purposes from a subsidiary of Citigroup. The lender has no obligation to make
any loan to TAP under this line of credit.

As more fully described in Note 3 of Notes to Consolidated Financial Statements,
on April 24, 1996 TAP sold in a public offering $500 million of 6-3/4% Notes due
April 15, 2001 and $200 million of 7-3/4% Notes due April 15, 2026, in
connection with the acquisition of Aetna P&C. During the remainder of 1996, TAP
also sold $200 million of 6-3/4% Notes due September 1, 1999, $200 million of
6-1/4% Notes due October 1, 1999 and $150 million of 6-3/4% Notes due November
15, 2006. At December 31, 1998, TAP had issued a total of $1.25 billion of, and
had $750 million available for, debt offerings under its shelf registration
statement.

                                       22
<PAGE>   23
Because the principal operating subsidiaries of the Company are Connecticut
insurance companies, the amount of dividends that each entity may pay to the
parent company is restricted. The insurance holding company law of Connecticut
requires notice to, and approval by, the state insurance commissioner for the
declaration or payment of any dividend that together with other distributions
made within the preceding twelve months exceeds the greater of (i) 10% of the
insurer's surplus or (ii) the insurer's net income for the twelve-month period
ended the preceding December 31st, in each case determined in accordance with
statutory accounting practices. Such declaration or payment is further limited
by adjusted unassigned funds (surplus), as determined in accordance with
statutory accounting practices. The insurance holding company laws of other
states in which the Company's subsidiaries are domiciled generally contain
similar (although in certain instances somewhat more restrictive) limitations on
the payment of dividends. In 1999, dividend payments to TAP from its insurance
subsidiaries are limited to $1.0 billion without prior approval of the
Connecticut Insurance Department.

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

The National Association of Insurance Commissioners (NAIC) adopted risk-based
capital (RBC) requirements for property-casualty companies to be used as minimum
capital requirements by the NAIC and states to identify companies that merit
further regulatory action. The formulas have not been designed to differentiate
among adequately capitalized companies that operate with levels of capital
higher than RBC requirements. Therefore, it is inappropriate and ineffective to
use the formulas to rate or to rank such companies. At December 31, 1998, all of
the Company's insurance subsidiaries had adjusted capital in excess of amounts
requiring any company or regulatory action.

The Company has a net deferred tax asset of $1.1 billion at December 31, 1998
which relates to temporary differences that are expected to reverse as net
ordinary deductions for tax purposes. Management believes that the realization
of the recognized net deferred tax asset of $1.1 billion is more likely than not
based on existing carryback ability and expectations as to future taxable
income. The Company is a member of a subgroup of companies comprised of TIGI and
its non-life insurance subsidiaries. This subgroup is included in the
consolidated federal income tax return filed by Citigroup. Citigroup has
reported pre-tax financial statement income from continuing operations exceeding
$10 billion on average over the last three years and has generated federal
taxable income exceeding $8 billion on average each year during this same
period.

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

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

On June 23, 1997, the Company repurchased, in the aggregate, 6,600,102 shares of
its Class A Common Stock held by Aetna, J.P. Morgan Capital Corporation, Fund
American Enterprise Holdings, Inc. and The Trident Partnership, L.P.
(collectively, the "Private Investors") for a total purchase price of
approximately $241 million, representing a discount to the then current market
price. The repurchases represented 20% of the holdings of each of the Private
Investors.

                                       23
<PAGE>   24
On October 24, 1997, the Company filed a registration statement covering
14,200,207 shares of Class A Common Stock which were sold by the Private
Investors. Except for underwriting commissions, all expenses incurred in
connection with the sale were paid by the Company. The Company did not receive
any proceeds from this sale of the Class A Common Stock. The sale represented
approximately 54% of the remaining holdings of each of the Private Investors.

On January 19, 1999 and January 28, 1998, the Company, through the Travelers
Property Casualty Corp. Capital Accumulation Plan, reissued 476,431 and 763,654
shares, respectively, of treasury stock in the form of restricted Class A Common
Stock to participating officers and other key employees. Previously, on January
22, 1997, the Company issued 413,578 shares of the Company's Class A Common
Stock and reissued 502,430 shares of treasury stock in the form of restricted
Class A Common Stock to participating officers and other key employees. The fair
market values per share of the 1999, 1998 and 1997 restricted stock awards at
the grant date were $31.88, $43.71 and $37.58, respectively. The restricted
stock generally vests after a three-year period. Except under limited
circumstances, the stock cannot be sold or transferred during the restricted
period by the participant, who is required to render service to the Company
during the restricted period. Unearned compensation expense associated with the
restricted stock grant represents the market value of the Company's common stock
at the date of grant and is recognized as a charge to income ratably over the
vesting period. The after-tax compensation cost charged to earnings for these
restricted stock awards was $12 million, $7 million and zero for the years ended
December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, there were
2,320,338 shares available for future grants under TAP's restricted stock plan.

On August 12, 1998, TAP's Board of Directors authorized the expenditure of up to
$150 million for the repurchase of its Class A Common Stock. The repurchases may
be made from time to time in the open market or through negotiated transactions
and will be used primarily for the issuance of stock for employee benefit plans.
At December 31, 1998, TAP had repurchased $62 million of its common stock
pursuant to the repurchase program.

YEAR 2000 DATE CONVERSION

The Company is highly dependent on computer systems and system applications for
conducting its ongoing business functions. In 1996, the Company began the
process of identifying, evaluating and implementing changes to computer programs
necessary to address the Year 2000 issue. This issue involves the ability of
computer systems that have time sensitive programs to recognize properly the
year 2000. The inability to do so could result in major failures or
miscalculations that would disrupt the Company's ability to meet its customer
and other obligations on a timely basis.

The Company has achieved substantial compliance with respect to its business
critical systems in accordance with its Year 2000 plan and is in the process of
certification to validate compliance. The Company anticipates completing the
certification process by June 30, 1999. An ongoing re-certification process will
be put in place for the third and fourth quarter of 1999 to ensure all systems
and products remain compliant.

The total pre-tax cost associated with the required modifications and
conversions is expected to be approximately $52 million and is being expensed as
incurred in the period 1996 through 1999. The Company has incurred approximately
$42 million to date on these efforts. The Company also has third party
customers, financial institutions, vendors and others with whom it conducts
business and has confirmed their plans to address and resolve Year 2000 issues
on a timely basis. While it is likely that these efforts by third party vendors
and customers will be successful, it is possible that a series of failures by
third parties could have a material adverse effect on the Company's results of
operations in future periods.

In addition, the Company is developing contingency plans to address perceived
risks associated with the Year 2000 effort. These include business resumption
plans to address the possibility of internal systems failures and the
possibility of failure of systems or processes outside the Company's control. As
of year-end 1998, the Company has completed initial business resumption
contingency plans which would enable business critical units to function January
1, 2000 in the event of an unexpected failure. Business resumption contingency
plans are expected to be finalized by June 30, 1999. Preparations for the
management of the date change will continue through 1999.

                                       24
<PAGE>   25
An additional Year 2000 issue for the Company is the potential future impact of
claims for insurance coverage from customers who suffer Year 2000 business
losses or claim coverage for their potential liability to third parties. The
Company has taken certain initiatives to mitigate this potential risk, including
addressing Year 2000 issues, where applicable, in the underwriting of insurance
policies. Losses for Year 2000 insurance claims and litigation costs related to
such claims are not reasonably estimable at this time.

FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.

FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "may affect," and similar expressions. In particular, the
information appearing in the section under the heading "Outlook" is
forward-looking. These forward-looking statements involve risks and
uncertainties including, but not limited to, the following: the resolution of
legal proceedings and related matters; the conduct of the Company's businesses
following the Merger; customer responsiveness to both new products and
distribution channels; and the ability of the Company and third party vendors to
modify computer systems for the Year 2000 date conversion in a timely manner.
Readers are also directed to other risks and uncertainties discussed in
documents filed by the Company with the Securities and Exchange Commission.

                                       25
<PAGE>   26
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENT OF INCOME
                     (In millions, except per share amounts)


<TABLE>
<CAPTION>
For the Year Ended December 31,                         1998          1997         1996
-----------------------------------------------------------------------------------------
<S>                                                    <C>          <C>          <C>
REVENUES
Premiums                                               $ 7,796      $ 7,225      $ 6,028
Net investment income                                    2,100        2,051        1,656
Fee income                                                 306          365          392
Realized investment gains                                  143          169           18
Other revenues                                             106          101          103
-----------------------------------------------------------------------------------------
   Total revenues                                       10,451        9,911        8,197
-----------------------------------------------------------------------------------------
CLAIMS AND EXPENSES                                   
Claims and claim adjustment expenses                     5,947        5,484        5,282
Amortization of deferred acquisition costs               1,197        1,127          906
Interest expense                                           161          163          118
General and administrative expenses                      1,309        1,385        1,404
-----------------------------------------------------------------------------------------
   Total claims and expenses                             8,614        8,159        7,710
-----------------------------------------------------------------------------------------
Income before federal income taxes                       1,837        1,752          487
-----------------------------------------------------------------------------------------
Federal income taxes:                                 
  Current expense (benefit)                                394          422         (100)
  Deferred expense                                         100           94          196
-----------------------------------------------------------------------------------------
     Total federal income taxes                            494          516           96
-----------------------------------------------------------------------------------------
Net income                                             $ 1,343      $ 1,236      $   391
=========================================================================================
Net income per common share                            $  3.43      $  3.13      $  1.02
Net income per common share-assuming dilution          $  3.42      $  3.12      $  1.02
-----------------------------------------------------------------------------------------
</TABLE>

                 See notes to consolidated financial statements.

                                       26
<PAGE>   27
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                          (In millions, except shares)


<TABLE>
<CAPTION>
At December 31,                                                                      1998            1997
------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>            <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $26,580 and $26,127)      $ 27,977       $ 27,188
Equity securities, at fair value (cost, $796 and $977)                                   828          1,037
Mortgage loans                                                                           574            691
Real estate held for sale                                                                 83             95
Short-term securities                                                                  1,597          1,446
Other investments                                                                        827            574
------------------------------------------------------------------------------------------------------------
         Total investments                                                            31,886         31,031
------------------------------------------------------------------------------------------------------------
Cash                                                                                      62             47
Investment income accrued                                                                409            387
Premium balances receivable                                                            2,901          2,897
Reinsurance recoverables                                                               9,153          9,188
Deferred acquisition costs                                                               518            501
Deferred federal income taxes                                                          1,109          1,316
Contractholder receivables                                                             2,019          1,923
Goodwill                                                                               1,457          1,497
Other assets                                                                           1,760          1,895
------------------------------------------------------------------------------------------------------------
         Total assets                                                               $ 51,274       $ 50,682
============================================================================================================
LIABILITIES
Claims and claim adjustment expense reserves                                        $ 29,589       $ 30,324
Unearned premium reserves                                                              4,166          3,867
Contractholder payables                                                                2,019          1,923
Commercial paper                                                                        --              108
Long-term debt                                                                         1,250          1,249
Other liabilities                                                                      4,225          4,534
------------------------------------------------------------------------------------------------------------
         Total liabilities                                                            41,249         42,005
------------------------------------------------------------------------------------------------------------
TAP-obligated mandatorily redeemable securities of subsidiary
    trusts holding solely junior subordinated debt securities of TAP                     900            900
------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock:
  Class A, $.01 par value, 700 million shares authorized;
    72,393,407 shares issued and outstanding                                               1              1
  Class B, $.01 par value, 700 million shares authorized;
    328,020,170 shares issued and outstanding                                              3              3
Additional paid-in capital                                                             5,479          5,473
Retained earnings                                                                      3,052          1,866
Accumulated other changes in equity from nonowner sources                                921            722
Treasury stock, at cost (shares, 8,544,687 and 7,314,688)                               (298)          (266)
Unearned compensation                                                                    (33)           (22)
------------------------------------------------------------------------------------------------------------
         Total stockholders' equity                                                    9,125          7,777
------------------------------------------------------------------------------------------------------------
         Total liabilities and stockholders' equity                                 $ 51,274       $ 50,682
============================================================================================================
</TABLE>

                 See notes to consolidated financial statements.

                                       27
<PAGE>   28
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                          (In millions, except shares)


<TABLE>
<CAPTION>
                                                                                                                         
For the Year Ended December 31,                     1998                      1997                         1996          
------------------------------------------------------------------------------------------------------------------------ 
<S>                                       <C>           <C>          <C>            <C>          <C>            <C>
COMMON STOCK AND                                                                                                         
   ADDITIONAL PAID-IN                                                                                                    
   CAPITAL                                                                                                               
Balance, beginning of year                $  5,477                   $  5,459                    $  2,899                
Net Capital Accumulation Plan grants             6                         18                           -
Capitalization of Travelers                                                                                              
   Property Casualty Corp.                       -                          -                       2,560                
------------------------------------------------------------------------------------------------------------------------ 
                                                                                                                         
Balance, end of year                         5,483                      5,477                       5,459                
------------------------------------------------------------------------------------------------------------------------ 
                                                                                                                         
RETAINED EARNINGS                                                                                                        
Balance, beginning of year                   1,866                        749                         422                
Net income                                   1,343      $  1,343        1,236       $  1,236          391       $    391 
Dividends                                     (157)                      (119)                        (64)               
------------------------------------------------------------------------------------------------------------------------ 
                                                                                                                         
Balance, end of year                         3,052                      1,866                         749                
------------------------------------------------------------------------------------------------------------------------ 
                                                                                                                         
ACCUMULATED OTHER                                                                                                        
   CHANGES IN EQUITY                                                                                                     
   FROM NONOWNER                                                                                                         
   SOURCES, NET OF TAX                                                                                                   
Balance, beginning of year                     722                        285                         280                
Net unrealized gain on investment                                                                                        
   securities, net of reclassification                                                                                    
   adjustment (see note 10)                                  200                         437                           4 
Foreign currency translation                                                                                             
   adjustments                                                (1)                          -                           1 
------------------------------------------------------------------------------------------------------------------------ 
Other changes in equity from
   nonowner sources                            199           199          437            437            5              5 
------------------------------------------------------------------------------------------------------------------------ 
Total changes in equity from
   nonowner sources                                     $  1,542                    $  1,673                    $    396
------------------------------------------------------------------------------------------------------------------------ 
                                                                                                                         
Balance, end of year                           921                        722                         285                
------------------------------------------------------------------------------------------------------------------------ 
                                                                                                                         
TREASURY STOCK (at cost)                                                                                                 
Balance, beginning of year                    (266)                       (13)                          -                
Net Capital Accumulation Plan grants            29                         15                           -
Treasury stock acquired                        (62)                      (268)                        (13)               
Other                                            1                          -                           -                
------------------------------------------------------------------------------------------------------------------------ 
                                                                                                                         
Balance, end of year                          (298)                      (266)                        (13)               
------------------------------------------------------------------------------------------------------------------------ 
                                                                                                                         
UNEARNED COMPENSATION                                                                                                    
Balance, beginning of year                     (22)                         -                           -                
Net issuance of restricted stock under                                                                                       
   Capital Accumulation Plan                   (29)                       (33)                          -
Restricted stock amortization                   18                         11                           -                
------------------------------------------------------------------------------------------------------------------------ 
                                                                                                                         
Balance, end of year                           (33)                       (22)                          -                
------------------------------------------------------------------------------------------------------------------------ 
                                                                                                                         
Total stockholders' equity                                                                                               
   and shares outstanding                 $  9,125                   $  7,777                    $  6,480                
======================================================================================================================== 
</TABLE>



<TABLE>
<CAPTION>
                                                 SHARES (IN THOUSANDS)   
                                           -------------------------------
For the Year Ended December 31,             1998         1997       1996
--------------------------------------------------------------------------
<S>                                        <C>         <C>         <C>
COMMON STOCK AND                                                   
   ADDITIONAL PAID-IN                                              
   CAPITAL                                                         
Balance, beginning of year                 400,414     400,000         100
Net Capital Accumulation Plan grants             -         414           -
Capitalization of Travelers                                        
   Property Casualty Corp.                       -           -     399,900
--------------------------------------------------------------------------
                                                                   
Balance, end of year                       400,414     400,414     400,000
--------------------------------------------------------------------------
                                                                   
RETAINED EARNINGS                                                  
Balance, beginning of year                                         
Net income                                                         
Dividends                                                          
--------------------------------------------------------------------------
Balance, end of year                                               
--------------------------------------------------------------------------
                                                                   
ACCUMULATED OTHER                                                  
   CHANGES IN EQUITY                                               
   FROM NONOWNER                                                   
   SOURCES, NET OF TAX                                             
Balance, beginning of year                                         
Net unrealized gain on investment                                  
   securities, net of reclassification                              
   adjustment (see note 10)                                        
Foreign currency translation                                       
   adjustments                                                     
--------------------------------------------------------------------------
Other changes in equity from
   nonowner sources
--------------------------------------------------------------------------
Total changes in equity from
   nonowner sources
--------------------------------------------------------------------------
Balance, end of year                                               
--------------------------------------------------------------------------
                                                                   
TREASURY STOCK (at cost)                                           
Balance, beginning of year                  (7,315)       (407)          -
Net Capital Accumulation Plan grants           782         449           -
Treasury stock acquired                     (2,029)     (7,359)       (407)
Other                                           17           2           -
--------------------------------------------------------------------------
                                                                   
Balance, end of year                        (8,545)     (7,315)       (407)
--------------------------------------------------------------------------
                                                                   
UNEARNED COMPENSATION                                              
Balance, beginning of year                                         
Net issuance of restricted stock under
   Capital Accumulation Plan                                       
Restricted stock amortization                                      
--------------------------------------------------------------------------
                                                                   
Balance, end of year                                                    
--------------------------------------------------------------------------
                                                                   
Total stockholders' equity                                         
   and shares outstanding                  391,869     393,099     399,593
==========================================================================
</TABLE>

                 See notes to consolidated financial statements.

                                       28
<PAGE>   29
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (In millions)



<TABLE>
<CAPTION>
For the Year Ended December 31,                                                            1998           1997           1996
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                             $  1,343       $  1,236       $    391
   Adjustments to reconcile net income to net cash provided by operating activities
     Realized investment gains                                                               (143)          (169)           (18)
     Depreciation and amortization                                                             60             47             40
     Deferred federal income taxes                                                            100             94            196
     Amortization of deferred policy acquisition costs                                      1,197          1,127            906
     Premium balances receivable                                                               (4)            79            212
     Reinsurance recoverables                                                                 (60)            97           (159)
     Deferred policy acquisition costs                                                     (1,214)        (1,210)          (935)
     Insurance reserves                                                                      (341)          (121)           691
     Other                                                                                   (220)          (557)          (143)
--------------------------------------------------------------------------------------------------------------------------------
     Net cash provided by operating activities                                                718            623          1,181
--------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from maturities of investments
   Fixed maturities                                                                         1,551          1,422          1,567
   Mortgage loans                                                                             160            154            133
  Proceeds from sales of investments
   Fixed maturities                                                                         8,541         10,045         12,606
   Equity securities                                                                          580            504            558
   Mortgage loans                                                                              15            231             23
   Real estate held for sale                                                                   33            129             16
  Purchases of investments
   Fixed maturities                                                                       (10,206)       (13,421)       (15,049)
   Equity securities                                                                         (505)          (554)          (785)
   Mortgage loans                                                                             (34)           (38)          (161)
  Short-term securities, (purchases) sales, net                                               (98)           872         (1,044)
  Other investments, net                                                                     (244)           (57)           (90)
  Business acquisitions                                                                      --             --           (4,160)
  Business divestments                                                                       --             --                1
  Securities transactions in course of settlement                                            (169)           335            571
--------------------------------------------------------------------------------------------------------------------------------
     Net cash used in investing activities                                                   (376)          (378)        (5,814)
--------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Issuance (repayment) of commercial paper, net                                              (108)            83             25
  Issuance of long-term debt                                                                 --             --            1,249
  Borrowings on revolving line of credit                                                     --             --            2,650
  Payments on revolving line of credit                                                       --             --           (2,650)
  Contribution from TIGI                                                                     --             --            1,138
  Purchase of treasury stock                                                                  (62)          (268)           (13)
  Private offering of common stock                                                           --             --              525
  Initial public offering of common stock                                                    --             --              928
  Issuance of mandatorily redeemable securities                                              --             --              900
  Issuance of Series Z preferred stock                                                       --             --              540
  Redemptions of Series Z preferred stock                                                    --             --             (540)
  Dividends on Series Z preferred stock                                                      --             --               (4)
  Dividends to TIGI                                                                          (131)           (98)           (49)
  Dividends to minority shareholders                                                          (26)           (21)           (11)
--------------------------------------------------------------------------------------------------------------------------------
     Net cash provided by (used in) financing activities                                     (327)          (304)         4,688
--------------------------------------------------------------------------------------------------------------------------------
  Net increase (decrease) in cash                                                              15            (59)            55
  Cash at beginning of period                                                                  47            106             51
--------------------------------------------------------------------------------------------------------------------------------
  Cash at end of period                                                                  $     62       $     47       $    106
================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Income taxes paid (refunded)                                                           $    399       $    677       $   (208)
  Interest paid                                                                          $    161       $    163       $     99
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                 See notes to consolidated financial statements.

                                       29
<PAGE>   30
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       BASIS OF PRESENTATION

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

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

       ACCOUNTING CHANGES

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

       DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
       Effective January 1, 1998, the Company adopted Statement of Financial
       Accounting Standards No. 131, "Disclosures about Segments of an
       Enterprise and Related Information" (FAS 131). FAS 131 establishes
       standards for the way that public enterprises report information about
       operating segments in annual financial statements and requires that
       selected information about those operating segments be reported in
       interim financial statements. This statement supersedes Statement of
       Financial Accounting Standards No. 14, "Financial Reporting for Segments
       of a Business Enterprise." FAS 131 requires that all public enterprises
       report financial and descriptive information about its reportable
       operating segments. Operating segments are defined as components of an
       enterprise about which separate financial information is available that
       is evaluated regularly by the chief operating decision maker in deciding
       how to allocate resources and in assessing performance. The Company's
       reportable operating segments did not change significantly as a result of
       the adoption of FAS 131. See note 4.

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

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       REPORTING COMPREHENSIVE INCOME
       Effective January 1, 1998, the Company adopted Statement of Financial
       Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130).
       FAS 130 establishes standards for the reporting and display of
       comprehensive income and its components in a full set of general-purpose
       financial statements. All items that are required to be recognized under
       accounting standards as components of comprehensive income are to be
       reported in a financial statement that is displayed with the same
       prominence as other financial statements. This statement stipulates that
       comprehensive income reflect the change in equity of an enterprise during
       a period from transactions and other events and circumstances from
       nonowner sources. Comprehensive income thus represents the sum of net
       income and other changes in equity from nonowner sources. The accumulated
       balance of other changes in equity from nonowner sources is required to
       be displayed separately from retained earnings and additional paid-in
       capital in the consolidated balance sheet. The adoption of FAS 130
       resulted primarily in the Company reporting unrealized gains and losses
       on investments in debt and equity securities in changes in equity from
       nonowner sources. See note 10.

       ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
       INTERNAL USE
       During the third quarter of 1998, the Company adopted the Accounting
       Standards Executive Committee of the American Institute of Certified
       Public Accountants' (AcSEC) Statement of Position 98-1, "Accounting for
       the Costs of Computer Software Developed or Obtained for Internal Use"
       (SOP 98-1). SOP 98-1 provides guidance on accounting for the costs of
       computer software developed or obtained for internal use and for
       determining when specific costs should be capitalized and when they
       should be expensed. The adoption of SOP 98-1 did not have a significant
       impact on results of operations, financial condition or liquidity.

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

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

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

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
     EXTINGUISHMENTS OF LIABILITIES AND DEFERRAL OF THE EFFECTIVE DATE OF
     CERTAIN PROVISIONS OF SFAS 125

     Effective January 1, 1997, the Company adopted Statement of Financial
     Accounting Standards No. 125, "Accounting for Transfers and Servicing of
     Financial Assets and Extinguishments of Liabilities" (FAS 125). This
     statement establishes accounting and reporting standards for transfers and
     servicing of financial assets and extinguishments of liabilities. These
     standards are based on an approach that focuses on control. Under this
     approach, after a transfer of financial assets, an entity recognizes the
     financial and servicing assets it controls and the liabilities it has
     incurred, derecognizes financial assets when control has been surrendered
     and derecognizes liabilities when extinguished. FAS 125 provides standards
     for distinguishing transfers of financial assets that are sales from
     transfers that are secured borrowings. Effective January 1, 1998, the
     Company adopted Statement of Financial Accounting Standards No. 127,
     "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
     125" (FAS 127), which was effective for transfers and pledges of certain
     financial assets and collateral made after December 31, 1997. The adoption
     of the provisions of FAS 125 and FAS 127, effective January 1, 1997 and
     1998, respectively, did not have a significant impact on results of
     operations, financial condition or liquidity.

     ACCOUNTING POLICIES

     INVESTMENTS

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

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

     Mortgage loans are carried at amortized cost. A mortgage loan is considered
     impaired when it is probable that the Company will be unable to collect
     principal and interest amounts due. For mortgage loans that are determined
     to be impaired, a reserve is established for the difference between the
     amortized cost and fair market value of the underlying collateral. In
     estimating fair value, the Company uses interest rates reflecting the
     returns required in the current real estate financing market. There were no
     impaired loans at December 31, 1998 and 1997.

     Real estate held for sale is carried at the lower of cost or fair value
     less estimated costs to sell. Fair value is established at the time of
     foreclosure by internal analysis or external appraisers, using discounted
     cash flow analyses and other acceptable techniques. Thereafter, an
     allowance for losses on real estate held for sale is established if the
     carrying value of the property exceeds its current fair value less
     estimated costs to sell. There was no such allowance at December 31, 1998
     and 1997.


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


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

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

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

     INVESTMENT GAINS AND LOSSES

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

     REINSURANCE RECOVERABLES

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

     DEFERRED ACQUISITION COSTS

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

     CONTRACTHOLDER RECEIVABLES AND PAYABLES

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

     GOODWILL

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

     CLAIMS AND CLAIM ADJUSTMENT EXPENSE RESERVES

     Claims and claim adjustment expense reserves represent estimated provisions
     for both reported and unreported claims incurred and related expenses. The
     reserves are adjusted regularly based upon experience. Included in the
     claims and claim adjustment expense reserves in the consolidated balance
     sheet at December 31, 1998 and 1997 are $1.3 billion and $1.5 billion,
     respectively, of reserves related to workers' compensation that have been
     discounted using an interest rate of 5%.


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

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

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

     PERMITTED STATUTORY ACCOUNTING PRACTICES

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

     The NAIC recently completed a process intended to codify statutory
     accounting practices for certain insurance enterprises. As a result of this
     process, the NAIC will issue a revised statutory Accounting Practices and
     Procedures Manual - version effective January 1, 2001 (the revised Manual)
     that will be effective January 1, 2001 for the calendar year 2001 statutory
     financial statements. It is expected that the State of Connecticut will
     require that, effective January 1, 2001, insurance companies domiciled in
     Connecticut prepare their statutory basis financial statements in
     accordance with the revised Manual subject to any deviations prescribed or
     permitted by the Connecticut insurance commissioner. The Company has not
     yet determined the impact that this change will have on the statutory
     capital and surplus of its insurance subsidiaries.

     PREMIUMS AND UNEARNED PREMIUM RESERVES

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

     FEE INCOME

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

     OTHER REVENUES

     Other revenues include revenues from premium installment charges, which are
     recognized as collected, revenues of noninsurance subsidiaries other than
     fee income and gains and losses on dispositions of assets and operations
     other than realized investment gains and losses.

     FEDERAL INCOME TAXES

     The provision for federal income taxes is comprised of two components,
     current income taxes and deferred income taxes. Deferred federal income
     taxes arise from changes during the year in cumulative temporary
     differences between the tax basis and book basis of assets and liabilities.


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

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     STOCK-BASED COMPENSATION

     The Company accounts for its stock-based compensation plans using the
     accounting method prescribed by Accounting Principles Board Opinion No. 25,
     "Accounting for Stock Issued to Employees," and has included in the notes
     to consolidated financial statements the pro forma disclosures required by
     Statement of Financial Accounting Standards No. 123, "Accounting for
     Stock-Based Compensation." See note 15. The Company accounts for its
     stock-based non-employee compensation plans at fair value.

     EARNINGS PER SHARE

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

<TABLE>
     ---------------------------------------------------------------------------------------
     (for the year ended December 31,                                              PER SHARE
     in millions, except per share amounts)                INCOME(1)  SHARES (2)    AMOUNTS
     ---------------------------------------------------------------------------------------
<S>                                                        <C>        <C>          <C>
     1998
     Basic EPS - income available to common stockholders    $ 1,343      392.0      $  3.43
     Effects of dilutive securities - restricted stock           --         .7        (0.01)
     ---------------------------------------------------------------------------------------
     Diluted EPS - income available to common
      stockholders and assumed conversions                  $ 1,343      392.7      $  3.42
     ---------------------------------------------------------------------------------------
     1997
     Basic EPS - income available to common stockholders    $ 1,236      395.5      $  3.13
     Effects of dilutive securities - restricted stock           --         .3        (0.01)
     ---------------------------------------------------------------------------------------
     Diluted EPS - income available to common
      stockholders and assumed conversions                  $ 1,236      395.8      $  3.12
     ---------------------------------------------------------------------------------------
</TABLE>

     (1) Numerator
     (2) Denominator

     For the year ended December 31, 1996, there were no dilutive securities
     issued.

     For purposes of computing basic and diluted EPS for periods prior to the
     Company's initial public offering in April 1996, the 328 million shares of
     common stock issued to TIGI in April 1996 were assumed to be outstanding
     for all reported periods. See note 3.

     DERIVATIVE FINANCIAL INSTRUMENTS

     The Company uses derivative financial instruments, including interest rate
     swaps, options and forward contracts, as a means of hedging exposure to
     interest rate and foreign currency risk. The Company does not hold or issue
     derivative instruments for trading purposes. Hedge accounting is used to
     account for derivatives. To qualify for hedge accounting the changes in
     value of the derivative must be expected to substantially offset the
     changes in value of the hedged item. Hedges are monitored to ensure that
     there is a high correlation between the derivative instruments and the
     hedged investment.


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

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

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

     Forward contracts and options were not significant at December 31, 1998 and
     1997. Information concerning derivative financial instruments is included
     in note 13.

     ACCOUNTING STANDARDS NOT YET ADOPTED

     In October 1998, the AcSEC issued Statement of Position 98-7, "Deposit
     Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
     Transfer Insurance Risk" (SOP 98-7). SOP 98-7 provides guidance on how to
     account for insurance and reinsurance contracts that do not transfer
     insurance risk and applies to all entities and all such contracts, except
     for long-duration life and health insurance contracts. The method used to
     account for such contracts is referred to as deposit accounting. This SOP
     does not address when deposit accounting should be applied. SOP 98-7
     identifies several methods of deposit accounting for insurance and
     reinsurance contracts that do not transfer insurance risk and provides
     guidance on the application of each method. This SOP is effective for
     financial statements for fiscal years beginning after June 15, 1999, with
     earlier adoption encouraged. Restatement of previously issued financial
     statements is not permitted. The effect of initially adopting SOP 98-7
     should be reported as a cumulative catch-up adjustment. The Company does
     not expect the adoption of this SOP to have a significant impact on results
     of operations, financial condition or liquidity.

     In June 1998, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 133, "Accounting for Derivative
     Instruments and Hedging Activities" (FAS 133). This statement establishes
     accounting and reporting standards for derivative instruments, including
     certain derivative instruments embedded in other contracts (collectively
     referred to as derivatives), and for hedging activities. It requires that
     an entity recognize all derivatives as either assets or liabilities in the
     consolidated balance sheet and measure those instruments at fair value. If
     certain conditions are met, a derivative may be specifically designated as
     (a) a hedge of the exposure to changes in the fair value of a recognized
     asset or liability or an unrecognized firm commitment, (b) a hedge of the
     exposure to variable cash flows of a forecasted transaction, or (c) a hedge
     of the foreign currency exposure of a net investment in a foreign
     operation, an unrecognized firm commitment, an available-for-sale security,
     or a foreign-currency-denominated forecasted transaction. The accounting
     for changes in the fair value of a derivative (that is, gains and losses)
     depends on the intended use of the derivative and the resulting
     designation. FAS 133 is effective for all fiscal quarters of fiscal years
     beginning after June 15, 1999. Upon initial application of FAS 133, hedging
     relationships must be designated anew and documented pursuant to the
     provisions of this statement. The Company has not yet determined the impact
     that FAS 133 will have on its consolidated financial statements.

     In December 1997, the AcSEC issued Statement of Position 97-3, "Accounting
     by Insurance and Other Enterprises for Insurance-Related Assessments" (SOP
     97-3). SOP 97-3 provides guidance for determining when an entity should
     recognize a liability for guaranty-fund and other insurance-related
     assessments, how to measure that liability, and when an asset may be
     recognized for the recovery of such assessments through premium tax offsets
     or policy surcharges. This SOP is effective for financial statements for
     fiscal years beginning after December 15, 1998, and the effect of initial
     adoption is to be reported as a cumulative catch-up adjustment. Restatement
     of previously issued financial statements is not allowed. The Company plans
     to implement SOP 97-3 in the first quarter of 1999 and estimates that the
     cumulative catch-up adjustment will result in a charge of approximately
     $160 million after tax. Aside from the initial impact at adoption, this SOP
     is not expected to have a significant impact on results of operations,
     financial condition or liquidity.


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

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     NATURE OF OPERATIONS

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

     COMMERCIAL LINES

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

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

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

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

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

     PERSONAL LINES

     Personal Lines writes virtually all types of property and casualty
     insurance covering personal risks. The primary coverages in Personal Lines
     are personal automobile and homeowners insurance sold to individuals. These
     products are distributed through independent agents, sponsoring
     organizations such as employee and affinity groups, joint marketing
     arrangements with other insurers and through the independent agents of
     Primerica Financial Services, a unit of Citigroup. During 1998, Personal
     Lines also began distributing products directly to customers of Citibank, a
     unit of Citigroup.


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

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

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

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

     CATASTROPHE EXPOSURE

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

2.   TRAVELERS GROUP MERGER WITH CITICORP

     On October 8, 1998, Citicorp merged with and into a newly formed
     wholly-owned subsidiary of Travelers Group Inc. (Travelers Group) (the
     Merger), the indirect owner of approximately 84% of the outstanding common
     stock of TAP. Following the Merger, Travelers Group changed its name to
     Citigroup Inc.

     Upon consummation of the Merger, Citigroup became a bank holding company
     subject to the provisions of the Bank Holding Company Act of 1956 (the
     BHCA). The BHCA precludes a bank holding company and its affiliates from
     engaging in certain activities, generally including insurance underwriting.
     Under the BHCA in its current form, Citigroup has two years from the date
     it became a bank holding company to comply with all applicable provisions
     (the BHCA Compliance Period). The BHCA Compliance Period may be extended,
     at the discretion of the Federal Reserve Board, for three additional
     one-year periods so long as the extension is not deemed to be detrimental
     to the public interest.

     It is not expected that the restrictions of the BHCA will impede the
     Company's existing businesses in any significant respect, although the
     Company may be limited in its ability to make certain acquisitions. At this
     time, the Company believes that its compliance with applicable laws
     associated with the Merger will not have a significant adverse effect on
     its financial condition or results of operations. At the expiration of the
     BHCA Compliance Period, the Company and Citigroup each will evaluate its
     alternatives in order to comply with whatever laws are then applicable.


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

3.   ACQUISITION OF SUBSIDIARIES

     TRAVELERS CASUALTY AND SURETY COMPANY AND THE STANDARD FIRE INSURANCE
     COMPANY

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

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

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

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


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

3.   ACQUISITION OF SUBSIDIARIES, CONTINUED

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

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

     * Historical results of Aetna P&C include $307 million ($200 million after
       tax) of realized investment gains.

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

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

<TABLE>
<CAPTION>
     --------------------------------------------------------------------------------
     (for the year ended December 31, in millions)                              1996
     --------------------------------------------------------------------------------
<S>                                                                           <C>    
     Fair value of investments acquired                                       $13,969
     Fair value of other assets acquired                                       10,386
     Claims and claim adjustment expense reserves assumed                     (16,907)
     Other liabilities assumed                                                 (3,288)
     --------------------------------------------------------------------------------
     Cash payment related to business acquisition                             $ 4,160
     ================================================================================
</TABLE>

4.   SEGMENT INFORMATION

     The Company has two reportable business segments.

     The Commercial Lines business segment serves businesses of all sizes,
     providing a full range of primary and excess insurance and risk management
     and insurance-related services. The Commercial Lines segment offers
     workers' compensation, general liability, commercial multi-peril,
     commercial automobile, property, fidelity and surety, professional
     liability, and several miscellaneous coverages.

     The Personal Lines business segment serves consumers and writes virtually
     all types of property and casualty insurance covering personal risks. The
     primary coverages in Personal Lines are personal automobile and homeowners
     insurance.

     The accounting policies used to generate the following segment data are the
     same as those described in the summary of significant accounting policies
     in note 1. The amount of investments in equity method investees and total
     expenditures for additions to long-lived assets other than financial
     instruments were not significant.


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

4.   SEGMENT INFORMATION, CONTINUED

<TABLE>
<CAPTION>
     --------------------------------------------------------------------------------------
                                                                                   TOTAL
                                                           COMMERCIAL  PERSONAL  REPORTABLE
     (at and for the year ended December 31, in millions)     LINES      LINES    SEGMENTS
     --------------------------------------------------------------------------------------
<S>                                                        <C>         <C>       <C>
     1998
     Revenues
       Premiums                                              $ 4,525    $ 3,271    $ 7,796
       Net investment income                                   1,709        389      2,098
       Fee income                                                306          -        306
       Realized investment gains                                 117         26        143
       Other                                                      42         57         99
     --------------------------------------------------------------------------------------
        Total revenues                                       $ 6,699    $ 3,743    $10,442
     ======================================================================================
     Amortization and depreciation                           $   686    $   570    $ 1,256
     Federal income taxes                                        354        201        555
     Operating income                                            942        420      1,362
     Assets                                                   43,403      7,562     50,965
     --------------------------------------------------------------------------------------
     1997                                                   
     Revenues                                               
       Premiums                                              $ 4,308    $ 2,917    $ 7,225
       Net investment income                                   1,695        353      2,048
       Fee income                                                365          -        365
       Realized investment gains                                 154         15        169
       Other                                                      35         56         91
     --------------------------------------------------------------------------------------
        Total revenues                                       $ 6,557    $ 3,341    $ 9,898
     ======================================================================================
     Amortization and depreciation                           $   654    $   519    $ 1,173
     Federal income taxes                                        378        204        582
     Operating income                                            846        403      1,249
     Assets                                                   43,208      7,113     50,321
     --------------------------------------------------------------------------------------
     1996                                                   
     Revenues                                               
       Premiums                                              $ 3,695    $ 2,323    $ 6,018
       Net investment income                                   1,343        311      1,654
       Fee income                                                392          -        392
       Realized investment gains (losses)                         26         (8)        18
       Other                                                      41         59        100
     --------------------------------------------------------------------------------------
        Total revenues                                       $ 5,497    $ 2,685    $ 8,182
     ======================================================================================
     Amortization and depreciation                           $   559    $   385    $   944
     Federal income taxes                                          8        136        144
     Operating income                                            633        257        890
     Assets                                                   42,345      7,030     49,375
     --------------------------------------------------------------------------------------
</TABLE>

     Results of operations include amounts related to Aetna P&C from April 2,
     1996, the date of the acquisition.
   
     Operating income excludes realized investment gains (losses), restructuring
     actions and merger-related charges, and is reflected net of tax.
 

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

4.   SEGMENT INFORMATION, CONTINUED

     BUSINESS SEGMENT RECONCILIATIONS
   
<TABLE>
     ------------------------------------------------------------------------------------------
     (at and for the year ended December 31, in millions)        1998        1997        1996
     ------------------------------------------------------------------------------------------
<S>                                                             <C>         <C>         <C>
     REVENUE RECONCILIATION
   
     Total revenues for reportable segments                     $10,442     $ 9,898     $ 8,182
     Other revenues (1)                                               9          13          15
     ------------------------------------------------------------------------------------------
       Total consolidated revenues                              $10,451     $ 9,911     $ 8,197
     ------------------------------------------------------------------------------------------
     INCOME RECONCILIATION (2)
   
     Total operating income for reportable segments             $ 1,362     $ 1,249     $   890
     Other operating loss (3)                                      (112)       (123)        (88)
     Realized investment gains                                       93         110          12
     Aetna P&C acquisition-related charges and reserve review        --          --        (423)
     ------------------------------------------------------------------------------------------
       Total consolidated net income                            $ 1,343     $ 1,236     $   391
     ------------------------------------------------------------------------------------------
     ASSET RECONCILIATION
   
     Total assets for reportable segments                       $50,965     $50,321     $49,375
     Other assets (4)                                               309         361         404
     ------------------------------------------------------------------------------------------
       Total consolidated assets                                $51,274     $50,682     $49,779
     ------------------------------------------------------------------------------------------
</TABLE>

     (1)  The source of other revenues is businesses that are in run-off and are
          not significant.

     (2)  Net of tax.

     (3)  The primary component of the other operating loss is after-tax
          interest expense of $105 million, $106 million and $77 million for
          1998, 1997 and 1996, respectively.

     (4)  Reinsurance recoverables of businesses that are in run-off is the
          primary component of other assets.

     Enterprise-Wide Disclosures

     The Company generally does not accumulate revenues by product; therefore,
     it would be impracticable to provide revenues from external customers for
     each product.

     Revenues from internal customers, foreign revenues and foreign assets are
     not significant. The Company does not have revenue from transactions with a
     single customer amounting to 10 percent or more of its revenues.


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

5.   INVESTMENTS

     FIXED MATURITIES

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


<TABLE>
<CAPTION>
     --------------------------------------------------------------------------------------
                                                                GROSS UNREALIZED
                                                    AMORTIZED   ----------------     FAIR
     (at December 31, 1998, in millions)              COST      GAINS     LOSSES     VALUE
     --------------------------------------------------------------------------------------
<S>                                                 <C>        <C>        <C>       <C>
     Mortgage-backed securities -
      CMOs and pass-through securities               $ 4,233   $   181    $    1    $ 4,413
     U.S. Treasury securities and obligations
      of U.S. Government and government
      agencies and authorities                         2,002       210        --      2,212
     Obligations of states, municipalities and
      political subdivisions                          10,114       534         3     10,645
     Debt securities issued by foreign governments       866        51         2        915
     All other corporate bonds                         9,202       452        26      9,628
     Redeemable preferred stock                          163         2         1        164
     --------------------------------------------------------------------------------------
       Total                                         $26,580   $ 1,430    $   33    $27,977
     ======================================================================================

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

     The amortized cost and fair value of fixed maturities by contractual
     maturity follow. Actual maturities will differ from contractual maturities
     because borrowers may have the right to call or prepay obligations with or
     without call or prepayment penalties.


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

5.   INVESTMENTS, CONTINUED

<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------
                                                          AMORTIZED         FAIR
     (at December 31, 1998, in millions)                       COST        VALUE
     ---------------------------------------------------------------------------
<S>                                                        <C>           <C>    
     Due in one year or less                               $    925      $   931
     Due after 1 year through 5 years                         5,238        5,414
     Due after 5 years through 10 years                       5,826        6,226
     Due after 10 years                                      10,358       10,993
     ---------------------------------------------------------------------------
                                                             22,347       23,564
     Mortgage-backed securities                               4,233        4,413
     ---------------------------------------------------------------------------
       Total                                               $ 26,580      $27,977
     ===========================================================================
</TABLE>

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

     At December 31, 1998 and 1997, the Company held CMOs classified as
     available for sale with a fair value of $2.3 billion and $2.2 billion,
     respectively. Approximately 69% and 77% of the Company's CMO holdings are
     fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 1998
     and 1997, respectively. In addition, the Company held $2.1 billion and $2.6
     billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
     December 31, 1998 and 1997, respectively. Virtually all of these securities
     are rated Aaa.

     The Company engages in securities lending whereby certain securities from
     its portfolio are loaned to other institutions for short periods of time.
     The Company receives cash collateral from the borrower, equal to at least
     the market value of the loaned securities plus accrued interest, and
     reinvests it in a short-term investment pool. See note 15. The Company had
     $1.0 billion and $1.1 billion of loaned securities outstanding at December
     31, 1998 and 1997, respectively. A liability representing the Company's
     obligation to return the collateral related to these loaned securities is
     included in other liabilities in the consolidated balance sheet.

     Proceeds from sales of fixed maturities classified as available for sale
     were $8.5 billion, $10.0 billion and $12.6 billion in 1998, 1997 and 1996,
     respectively. Gross gains of $210 million, $172 million and $82 million and
     gross losses of $93 million, $94 million and $177 million, respectively,
     were realized on those sales.


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

5.   INVESTMENTS, CONTINUED

     EQUITY SECURITIES

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

<TABLE>
<CAPTION>
     ----------------------------------------------------------------------------
                                                       GROSS UNREALIZED
                                                       ----------------    FAIR
     (at December 31, 1998, in millions)      COST     GAINS     LOSSES    VALUE
     ----------------------------------------------------------------------------
<S>                                           <C>      <C>       <C>       <C>   
     Common stocks                            $ 164    $  20      $  10    $  174
     Nonredeemable preferred stocks             632       30          8       654
     ----------------------------------------------------------------------------
      Total                                   $ 796    $  50      $  18    $  828
     ============================================================================
     (at December 31, 1997, in millions)
     ----------------------------------------------------------------------------
     Common stocks                            $ 202    $  31      $  14    $  219
     Nonredeemable preferred stocks             775       46          3       818
     ----------------------------------------------------------------------------
      Total                                   $ 977    $  77      $  17    $1,037
     ============================================================================
</TABLE>

     Proceeds from sales of equity securities were $580 million, $504 million
     and $558 million in 1998, 1997 and 1996, respectively, resulting in gross
     realized gains of $74 million, $78 million and $147 million and gross
     realized losses of $60 million, $55 million and $28 million, respectively.

     MORTGAGE LOANS

     Underperforming mortgage loans include delinquent loans, loans in the
     process of foreclosure and loans modified at interest rates below market
     and were not significant at December 31, 1998 and 1997.

     Aggregate annual maturities on mortgage loans include $25 million which are
     past maturity and $152 million, $168 million, $40 million, $5 million, $32
     million and $152 million for 1999, 2000, 2001, 2002, 2003 and 2004 and
     thereafter, respectively.

     CONCENTRATIONS

     At December 31, 1998 and 1997, the Company had concentrations of credit
     risk in tax-exempt investments of the State of Texas of $1.4 billion and
     $1.2 billion, respectively, and in the State of New York of $1.5 billion
     and $1.2 billion, respectively.

     The Company participates in a short-term investment pool maintained by an
     affiliate. See note 15.

     Included in fixed maturities are below investment grade assets totaling
     $1.2 billion and $832 million at December 31, 1998 and 1997, respectively.
     The Company defines its below investment grade assets as those securities
     rated "Ba1" or lower by external rating agencies, or the equivalent by
     internal analysts when a public rating does not exist. Such assets include
     publicly traded below investment grade bonds and certain other privately
     issued bonds that are classified as below investment grade loans.


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

5.   INVESTMENTS, CONTINUED

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

<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------
     (at December 31, in millions)                             1998        1997
     ---------------------------------------------------------------------------
<S>                                                           <C>         <C>   
     Banking                                                  $1,631      $2,444
     Financing                                                 1,107       1,645
     ---------------------------------------------------------------------------
</TABLE>

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

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

     NET INVESTMENT INCOME

<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------
     (for the year ended December 31, in millions)     1998        1997        1996
     -------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>
     Gross investment income:
      Fixed maturities                                $1,736      $1,695      $1,344
      Mortgage loans                                      90         103          90
      Other                                              323         324         274
     -------------------------------------------------------------------------------
                                                       2,149       2,122       1,708
     Investment expenses                                  49          71          52
     -------------------------------------------------------------------------------
     Net investment income                            $2,100      $2,051      $1,656
     ===============================================================================
</TABLE>

     REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)

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

<TABLE>
<CAPTION>
     --------------------------------------------------------------------------------
     (for the year ended December 31, in millions)     1998        1997        1996
     --------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>
     REALIZED
     Fixed maturities                                 $  117      $   78      $  (95)
     Equity securities                                    14          23         119
     Mortgage loans                                        9          20          (1)
     Real estate held for sale                             1          18           3
     Other                                                 2          30          (8)
     --------------------------------------------------------------------------------
     Realized investment gains                        $  143      $  169      $   18
     ================================================================================
</TABLE>


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

5.   INVESTMENTS, CONTINUED

     Changes in net unrealized gains (losses) on investment securities that are
     included as a separate component of accumulated other changes in equity
     from nonowner sources were as follows:

<TABLE>
<CAPTION>
     --------------------------------------------------------------------------------
     (for the year ended December 31, in millions)     1998        1997        1996
     --------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>
     UNREALIZED
     Fixed maturities                                 $  336      $  667      $   20
     Equity securities                                   (28)         37         (15)
     Other                                                 -         (30)          -
     --------------------------------------------------------------------------------
                                                         308         674           5
     Related taxes                                       108         237           1
     --------------------------------------------------------------------------------
     Change in unrealized gains on
       investment securities                             200         437           4
     Balance, beginning of year                          729         292         288
     --------------------------------------------------------------------------------
     Balance, end of year                             $  929      $  729      $  292
     ================================================================================
</TABLE>

6.   REINSURANCE

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

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

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


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

6.   REINSURANCE, CONTINUED

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

<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------
     (for the year ended December 31, in millions)     1998        1997        1996
     -------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>
     WRITTEN PREMIUMS
     Direct                                           $9,059      $8,862      $7,585
     Assumed from:
      Affiliated companies                               243         264         264
      Non-affiliated companies                           523         421         320
     Ceded to:
      Affiliated companies                               (43)        (54)        (58)
      Non-affiliated companies                        (1,678)     (1,661)     (1,769)
     -------------------------------------------------------------------------------
     Total net written premiums                       $8,104      $7,832      $6,342
     ===============================================================================
     EARNED PREMIUMS
     Direct                                           $8,751      $8,250      $7,263
     Assumed from:
      Affiliated companies                               238         305         201
      Non-affiliated companies                           503         429         395
     Ceded to:
      Affiliated companies                               (33)        (50)        (58)
      Non-affiliated companies                        (1,663)     (1,709)     (1,773)
     -------------------------------------------------------------------------------
     Total net earned premiums                        $7,796      $7,225      $6,028
     ===============================================================================
     Percentage of amount assumed to net earned          9.5%       10.2%        9.9%
     -------------------------------------------------------------------------------
     Ceded claims incurred                            $1,312      $1,082      $1,558
     -------------------------------------------------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------
     (at December 31, in millions)                                 1998        1997
     -------------------------------------------------------------------------------
<S>                                                               <C>         <C>
     REINSURANCE RECOVERABLES
     Property-casualty business:
      Pools and associations                                      $3,070      $3,378
      Non-affiliated companies                                     5,118       4,829
      Affiliated companies                                           787         795

     Accident and health business:
      Affiliated companies                                           178         186
     -------------------------------------------------------------------------------
     Total reinsurance recoverables                               $9,153      $9,188
     ===============================================================================
</TABLE>


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

6.   REINSURANCE, CONTINUED

     Amounts recoverable from unaffiliated insurers at December 31, 1998 and
     1997 include $398 million and $352 million, respectively, recoverable from
     Lloyd's of London (Lloyd's). In 1997, the Company reached an agreement to
     settle the arbitration with underwriters at Lloyd's and certain London
     companies in New York State to enforce reinsurance contracts with respect
     to recoveries for certain asbestos claims. The dispute involved the ability
     of the Company to aggregate asbestos claims under a market agreement
     between Lloyd's and the Company or under the applicable reinsurance
     treaties. The outcome of this agreement had no impact on earnings.

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

7.   INSURANCE CLAIMS RESERVES

     Claims and claim adjustment expense reserves were as follows:

<TABLE>
<CAPTION>
     --------------------------------------------------------------------------------
     (at December 31, in millions)                                 1998        1997
     --------------------------------------------------------------------------------
<S>                                                               <C>         <C>
     Claims and claim adjustment expense reserves:
      Property-casualty                                           $29,411     $30,138
      Accident and health                                             178         186
     --------------------------------------------------------------------------------
      Total                                                       $29,589     $30,324
     ================================================================================
</TABLE>


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

7.   INSURANCE CLAIMS RESERVES, CONTINUED

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

<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------------
     (for the year ended December 31, in millions)         1998       1997       1996
     ---------------------------------------------------------------------------------
<S>                                                      <C>        <C>        <C>
     Claims and claim adjustment expense
      reserves at beginning of year                      $30,138    $30,969    $15,213
     Less reinsurance recoverables on unpaid losses        8,732      9,153      5,123
     ---------------------------------------------------------------------------------
     Net balance at beginning of year                     21,406     21,816     10,090
     ---------------------------------------------------------------------------------
     Provision for claims and claim adjustment expenses
      for claims arising in the current year               6,057      5,730      4,839
     Estimated claims and claim adjustment expenses for
       claims arising in prior years                        (323)      (492)       192
     Acquisitions                                             --         --     11,752
     ---------------------------------------------------------------------------------
        Total increases                                    5,734      5,238     16,783
     ---------------------------------------------------------------------------------
     Claims and claim adjustment expense 
      payments for claims arising in:
      Current year                                         2,352      1,944      1,858
      Prior years                                          4,025      3,704      3,199
     ---------------------------------------------------------------------------------
        Total payments                                     6,377      5,648      5,057
     ---------------------------------------------------------------------------------
     Net balance at end of year                           20,763     21,406     21,816
     Plus reinsurance recoverables on unpaid losses        8,648      8,732      9,153
     ---------------------------------------------------------------------------------
     Claims and claim adjustment expense
      reserves at end of year                            $29,411    $30,138    $30,969
     =================================================================================
</TABLE>

     The decrease in the claims and claim adjustment expense reserves in 1998
     primarily was attributable to net payments of $663 million of
     environmental, asbestos and other cumulative injury claims.

     In 1998, estimated claims and claim adjustment expenses for claims arising
     in prior years included approximately $176 million primarily relating to
     net favorable development in certain Personal Lines coverages,
     predominantly automobile coverages. In addition, in 1998 Commercial Lines
     experienced favorable loss development on loss sensitive policies in the
     workers' compensation line; however, since the business to which it relates
     is subject to premium adjustments, there was no impact on results of
     operations.

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


                                       50
<PAGE>   51
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7.   INSURANCE CLAIMS RESERVES, CONTINUED

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

     The claims and claim adjustment expense reserves included $1.8 billion and
     $2.2 billion for asbestos and environmental-related claims net of
     reinsurance at December 31, 1998 and 1997, respectively.

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

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

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

     As a result of these processes and procedures, the reserves carried for
     environmental and asbestos claims at December 31, 1998 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 as well as changes in legislation applicable to such
     claims. 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.


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

8.   DEBT

     TAP has a revolving credit facility in the amount of $250 million with a
     syndicate of banks (the Credit Facility). Under this facility, which
     expires in December 2001, TAP is required to maintain a certain level of
     consolidated stockholders' equity (as defined in the agreement). At
     December 31, 1998, this requirement was exceeded by approximately $4.2
     billion. In addition, the Credit Facility places restrictions on the amount
     of consolidated debt TAP can incur. At December 31, 1998, there were no
     borrowings outstanding under this facility. If TAP had borrowings under
     this facility, the interest rate would be based upon LIBOR plus a
     negotiated margin. TAP compensates the banks for the Credit Facility
     through commitment fees. TAP also issues commercial paper directly to
     investors and maintains unused credit availability under the Credit
     Facility at least equal to the amount of commercial paper outstanding. At
     December 31, 1998, TAP had no commercial paper outstanding. TAP also
     currently has available to it a $200 million line of credit for working
     capital and other general corporate purposes from a subsidiary of
     Citigroup. The lender has no obligation to make any loan to TAP under this
     line of credit.

     The Company completed the following long-term debt offerings during 1996.
     At December 31, 1998, $750 million is available for debt offerings under
     its shelf registration statement. Long-term debt outstanding at December
     31, 1998 and 1997 was as follows:

<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------
     (in millions)                                               1998      1997
     ---------------------------------------------------------------------------
<S>                                                            <C>       <C>
     6-3/4% Notes due 1999                                     $  200    $  200
     6-1/4% Notes due 1999                                        200       200
     6-3/4% Notes due 2001                                        500       500
     6-3/4% Notes due 2006                                        150       150
     7-3/4% Notes due 2026                                        200       200
     ---------------------------------------------------------------------------
                                                                1,250     1,250
     Debt discount                                                 --        (1)
     ---------------------------------------------------------------------------
      Total                                                    $1,250    $1,249
     ===========================================================================
</TABLE>


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

9.   FEDERAL INCOME TAXES

<TABLE>
<CAPTION>
     --------------------------------------------------------------------------------
     (for the year ended December 31, in millions)     1998        1997        1996
     --------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>
     EFFECTIVE TAX RATE
     Income before federal income taxes               $1,837      $1,752      $  487
     Statutory tax rate                                   35%         35%         35%
     --------------------------------------------------------------------------------
     Expected federal income taxes                       643         613         170
     Tax effect of:
      Nontaxable investment income                      (154)       (108)        (86)
      Goodwill                                            14          14          12
      Other, net                                          (9)         (3)          -
     --------------------------------------------------------------------------------
     Federal income taxes                             $  494      $  516      $   96
     ================================================================================
     Effective tax rate                                   27%         29%         20%
     --------------------------------------------------------------------------------
     COMPOSITION OF FEDERAL INCOME TAXES 
     Current expense (benefit):
      United States                                   $  386      $  413      $ (102)
      Foreign                                              8           9           2
     --------------------------------------------------------------------------------
        Total                                            394         422        (100)
     --------------------------------------------------------------------------------
     Deferred expense:
      United States                                      100          94         196
     --------------------------------------------------------------------------------
     Federal income tax expense                       $  494      $  516      $   96
     ================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------
     (at December 31, in millions)                                 1998        1997
     -------------------------------------------------------------------------------
<S>                                                               <C>         <C>
     Deferred tax assets:
      Claims and claim adjustment expense reserves                $1,154      $1,206
      Acquisition-related reserves                                   117         146
      Unearned premium reserves                                      206         183
      Employee benefits                                              108          98
      Other                                                          178         211
     -------------------------------------------------------------------------------
        Total                                                      1,763       1,844
     -------------------------------------------------------------------------------
     Deferred tax liabilities:
      Deferred acquisition costs                                     181         175
      Investments                                                    429         314
      Other                                                           44          39
     -------------------------------------------------------------------------------
        Total                                                        654         528
     -------------------------------------------------------------------------------
     Net deferred tax asset                                       $1,109      $1,316
     ===============================================================================
</TABLE>


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

9.   FEDERAL INCOME TAXES, CONTINUED

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

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

     Management believes that the realization of the recognized net deferred tax
     asset of $1.1 billion is more likely than not based on existing carryback
     ability and expectations as to future taxable income. Citigroup has
     reported pre-tax financial statement income from continuing operations
     exceeding $10.0 billion on average over the last three years and has
     generated federal taxable income exceeding $8.0 billion on average during
     this same period.

10.  STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY

     MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS

     During 1996, the Company formed the following statutory business trusts
     under the laws of the state of Delaware. Each trust exists for the
     exclusive purposes of (i) issuing Trust Securities representing undivided
     beneficial interests in the assets of the Trust; (ii) investing the gross
     proceeds of the Trust Securities in Junior Subordinated Deferrable Interest
     Debentures (Subordinated Debentures) of its parent; and (iii) engaging in
     only those activities necessary or incidental thereto. These Subordinated
     Debentures and the related income effects are eliminated in the
     consolidated financial statements. The outstanding Trust Securities of
     subsidiary trusts were as follows at December 31, 1998 and 1997:

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


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

10.  STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED

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

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

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

     COMMON STOCK

     CLASS A

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


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

10.  STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED

     On June 23, 1997, the Company repurchased, in the aggregate, 6,600,102
     shares of Class A Common Stock held by the Private Investors for a total
     purchase price of approximately $241 million, representing a discount to
     the then current market price. Following this transaction, Citigroup's
     beneficial ownership of the Company increased to approximately 83.4%. The
     repurchases represented 20% of the holdings of each of the Private
     Investors.

     On January 19, 1999, January 28, 1998 and January 22, 1997, the Company,
     through the Travelers Property Casualty Corp. Capital Accumulation Plan
     (TAP CAP), reissued 476,431, 763,654 and 502,430 shares of treasury stock,
     respectively, in the form of restricted Class A Common Stock to
     participating officers and other key employees. In addition, on January 22,
     1997, the Company, through TAP CAP, issued 413,578 shares of the Company's
     Class A Common Stock in the form of restricted Class A Common Stock to
     participating officers and other key employees. The fair market value per
     share of the 1999, 1998 and 1997 restricted stock awards was $31.88, $43.71
     and $37.58, respectively. The restricted stock generally vests after a
     three-year period. Except under limited circumstances, the stock cannot be
     sold or transferred during the restricted period by the participant, who is
     required to render service to the Company during the restricted period.
     Unearned compensation expense associated with the restricted stock grants
     represents the market value of the Company's common stock at the date of
     grant and is recognized as a charge to income ratably over the vesting
     period. The after-tax compensation cost charged to earnings for these
     restricted stock awards was $12 million, $7 million and zero for the years
     ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998,
     2,320,338 shares were available for future grants under the Company's
     restricted stock plans.

     On August 12, 1998, TAP's Board of Directors authorized the expenditure of
     up to $150 million for the repurchase of its Class A Common Stock. The
     repurchases may be made from time to time in the open market or through
     negotiated transactions and will be used primarily for the issuance of
     stock for employee benefit plans. At December 31, 1998, TAP had repurchased
     $62 million of its common stock pursuant to the repurchase program.

     CLASS B

     In exchange for contributing the outstanding capital stock of The Travelers
     Indemnity Company and a capital contribution of approximately $1.1 billion,
     TIGI acquired approximately 328 million shares of Class B Common Stock of
     TAP. TIGI owns all of the outstanding shares of Class B Common Stock
     representing approximately 84% of the economic interest in TAP at December
     31, 1998. Class B holders are entitled to 10 votes per share on any matter
     submitted to vote of the TAP stockholders.

     PREFERRED STOCK

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


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

10.  STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED

     DIVIDENDS

     The Company's insurance subsidiaries are currently subject to various
     regulatory restrictions that limit the maximum amount of dividends
     available to be paid to their parent without prior approval of insurance
     regulatory authorities. Dividend payments to TAP from its insurance
     subsidiaries are limited to $1.0 billion in 1999 without prior approval of
     the Connecticut Insurance Department.

     STATUTORY NET INCOME AND SURPLUS

     Statutory net income of TAP's insurance subsidiaries was $1.4 billion and
     $1.1 billion for the years ended December 31, 1998 and 1997, respectively,
     and was $120 million, which includes $285 million related to the first
     quarter of Aetna P&C, for the year ended December 31, 1996.

     Statutory capital and surplus of TAP's insurance subsidiaries was $7.1
     billion and $6.2 billion at December 31, 1998 and 1997, respectively.

     ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX

<TABLE>
<CAPTION>
     ------------------------------------------------------------------------------------------------
                                                     NET UNREALIZED       FOREIGN         ACCUMULATED
                                                            GAIN ON      CURRENCY       OTHER CHANGES
                                                         INVESTMENT   TRANSLATION      IN EQUITY FROM
     (for the year ended December 31, in millions)       SECURITIES   ADJUSTMENTS    NONOWNER SOURCES
     ------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>            <C>
     1998
     Balance, beginning of year                            $    729       $    (7)            $   722
     Current-year change                                        200            (1)                199
     ------------------------------------------------------------------------------------------------
     Balance, end of year                                  $    929       $    (8)            $   921
     ================================================================================================
     1997                                                                                  
     Balance, beginning of year                            $    292       $    (7)            $   285
     Current-year change                                        437             -                 437
     ------------------------------------------------------------------------------------------------
     Balance, end of year                                  $    729       $    (7)            $   722
     ================================================================================================
                                                                                           
     1996                                                                                  
     Balance, beginning of year                            $    288       $    (8)            $   280
     Current-year change                                          4             1                   5
     ------------------------------------------------------------------------------------------------
     Balance, end of year                                  $    292       $    (7)            $   285
     ================================================================================================
</TABLE>


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

10.  STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED

     TAX EFFECTS ALLOCATED TO EACH COMPONENT OF OTHER CHANGES IN EQUITY FROM 
     NONOWNER SOURCES

<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------------
                                                      PRE-TAX     TAX EXPENSE/   AFTER-TAX
     (for the year ended December 31, in millions)     AMOUNT      (BENEFIT)       AMOUNT
     -------------------------------------------------------------------------------------
<S>                                                   <C>         <C>            <C>
     1998                                                        
     Unrealized gain on investment securities:                   
      Unrealized holding gains arising during year     $  439       $  154         $  285
      Less: reclassification adjustment for gains                
        realized in net income                           (131)         (46)           (85)
     -------------------------------------------------------------------------------------
     Net unrealized gain on investment securities         308          108            200
     Foreign currency translation adjustments              (1)          --             (1)
     -------------------------------------------------------------------------------------
     Other changes in equity from nonowner sources     $  307       $  108         $  199
     =====================================================================================
     1997                                                        
     Unrealized gain on investment securities:                   
      Unrealized holding gains arising during year     $  775       $  272         $  503
      Less: reclassification adjustment for gains                
        realized in net income                           (101)         (35)           (66)
     -------------------------------------------------------------------------------------
     Net unrealized gain on investment securities         674          237            437
     Foreign currency translation adjustments              --           --             --
     -------------------------------------------------------------------------------------
     Other changes in equity from nonowner sources     $  674       $  237         $  437
     =====================================================================================
     1996                                                        
     Unrealized gain on investment securities:                   
      Unrealized holding gains arising during year     $   29       $   10         $   19
      Less: reclassification adjustment for gains                
        realized in net income                            (24)          (9)           (15)
     -------------------------------------------------------------------------------------
     Net unrealized gain on investment securities           5            1              4
     Foreign currency translation adjustments               1           --              1
     -------------------------------------------------------------------------------------
     Other changes in equity from nonowner sources     $    6       $    1         $    5
     =====================================================================================
</TABLE>
                                                                
11.  BENEFIT PLANS

     PENSION AND OTHER POSTRETIREMENT BENEFITS

     The Company participates in a qualified, noncontributory defined benefit
     pension plan sponsored by an affiliate. In addition, the Company provides
     certain other postretirement benefits to retired employees through a plan
     sponsored by an affiliate. The Company's share of net expense for the
     qualified pension and other postretirement benefit plans was $31 million,
     $26 million and $19 million for 1998, 1997 and 1996, respectively.


                                       58
<PAGE>   59
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

11.  BENEFIT PLANS, CONTINUED

     401(k) SAVINGS PLAN

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

12.  LEASES

     Most leasing functions for TIGI and its subsidiaries are administered by
     the Company. Rent expense related to these leases is shared by the
     companies on a cost allocation method based generally on estimated usage by
     department. Rent expense was $106 million, $118 million and $90 million in
     1998, 1997 and 1996, respectively.

     Future minimum annual rentals under noncancellable operating leases are $96
     million, $83 million, $62 million, $40 million, $24 million and $80 million
     for 1999, 2000, 2001, 2002, 2003 and 2004 and thereafter, respectively.
     Future sublease rental income of approximately $59 million will partially
     offset these commitments.

13.  DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

     DERIVATIVE FINANCIAL INSTRUMENTS

     The Company uses derivative financial instruments, including interest rate
     swaps, options and forward contracts, as a means of hedging exposure to
     interest rate and foreign currency risk. The Company does not hold or issue
     derivative instruments for trading purposes. These derivative financial
     instruments have off-balance-sheet risk. Financial instruments with
     off-balance-sheet risk involve, to varying degrees, elements of credit and
     market risk in excess of the amount recognized on the consolidated balance
     sheet. The contract or notional amounts of these instruments reflect the
     extent of involvement the Company has in a particular class of financial
     instrument. However, the maximum loss of cash flow associated with these
     instruments can be less than these amounts. For forward contracts and
     interest rate swaps, credit risk is limited to the amount that it would
     cost the Company to replace the contract. As a writer of option contracts,
     the Company has no credit risk since the counterparty has no performance
     obligation after it has paid a premium.

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


                                       59
<PAGE>   60
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

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

     The Company may occasionally enter into interest rate swaps in connection
     with other financial instruments to provide greater risk diversification
     and to better match an asset with a corresponding liability. Under interest
     rate swaps, the Company agrees with other parties to exchange, at specified
     intervals, the difference between fixed-rate and floating-rate interest
     amounts calculated by reference to an agreed upon notional principal
     amount. Generally, no cash is exchanged at the outset of the contract and
     no principal payments are made by either party. A single net payment is
     usually made by one counterparty at each due date. Swaps are not exchange
     traded so they are subject to the risk of default by the counterparty.

     At December 31, 1998 and 1997, the Company held interest rate swaps with
     notional amounts of $46 million and $311 million, respectively. The fair
     value of these financial instruments was $1 million (gain position) at
     December 31, 1998 and was $11 million (gain position) and $10 million (loss
     position) at December 31, 1997. The fair values were determined using a
     discounted cash flow method.

     The off-balance-sheet risk of forward contracts and options was not
     significant at December 31, 1998 and 1997.

     FAIR VALUE OF FINANCIAL INSTRUMENTS

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

     At December 31, 1998 and 1997, investments in fixed maturities had a fair
     value, which equaled carrying value, of $28.0 billion and $27.2 billion,
     respectively. The fair value of investments in fixed maturities for which a
     quoted market price or dealer quote are not available was $1.2 billion and
     $1.5 billion at December 31, 1998 and 1997, respectively. The carrying
     values of cash, short-term securities, mortgage loans, investment income
     accrued and commercial paper approximated their fair values. See notes 1
     and 5.

     At December 31, 1998 and 1997, the carrying value of $1.3 billion of
     long-term debt approximated its fair value. Fair value is based upon bid
     price at December 31, 1998 and 1997. At December 31, 1998 and 1997, the
     carrying value of $900 million of TAP Trust Securities approximated their
     fair value. Fair value is based upon the closing price at December 31, 1998
     and 1997.

     The carrying values of $1.4 billion and $1.5 billion of financial
     instruments classified as other assets approximated their fair values at
     December 31, 1998 and 1997, respectively. The carrying values of $3.5
     billion and $3.8 billion of financial instruments classified as other
     liabilities at December 31, 1998 and 1997, respectively, also approximated
     their fair values. Fair value is determined using various methods including
     discounted cash flows, as appropriate for the various financial
     instruments.

     Financial guarantees are described in note 14.


                                       60
<PAGE>   61
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

14.  COMMITMENTS AND CONTINGENCIES

     FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

     See note 13 and the following, "Guarantees of the Securities of Other
     Issuers," for a discussion of financial instruments with off-balance-sheet
     risk.

     In the normal course of business, the Company issues fixed and variable
     rate loan commitments and has unfunded commitments to partnerships. The
     off-balance-sheet risks of these financial instruments were not significant
     at December 31, 1998 and 1997.

     GUARANTEES OF THE SECURITIES OF OTHER ISSUERS

     The Company underwrote insurance guaranteeing the securities of other
     issuers, primarily corporate and industrial revenue bond issuers. The
     aggregate net amount of guarantees of principal and interest for such
     securities was approximately $217 million ($5.1 billion before reinsurance)
     and $334 million ($5.6 billion before reinsurance) at December 31, 1998 and
     1997, respectively. The scheduled maturities for these guarantees are $8
     million, $9 million, $6 million, $6 million and $188 million for 1999,
     2000, 2001, 2002 and 2003 and thereafter, respectively.

     Included in the gross amounts are financial guarantees representing the
     Company's participation in the Municipal Bond Insurance Association's
     guarantee of municipal bond obligations of $4.8 billion and $5.3 billion at
     December 31, 1998 and 1997, respectively. The bonds are generally rated A
     or above, and the Company's participation has been reinsured.

     Reserves for the financial guarantee business, which include reserves for
     defaults, incurred but not reported losses and unearned premiums, totaled
     $24 million and $71 million at December 31, 1998 and 1997, respectively.

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

     LITIGATION

     In the ordinary course of business, the Company is a defendant or
     codefendant in various litigation matters other than environmental and
     asbestos claims. Although there can be no assurances, as of December 31,
     1998, the Company believes, based on information currently available, that
     the ultimate resolution of these legal proceedings would not be likely to
     have a material adverse effect on its results of operations, financial
     condition or liquidity.

15.  RELATED PARTY TRANSACTIONS

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


                                       61
<PAGE>   62
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

15.  RELATED PARTY TRANSACTIONS, CONTINUED

     An affiliate maintains a short-term investment pool in which the Company
     participates. The positions of each company participating in the pool are
     calculated and adjusted daily. At December 31, 1998 and 1997, the pool
     totaled approximately $2.3 billion and $2.6 billion, respectively. The
     Company's share of the pool amounted to $1.4 billion and $1.2 billion at
     December 31, 1998 and 1997, respectively, and is included in short-term
     securities in the consolidated balance sheet.

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

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

     Had the Company applied FAS 123 in accounting for Citigroup stock options,
     net income and net income per share-assuming dilution would have been the
     pro forma amounts indicated as follows:

<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------
     (for the year ended December 31,                                 NET INCOME
     in millions, except per share amounts)              NET INCOME   PER SHARE
     ---------------------------------------------------------------------------
<S>                                                      <C>          <C>
     1998                                                           
     Net income, as reported                               $1,343      $  3.42
     FAS 123 pro forma adjustments, after tax                 (25)       (0.06)
     ---------------------------------------------------------------------------
     Net income, pro forma                                 $1,318      $  3.36
     ===========================================================================
     1997                                                            
     Net income, as reported                               $1,236      $  3.12
     FAS 123 pro forma adjustments, after tax                 (16)       (0.04)
     ---------------------------------------------------------------------------
     Net income, pro forma                                 $1,220      $  3.08
     ===========================================================================
     1996                                                            
     Net income, as reported                               $  391      $  1.02
     FAS 123 pro forma adjustments, after tax                  (6)       (0.01)
     ---------------------------------------------------------------------------
     Net income, pro forma                                 $  385      $  1.01
     ===========================================================================
</TABLE>

     The assumptions used in applying FAS 123 to account for Citigroup stock
     options were as follows:

<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------
                                                           1998      1997      1996
     -------------------------------------------------------------------------------
<S>                                                      <C>       <C>       <C>  
     Expected volatility of Citigroup stock                37.1%     31.5%     28.4%
     Risk-free interest rate                               4.70%     5.83%     5.50%
     Expected annual dividends per Citigroup share       $ 0.65    $ 0.47    $ 0.37
     Expected annual forfeiture rate                          5%        5%        5%
     ===============================================================================
</TABLE>

     Most leasing functions for TIGI and its subsidiaries are administered by
     the Company. See note 12.


                                       62
<PAGE>   63
               TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

15.  RELATED PARTY TRANSACTIONS, CONTINUED

     The Company leases furniture and equipment from subsidiaries of TIGI. The
     rental expense charged to the Company for this furniture and equipment was
     $42 million, $48 million and $44 million in 1998, 1997 and 1996,
     respectively.

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

     The Company participates in reinsurance agreements with TIC. See note 6.

     The Company purchases annuities from affiliates to settle certain claims.
     Reinsurance recoverables at December 31, 1998 and 1997 included $787
     million and $795 million, respectively, related to these annuities.

16.  NONCASH FINANCING AND INVESTING ACTIVITIES

     Significant noncash financing activities include the transfer of
     approximately 328 million shares of Class B Common Stock to TIGI in
     exchange for the outstanding capital stock of The Travelers Indemnity
     Company in 1996. See note 3.

     Other than the acquisition of Aetna P&C, there were no significant noncash
     investing activities for the years ended December 31, 1998, 1997 or 1996.
     See note 3.


                                       63
<PAGE>   64
                TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

17.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------------------------------
                                                    FIRST     SECOND      THIRD      FOURTH
     1998 (in millions, except per share amounts)  QUARTER    QUARTER    QUARTER     QUARTER      TOTAL
     ---------------------------------------------------------------------------------------------------
<S>                                                <C>        <C>        <C>         <C>        <C>    
     Total revenues                                $  2,594   $ 2,532   $   2,601    $ 2,724    $ 10,451
     Total expenses                                   2,108     2,106       2,176      2,224       8,614
     ---------------------------------------------------------------------------------------------------
     Income before federal income taxes                 486       426         425        500       1,837
     Federal income tax expense                         139       113         110        132         494
     ---------------------------------------------------------------------------------------------------
     Net income                                    $    347   $   313   $     315    $   368    $  1,343
     ===================================================================================================
     Net income per common share                   $   0.88   $  0.80   $    0.80    $  0.94    $   3.43
     Net income per common share-
      assuming dilution                            $   0.88   $  0.80   $    0.80    $  0.94    $   3.42
     ---------------------------------------------------------------------------------------------------
     Common stock price
      High                                         $46 1/16   $45 5/8   $45 3/4      $35 1/2    $46 1/16
      Low                                          $39 1/8    $38 3/4   $29 5/8      $24 1/8    $24 1/8
      Close                                        $44        $42 7/8   $31 15/16    $31        $31
     Dividends per share of common stock           $ 0.100    $ 0.100   $   0.100    $ 0.100    $ 0.400
     ---------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------------------------------
                                                    FIRST     SECOND      THIRD      FOURTH
     1997 (in millions, except per share amounts)  QUARTER    QUARTER    QUARTER     QUARTER      TOTAL
     ---------------------------------------------------------------------------------------------------
<S>                                                <C>        <C>        <C>         <C>        <C>    
     Total revenues                                $ 2,431    $ 2,431    $  2,507    $ 2,542     $ 9,911
     Total expenses                                  2,041      2,038       2,040      2,040       8,159
     ---------------------------------------------------------------------------------------------------
     Income before federal income taxes                390        393         467        502       1,752
     Federal income tax expense                        117        117         140        142         516
     ---------------------------------------------------------------------------------------------------
     Net income                                    $   273    $   276    $    327    $   360     $ 1,236
     ===================================================================================================
     Net income per common share                   $  0.68    $  0.69    $   0.83    $  0.92     $  3.13
     Net income per common share-                                                   
      assuming dilution                            $  0.68    $  0.69    $   0.83    $  0.92     $  3.12
     ---------------------------------------------------------------------------------------------------
     Common stock price                                                             
      High                                         $39 5/8    $40 3/8    $43 9/16    $45         $45
      Low                                          $31 3/4    $31 3/8    $37 7/8     $34 7/8     $31 3/8
      Close                                        $31 3/4    $39 7/8    $40 1/2     $44         $44
     Dividends per share of common stock           $ 0.075    $ 0.075    $  0.075    $ 0.075     $ 0.300
     ===================================================================================================
</TABLE>
                                                                       
     Due to changes in the number of average shares outstanding, quarterly
     earnings per share of common stock may not add to the total for the years.


                                       64
<PAGE>   65
                          INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying consolidated balance sheets of Travelers
Property Casualty Corp. and Subsidiaries as of December 31, 1998 and 1997, 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,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Travelers Property
Casualty Corp. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations, changes in stockholders' equity and their cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.




Hartford, Connecticut
January 25, 1999


                                       65